Companiesí Financial Decisions under the Distributed Profit Taxation Regime of Estonia

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

No 155, Working Papers from Tallinn School of Economics and Business Administration, Tallinn University of Technology

Abstract: This paper presents an empirical analysis of companiesí capital structure and dividend decisions under distributed profit taxation (DPT), the corporate taxation regime of Estonia since 2000. The survey is based on the financial information available from the Estonian Commercial Registry in respect of a sample of 51 thousand Estonian companies over a ten-year period. For the purposes of cross-country comparison, the Amadeus database information of 0.7 million companies from the European Union countries is used. The results give support to the hypothesis that the share of external financing in total capital of Estonian companies is lower in the conditions of DPT in comparison to that under the traditional gross profit taxation system. The DPT system has led companies to distribute lower portions of profit as dividends. The undistributed profits appear to be largely retained as surplus cash, instead of being reinvested into long term productive assets. DPT appears to have a positive impact on companiesí liquidity and sustainability, however the downside being the allocation of available funds into potentially inefficient investments. The results of the study may lead to discussions on introducing a similar system in other jurisdictions or on modifying the corporate taxation principles in Estonia.

Keywords: capital structure; dividend policy; corporate taxation (search for similar items in EconPapers)
JEL-codes: G32 G35 K34 (search for similar items in EconPapers)
Pages: 15
Date: 2007
New Economics Papers: this item is included in nep-eec, nep-law and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Working Papers in Economics.School of Economics and Business Administration,Tallinn University of Technology (TUTWPE), Pages 5-19

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