The corporate income tax treatment of debt andequity is fundamentally different. In most countries,interest is taxable, or tax deductible (if certain condi-tions are met), when received or paid, respectively. Incontrast, dividends are paid out of taxed profits and donot reduce a company’s taxable income. At the level ofthe shareholder, dividends may be subject to a (partial)tax exemption or a tax credit. When loans are grantedbetween different members of a multinational group,the interest payments will reduce the taxable income ofthe borrowing entity and increase the taxable incomeof the lending entity. Thus, in a cross-border context,the income will be taxable in the state of residence ofthe lender and not in that of the borrower. In order tolimit the amount of tax-deductible expenses, virtuallyall high-tax countries introduced different kinds ofrules that set limits to the amount of allowable interestexpenses (for example, thin capitalization rules, earn-ings stripping rules, and arm’s-length interest rates).