An Investigation of the Effect of the Notional Interest Deduction on the Capital Structure of Belgian SMEs
In 2005, the Belgian government introduced a radically new measure into the corporate tax system: the so-called notional interest deduction. This tax invention allows Belgian companies to deduct a fictitious interest cost on equity from their tax base and directly tackles the classical tax discrimination between equity and debt financing, which characterizes the tax system of most countries. This paper investigates whether the capital structure of Belgian small and medium sized enterprises (SMEs) reflects the cross-sectional variation in tax incentives induced by the notional interest deduction, three year 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. For our sample of SMEs, we find that, due to the notional interest deduction, the simulated marginal tax rates declined from 29% to 2.9%. Consistent with the trade-off theory on capital structure, our regression analysis reveals that the explanatory power of the debt rates of Belgian SMEs on marginal tax rates is higher if the marginal tax rates take the notional interest deduction into account. We interpret this as evidence consistent with a debt policy of Belgian SMEs that takes into account the tax incentives of the notional interest deduction
|Date of creation:||Jan 2010|
|Contact details of provider:|| Postal: Hoveniersberg 4, B-9000 Gent|
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
Web page: http://www.ugent.be/eb
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- MacKie-Mason, Jeffrey K, 1990.
" Do Taxes Affect Corporate Financing Decisions?,"
Journal of Finance,
American Finance Association, vol. 45(5), pages 1471-1493, December.
- Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
- Hernán Ortiz-Molina & María Penas, 2008. "Lending to small businesses: the role of loan maturity in addressing information problems," Small Business Economics, Springer, vol. 30(4), pages 361-383, April.
- Ortiz-Molina, H. & Penas, M.F., 2004. "Lending to Small Businesses : The Role of Loan Maturity in Adressing Information Problems," Discussion Paper 2004-99, Tilburg University, Center for Economic Research.
When requesting a correction, please mention this item's handle: RePEc:rug:rugwps:10/640. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nathalie Verhaeghe)
If references are entirely missing, you can add them using this form.