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Does a Tax Exemption of Retained Profits Strengthen the Equity Base of Firms?

Author

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  • Rainer Niemann
  • Silke Rünger
  • Peter Schmidt

Abstract

Tax legislators have used a tax exemption of retained profits (TERP) to stimulate an increase in firms' equity by imposing a lock-in effect. We examine the Croatian TERP over the period 2013-2016 to investigate whether taxpayers use a TERP and whether it contributes to an increase in firms' equity. Our findings show that Croatian firms used the TERP, but its application varies substantially depending on the ownership structure of the firm. Compared to a control group, total equity of Croatian firms did not increase after the introduction of the TERP, indicating that firms used the TERP as a tax saving tool without changing their payout policy.

Suggested Citation

  • Rainer Niemann & Silke Rünger & Peter Schmidt, 2024. "Does a Tax Exemption of Retained Profits Strengthen the Equity Base of Firms?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(2), pages 193-233.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2024-0008
    DOI: 10.1628/fa-2024-0008
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    More about this item

    Keywords

    retained profits; tax exemption; equity; ownership; tax policy; capital structure;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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