This article aims at analyzing the link between subsidiaries capital structure and taxation in Europe. First we introduce a trade-off model, which studies a MNC's fi nancial strategy and shows how debt policy allows multinational groups to shift pro fits from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the percentage of pro fit shifting, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: i) subsidiaries leverage increases with the statutory tax rate, levied in the country where it operates; ii) this positive effect is lower, the higher the parent company tax rate is. Furthermore, an increase in the parent company's tax rate is estimated to raise its subsidiaries leverage.
- capital structure,
- profit shifting,
Available at: http://works.bepress.com/marialaura_parisi/12/