The influence of taxes on financing decision has long been discussed and different opinions exist concerning this subject. However, the importance of tax shield must not be underestimated because taxes can alter the effective interest rate of an instrument significantly. Generally it is assumed that payments of instrument that provide for revenue based compensation are not tax deductible because these instruments are normally qualified as equity. However, a detailed analysis of the various tax laws shows that this need not necessarily be the case. Payments that depend on the profits of a corporation can obtain an interest treatment if an instrument is structured according to the qualification criteria of a specific tax law. The deductibility can then decrease the effective interest rate of the issuing corporation. If a debt treatment can be obtained the question of the timing of interest payments has to be answered. In contrast to dividend distributions interest payments generally are not deductible as they occur but as they accrue. Especially in the case of fluctuating payments it is normally obligatory to determine the deductible amount in each accrual period. The time value of money aspect of interest payments is implemented differently in the various tax laws and can therefore change the effective tax rate. However, it is of great importance to consider these aspects before the issuance of a specific instrument. The first part of the paper analyses the necessary requirements for a debt treatment and possible obstacles to an interest deduction. In order to qualify for a debt treatment it is important to consider these facts before the issue of an instrument because a later reclassification of the instrument might change the cost of capital substantially. Even if an instrument is qualified as debt an interest deduction can be denied due to various limitations and restrictions. The second part of the paper examines the timing of revenue based payments that are considered as interest. Depending on the situation the taxpayer may or may not choose one of the described methods. However, it is important to know the impact of each method in order to able to determine the cost of a specific instrument. Another question raised in this paper concerns the discount rate used for the net present calculation and if the method used by IRS is of economic substance. This paper demonstrates the influence of the different methods of taxing revenue based payments and shows that the preferable method depends on the development of the profits. This paper emphasizes the impact of taxes on revenue based payments and the importance of the various approaches of tax authorities to execute such compensations. (author's abstract) / Series: Discussion Papers SFB International Tax Coordination

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