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How did the notional interest deduction affect Belgian SMEs’ capital structure?

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  • Geert Campenhout

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  • Tom Caneghem

Abstract

The recently introduced risk capital allowance in Belgium, which allows a notional interest deduction (to be denoted NID hereafter) on a firm’s adjusted equity for tax purposes, has mitigated the tax discrepancy between equity and debt financing. To our knowledge, we provide the first empirical study of the extent to which this regulation has resulted in a strengthening of small and medium sized enterprises’ (to be denoted SMEs hereafter) solvency, which was one of its most prominent objectives. Results from logit regressions reveal that the probability of adopting the NID is higher for lowly leveraged SMEs, SMEs without experience with the tax-exempt investment reserve and SMEs with a sound knowledge of the notional interest deduction regulation. Results on the impact of the NID on the capital structure of SMEs based on panel and first differences regressions reveal that this measure did not result in a significant change of SMEs’ leverage. In view of the discussion regarding the optimal tax and legislative framework that governments should put in place (Poutziouris et al., J Small Bus Enterp Dev 6(1):7–25, 1999 ), these results cast doubt on the risk capital allowance, as it stands now, being the right government instrument to contribute—at least in the short term—to creating a pro-enterprising tax and legislative climate for SMEs. We conclude by providing some general suggestions for improving the effectiveness of the risk capital allowance. Copyright Springer Science+Business Media, LLC. 2013

Suggested Citation

  • Geert Campenhout & Tom Caneghem, 2013. "How did the notional interest deduction affect Belgian SMEs’ capital structure?," Small Business Economics, Springer, vol. 40(2), pages 351-373, February.
  • Handle: RePEc:kap:sbusec:v:40:y:2013:i:2:p:351-373
    DOI: 10.1007/s11187-011-9364-1
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    1. repec:eee:quaeco:v:68:y:2018:i:c:p:211-225 is not listed on IDEAS
    2. repec:kap:sbusec:v:51:y:2018:i:1:d:10.1007_s11187-017-9921-3 is not listed on IDEAS
    3. repec:pjm:journl:v:xxii:y:2017:i:1:p:25-49 is not listed on IDEAS

    More about this item

    Keywords

    Notional interest deduction; Leverage; Capital structure; SME; Fiscal policy; G32; H25; H32; L53;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy

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