The Capital Structure of Multinationals in Brazil after the Issuance of the Brazilian Thin Capitalization Rules: A Difference-in-Differences Approach

1 Pages Posted: 4 Aug 2016 Last revised: 9 Dec 2020

See all articles by Denis Alves

Denis Alves

Edson Luiz Riccio, E L Riccio

Universidade de Sao Paulo

Christoph Watrin

University of Muenster - Accounting Center

Date Written: May 29, 2016


Several papers have reported recently the effects of thin capitalization rules on firms’ capital structure. However, none has yet assessed the effects of the newly issued Brazilian thin-capitalization rule. This paper aims at helping filling this gap by showing evidence of the Brazilian thin capitalization rules on european private multinationals’ consolidated financial statements’ capital structures. Through a relatively fast legislative process, Brazilian thin capitalization law was enacted in 2010 and has established thresholds for intercompany debt regarding the deductibility of interests’ payment. The promulgation of the law is herein considered as an exogenous event and the analysis followed a differences-in-differences approach, having the law’s legal effectiveness regarding income tax as event date. Data were collected from the Amadeus Database. The two groups of companies were distinguished by whether a company has or not a subsidiary in Brazil. The sample includes 36,785 company-year observations of 29 european countries, 5,548 companies with 21,540 subsidiaries in Brazil in the period of 2007 to 2014. Although the two groups are clearly different regarding values of size, sales, taxes and profitability, time trends analysis, taking size, intangible assets, incurred taxes, country and year fixed effects, allows the acceptance of the groups’ comparability. An OLS with robust company-level standard errors model was estimated. Results point to a strongly significant reduction between 2,20% and 2,78%, depending on the inclusion of country, year and size fixed effects, in the leverage in relation to Total Assets for multinational companies at their consolidated data, when comparing them against european companies with no subsidiaries in Brazil. Although these results could be in line with the assumption that companies are eliminating internal loans previously borrowed for reasons of debt shifting without replacing them, the data do not allow to conclude that this is due to the management avoiding the extra tax burden due to the new Brazilian law. The leverage variation could come from other sources besides intercompany. Also it is not possible to be sure about the original source of funds directed to Brazilian subsidiaries. Nevertheless, the results make possible to conclude that the Brazilian thin capitalization rules play a role in determining the decrease in leverage. However, future research including also intercompany debt private data should investigate directly the effects observed on the subsidiaries’ capital structure.

Keywords: thin capitalization, subcapitalização, differences-in-differences, multinationals, capital structure, Brazil, IFRS, capital structure.

JEL Classification: M48, F34, F38, G31, H26, C99

Suggested Citation

Alves, Denis and Riccio, Edson Luiz and Watrin, Christoph, The Capital Structure of Multinationals in Brazil after the Issuance of the Brazilian Thin Capitalization Rules: A Difference-in-Differences Approach (May 29, 2016). Available at SSRN: or

Edson Luiz Riccio

Universidade de Sao Paulo ( email )

Av. Prof. Luciano Gualberto 908
São Paulo SP, São Paulo 05508-900
+55 11 3091 5820 (Phone)


Christoph Watrin

University of Muenster - Accounting Center ( email )

Universitätsstr. 14-16
Muenster, 48143

No contact information is available for Denis Alves

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