Dividend Decision under Distributed Profit Taxation: Investor’s Perspective

Aaro Hazak ()
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Aaro Hazak: School of Economics and Business Administration, Tallinn University of Technology

No 145, Working Papers from School of Economics and Business Administration, Tallinn University of Technology

Abstract: Distributed profit taxation is the corporate taxation regime of Estonia. A theoretical model on dividend policy under this tax system, compared to traditional gross profit taxation, is presented in this paper. The paper seeks to model a company operating under uncertainty in a binomial framework, including company and investor level taxes and investor’s different consumption levels. Overall, the tax effects on different forms of payout (e.g. dividends or share repurchases) are equal under this tax regime and the main question is deciding upon the timing of dividends. There appear to be different optimums for the timing, depending on the investor’s consumption as well as the probability of losses, tax rates and interest rates. Though one of the aims of the Estonian corporate tax system is to motivate companies to reinvest the profits earned instead of paying them out, the theoretical analysis in this paper shows that from the investor’s perspective retaining of all profits in the company may not be the optimal payout policy in many cases. The study helps to understand the characteristics of this unusual tax regime and may potentially lead to discussions on introducing a similar system in other jurisdictions or on modifying the corporate taxation principles in Estonia

Keywords: dividend policy; corporate taxation; distributed profit taxation (search for similar items in EconPapers)
JEL-codes: G35 K34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law
Date: 2006
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Published in Working Papers in Economics, School of Economics and Business Administration,Tallinn University of Technology (TUTWPE), Volume 20, Pages 5-25

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