Review of Quantitative Finance and Accounting

, Volume 51, Issue 4, pp 943–965 | Cite as

The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example

  • Carmen Bachmann
  • Martin Baumann
  • Konrad Richter
Original Research


In the past years, allowance for corporate equity (ACE) tax systems have become more popular even though they are still quite rare. An ACE tends to make a tax system neutral in respect of whether a company is financed by debt or equity. Less attention is given to the effects on investment incentives by scientific literature. We construct a model based on the principle of a hurdle rate to show whether and how an ACE system could change a company’s decision between distribution and reinvestment. The analysis is extended by implementing the so called fairness tax. We find that the influence of the fairness tax on (re)investment incentives depends on the debt to total capital ratio and the return on equity. Hence, the introduction of an ACE does only in certain cases lead to a change from distribution to reinvestment. Interestingly, the fairness tax can increase the incentive to reinvest in few situations and can make the ACE system more attractive in respect of reinvestment.


Allowance for corporate equity Notional interest deduction Reinvestment incentive Fairness tax 

JEL Classification

F21 G35 H25 H71 


  1. Aus dem Moore N (2014) Taxes and corporate financing decisions: evidence from the Belgian ACE reform. Ruhr Econ Pap 553:1–71. CrossRefGoogle Scholar
  2. Bachmann C, Baumann M (2016) The repatriation incentive of the foreign dividend exemption system. Appl Econ 48:2736–2755. CrossRefGoogle Scholar
  3. Bahng JS, Jeong HC (2012) Nonlinear behaviors in capital structure decisions in Australian firms. Rev Pac Basin Financ Mark Policies 15:1–19. CrossRefGoogle Scholar
  4. Boadway R, Bruce N (1984) A general proposition on the design of a neutral business tax. J Public Econ 24:231–239. CrossRefGoogle Scholar
  5. Bond SR (2000) Levelling up or levelling down? Some reflections on the ACE and CBIT proposals, and the future of the corporate tax base. In: Cnossen S (ed) Taxing capital income in the European Union. Oxford University Press, Oxford, pp 161–179Google Scholar
  6. Bond SR, Devereux MP (1995) On the design of a neutral business tax under uncertainty. J Public Econ 58:57–71. CrossRefGoogle Scholar
  7. Bond SR, Devereux MP, Gammie M (1996) Tax reform to promote investment. Oxf Rev Econ Policy 12:109–117. CrossRefGoogle Scholar
  8. Cheng MC, Tzeng ZC (2014) Effect of leverage on firm market value and how contextual variables influence this relationship. Rev Pac Basin Financ Mark Policies 17:1–63. CrossRefGoogle Scholar
  9. Cooper GS (2012) Implementing an allowance for corporate equity. Aust Tax Forum 27:241–271Google Scholar
  10. Couch R, Dothan M, Wu W (2012) Interest tax shields: a barrier options approach. Rev Quant Finance Account 39:123–146. CrossRefGoogle Scholar
  11. De Mooij RA (2012) Tax biases to debt finance: assessing the problem, finding solutions. Fisc Stud 33:489–512. CrossRefGoogle Scholar
  12. De Mooij RA, Devereux MP (2011) An applied analysis of ACE and CBIT reforms in the EU. Int Tax Public Finance 18:93–120. CrossRefGoogle Scholar
  13. Devereux MP (2012) Issues in the design of taxes on corporate profit. Natl Tax J 65:709–730. CrossRefGoogle Scholar
  14. Devereux MP, Freeman H (1991) A General Neutral Profits Tax. Fisc Stud 12:1–15. CrossRefGoogle Scholar
  15. Devereux MP, Griffith R, Klemm A (2002) Corporate income tax reforms and international tax competition. Econ Policy 17:449–495. CrossRefGoogle Scholar
  16. ECJ (2017) Judgement of the court in case C-68/15. Accessed 11 Nov 2017
  17. European Commission (2016) Proposal for a council directive on a common corporate tax base. Accessed 22 Mar 2017
  18. Eurostat (2015) Taxation trends in the European Union—data for the EU member states, Iceland and Norway. Publications Office of the European Union. Accessed 9 June 2016
  19. Freebairn JW (2016) Design alternatives for an Australian allowance for corporate equity. Aust Tax Forum 31:555–575Google Scholar
  20. Frühwirth M, Kobialka M (2010) The impact of imputed interest on equity provisions on the capital structure of Austrian firms. Euro-Mediterr Econ Finance Rev 5:55–70Google Scholar
  21. Gordon RH (2011) Commentary on tax by design: the Mirrlees review. Fisc Stud 32:395–414. CrossRefGoogle Scholar
  22. Hall G, Hutchinson P, Michaelas N (2000) Industry effects on the determinants of unquoted SMEs’ capital structure. Int J Econ Bus 7:297–312. CrossRefGoogle Scholar
  23. Hebous S, Ruf M (2015) Evaluating the effects of ACE systems on multinational debt financing and investment. CESifo working paper no. 5360, MunichGoogle Scholar
  24. IMF (2009) Debt bias and other distortions: crisis-related issues in tax policy. Technical report, international monetary fund. Accessed 27 May 2016
  25. Issac J (1997) A comment on the viability of the allowance for corporate equity. Fisc Stud 18:303–318. CrossRefGoogle Scholar
  26. Jugurnath B, Stewart M, Brooks R (2008) Dividend taxation and corporate investment: a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia. Rev Quant Finance Account 31:209–224. CrossRefGoogle Scholar
  27. Keen M, King J (2002) The Croatian profit tax: an ACE in practice. Fisc Stud 23:401–418. CrossRefGoogle Scholar
  28. Klemm A (2007) Allowances for corporate equity in practice. CESifo Econ Stud 53:229–262. CrossRefGoogle Scholar
  29. Kruschwitz L, Löffler A (2005) Discounted cash flow—a theory of the valuation of firms. Wiley, HobokenCrossRefGoogle Scholar
  30. Lammersen L (2002) Investment decisions and tax revenues under an allowance for corporate equity. ZEW discussion paper no. 02-47.
  31. Menichini AA (2017) On the value and determinants of the interest tax shields. Rev Quant Finance Account 48:725–748. CrossRefGoogle Scholar
  32. Michel B, Van den Berghe P (2014) Fairly odd: Belgium’s new fairness tax. Eur Tax 54:223–234Google Scholar
  33. Mirrlees J, Adam S, Besley T, Blundell R, Bond S, Chote R, Gammie M, Johnson P, Myles G, Poterba JM (2011) Tax by design: the Mirrlees review. Oxford University Press, OxfordGoogle Scholar
  34. Modigliani F, Miller MH (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48:261–297Google Scholar
  35. Modigliani F, Miller MH (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53:433–443Google Scholar
  36. Overesch M, Wamser G (2014) Bilateral internal debt financing and tax planning of multinational firms. Rev Quant Finance Account 42:191–209. CrossRefGoogle Scholar
  37. Peeters B, Hermie T (2011) Notional interest deduction. the Belgian experience. Working paper Tiberghien Lawyers. Accessed 27 May 2016
  38. Princen S (2012) Taxes do affect corporate financing decisions: the case of Belgian ACE. CESifo working paper no. 3713, MunichGoogle Scholar
  39. Rumpf D (2009) Zinsbereinigung des Eigenkapitals im internationalen Steuerwettbewerb – Eine kostengünstige Alternative zu Thin Capitalization Rules? Z Wirtsch 58:94–126Google Scholar
  40. Schultze W, Dinh Thi TP (2007) Kapitalwertneutrale Wiederanlage in der Unternehmensbewertung: Die Ermittlung der Mindestrenditen von Kapitalgesellschaften bei Thesaurierung. Z Betriebswirtschaft 77:1179–1216. CrossRefGoogle Scholar
  41. Staderini A (2001) Tax reforms to influence corporate financial policy: the case of the Italian business tax reform of 1997–98. Economic Research Department, Banca d‘Italia, discussion paper no. 423. Accessed 27 May 2016
  42. Staubli A, Küttel R (2013) Notional Interest Deduction. Die Einführung einer zinsbereinigten Gewinnsteuer im Kontext der Unternehmenssteuerreform III. Der Schweizer Treuhänder 87:790–799Google Scholar
  43. Talberg M, Winge C, Frydenberg S, Westgaard S (2008) Capital structure across industries. Int J Econ Bus 15:181–200. CrossRefGoogle Scholar
  44. Van Campenhout G, Van Caneghem T (2013) How did the notional interest deduction affect Belgian SMEs’ capital structure? Small Bus Econ 40:351–373. CrossRefGoogle Scholar
  45. Wenger E (1983) Gleichmäßigkeit der Besteuerung von Arbeits- und Vermögenseinkünften. FinanzArchiv 41:207–252Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  • Carmen Bachmann
    • 1
  • Martin Baumann
    • 1
  • Konrad Richter
    • 1
  1. 1.Chair of Business Taxation, Institute of Accounting, Finance and TaxationLeipzig UniversityLeipzigGermany

Personalised recommendations