Contractum trinius revised
PhD student: Mr S. Jafari
Promotor: Prof R.G. Prokisch
Duration: 1/4/2013 - 31/3/2014
In todays world, business is interconnected and markets are not locked into country borders anymore with so many globally operating businesses. As taxation is always looking and respecting country borders there is a miss match. Therefore, there is a huge incentive for global operating companies to shift profits to the lowest or non-taxing countries and diminishing the tax base in local markets by means of debt and other instruments. Legislator have seen an increased pressure on their tax base over the years due to tax planning. Profits are shifted across borders with the help of interest deductions. There are many tax models which can be incorporated into local tax law to tackle the problem of different treatment of debt and equity. To increase competitiveness compared to other countries, legislators have constantly, over the last years, decreased statutory tax rates while simultaneously increasing their tax base. This downward pressure on statutory rates, or the race-to-the-bottom can not easily be compensated anymore by increasing the tax base.
In the middle-ages interest was banished and seen as unethical, the contractum trinius was a way to circumvent those restrictions. It looks very similar to todays hybrid capital constructions to achieve debt deduction while having equity features. So why do we allow the deductibility of interest in our modern society while such an old well founded principle existed in the past?