Allowances for Corporate Equity in Practice

35 Pages Posted: 27 Nov 2006

See all articles by Alexander Klemm

Alexander Klemm

International Monetary Fund (IMF)

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Date Written: November 2006

Abstract

This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. Despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased. Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear.

JEL Classification: H21, H25, C33

Suggested Citation

Klemm, Alexander, Allowances for Corporate Equity in Practice (November 2006). IMF Working Paper No. 06/259, Available at SSRN: https://ssrn.com/abstract=947375

Alexander Klemm (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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