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This paper investigates the impact of an Allowance for Corporate Equity (ACE) on the expected tax revenues and on the international tax competition. Beginning with an analysis of the relation between the rate of return on equity and the interest rate on the capital market, this paper figures out some effects which cause surprisingly low net assets used to calculate the ACE. This yields to a strong impact on the financial structure of multicorporate enterprises although there is only a moderate decline in tax revenues. Focusing profit shifting via transfer prices, the ACE has no positive effect. Only a cut of the corporate tax rate is useful in this context. The relevance of these results is additionally affirmed by using the statistical data published by the “Deutsche Bundesbank”, the central bank of Germany, which includes an aggregated corporate balance sheet. All in all, the ACE can be seen as an alternative to the new German thin capitalization rules applied in 2008 (“Zinsschranke”). Additionally, the low tax revenue losses constitute a new advantage for the ACE as a blueprint for corporate tax reforms. This is also interesting because an ACE could reduce the negative effects on the financial structure of firms which accompanies the implementation of a low withholding tax on interests.

Zinsbereinigung des Eigenkapitals im internationalen Steuerwettbewerb – Eine kostengünstige Alternative zu “Thin Capitalization Rules”?