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

Rainer Niemann, Silke Rünger and Peter Schmidt

FinanzArchiv: Public Finance Analysis, 2024, vol. 80, issue 2, 193-233

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.

Keywords: retained profits; tax exemption; equity; ownership; tax policy; capital structure (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 H20 H25 H32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1628/fa-2024-0008

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