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The Effect of the Notional Interest Deduction on the Capital Structure of Belgian SMEs

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  • Katrien Kestens
  • Philippe Van Cauwenberge
  • Johan Christiaens

Abstract

In 2005 the Belgian government introduced a radically new measure into the corporate tax system: the notional interest deduction. This feature allows Belgian companies to deduct a fictitious interest cost on equity from their tax base and tackles the classical tax discrimination between debt and equity financing. We investigate whether changes in the debt ratios of Belgian small and medium-sized enterprises reflect changes in tax incentives induced by the notional interest deduction, up to three years after its introduction. To measure the tax incentives of the notional interest deduction, we incorporate the notional interest deduction into a simulation procedure of marginal tax rates. We find that (1) the notional interest deduction caused a significant decline in the average simulated marginal tax rates and (2) the change in simulated marginal tax rates due to the introduction of the notional interest deduction is significant in explaining the change in debt ratios.

Suggested Citation

  • Katrien Kestens & Philippe Van Cauwenberge & Johan Christiaens, 2012. "The Effect of the Notional Interest Deduction on the Capital Structure of Belgian SMEs," Environment and Planning C, , vol. 30(2), pages 228-247, April.
    • Handle: RePEc:sae:envirc:v:30:y:2012:i:2:p:228-247
    DOI: 10.1068/c1163b
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    Cited by:

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    2. Cao, Yifei & Whyte, Kemar, 2022. "Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance," National Institute of Economic and Social Research (NIESR) Discussion Papers 542, National Institute of Economic and Social Research.
    3. Dave Goyvaerts & Annelies Roggeman, 2020. "The Impact of Thin Capitalization Rules on Subsidiary Financing: Evidence from Belgium," De Economist, Springer, vol. 168(1), pages 23-51, March.
    4. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    5. Annelies Roggeman & Isabelle Verleyen & Philippe Van Cauwenberge & Carine Coppens, 2014. "Impact of a Common Corporate Tax Base on the effective tax burden in Belgium," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(3), pages 530-543, June.
    6. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16 [Focus on Future Viability. Annual Report 2015/16]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.
    7. Meki, Muhammad, 2023. "Levelling the debt–equity playing field: Evidence from Belgium," European Economic Review, Elsevier, vol. 151(C).
    8. Mooij Ruud De & Hebous Shafik & Hrdinkova Milena, 2018. "Growth-Enhancing Corporate Tax Reform in Belgium," Nordic Tax Journal, Sciendo, vol. 2018(1), pages 1-17, January.

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