This article aims to analyze the link between subsidiary capital structure and taxation in Europe. First we introduce a trade-off model, which looks at a MNC's financial strategy and in particular debt shifting from low-tax to high-tax jurisdictions. By letting the MNC choose both leverage and the profit shifting percentage, we depart from the relevant literature which has mainly focused on the latter. Using the AMADEUS dataset we show that: i) in line with the relevant literature, subsidiary leverage increases with its statutory tax rate; ii) contrary to previous work, if a parent company is located in a high-tax country and its subsidiary is making profit, an increase in the parent company's tax rate has a positive impact on the subsidiary's leverage.
