Addressing the debt bias : a comparison between the Belgian and the Italian ACE systems.
Date: 2014-07-08
Institutions: Directorate-General for Taxation and Customs Union
Subjects: Belgium, Italy, business tax, corporate finance, corporation tax, tax system

ADDRESSING THE DEBT BIAS:  

A COMPARISON BETWEEN THE BELGIAN AND THE 

ITALIAN ACE SYSTEMS 

Ernesto Zangari1 

(European Commission) 

June 2014 

Abstract:  This  paper  reviews  the  experiences  of  Belgium  and  Italy  with  ACE-type  systems  of 
corporate taxation. The comparison focusses on the definition of the base for the computation of the 
allowance and the anti-avoidance framework to tackle abuses. It is argued that the Italian system, with 
its incremental feature and a comprehensive anti-avoidance framework targeting transactions between 
related parties, seems a more viable solution for an ACE reform aimed at addressing the debt bias in 
the corporate sector. 

Key words: Allowance for Corporate Equity; Capital structure; Taxation; Italy; Belgium 

JEL classifications: G32, H25 

1   Ernesto  Zangari  is  economist  at  Banca  d’Italia  in  secondment  at  the  European  Commission’s  General 
Directorate for Taxation and Customs Union. Contact information: ernesto.zangari@ec.europa.eu. The views 
expressed  in  this  study  are  those  of  the  author  and  do  not  necessarily  reflect  those  of  the  European 
Commission.  The  author  appreciates  the  helpful  comments  of  Gaëtan  Nicodème,  Thomas  Hemmelgarn, 
Giacomo  Ricotti,  Elena  Padovani  and  Elena  Pisano.  Errors  and  omissions  are  those  of  the  author  and  his 
only. 

1 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
Non-Technical Summary 

Corporate  income  tax  (CIT)  systems  generally  allow  for  the  deductibility  of  interest 
payments, while the return to equity is not considered as a deductible cost. This asymmetry favours 
debt  over  equity  as  a  means  of  funding  investments.  This  debt  bias  is  a  problem  because  it  may 
generate  several  distortions.  Most  notably,  it  may  lead  to  an  excessive  leverage  in  the  corporate 
sector, with an excessively high level of bankruptcy costs and with a higher volatility of the business 
cycle.  The  debt  bias  may  also  fuel  international  tax  avoidance.  This  can  be  achieved  through 
increases  of  debt  funding  in  high-tax  jurisdictions  and  equity  funding  in  low-tax  ones,  and  by 
exploiting  mismatches  across  countries  in  the  tax  law  definitions  of  debt  and  equity,  especially 
related to the so-called hybrid securities. The available empirical evidence supports the view that the 
asymmetric tax treatment of debt and equity affects companies' financial and profit shifting choices.  

A promising tax system able to establish a symmetric tax treatment between debt and equity 
at the corporate level is the Allowance for Corporate Equity (ACE), also known as Notional Interest. 
ACE-type systems  are  currently  in  force  in  Belgium, Italy and, for SMEs, Portugal. The ACE reforms 
implemented  in  Belgium  and  Italy  represent  an  interesting  case  study  because  they  are  quite 
different.  

Belgium  introduced  an  ACE-type  corporate  tax  system  in  2006.  The  Belgian  ACE  has  been 
effective  in  reducing  the  gap  in  the  tax  treatment  of  debt  and  equity  and  has  reduced  the 
indebtedness  of corporations.  The  strong growth of foreign direct investment  in Belgium  following 
the  introduction  of  ACE  indicates  that  the  reform  has  been  likely  successful  also  in  improving  the 
attractiveness of Belgium for the multinationals. The above positive effects came however at a cost 
in terms of foregone budgetary revenues. Since the launch of the reform, the budgetary impact of 
the ACE has increased substantially passing from EUR 1.8 billion in 2006 to EUR 6.2 billion in 2011, 
even though the budgetary cost of the ACE is probably overestimated as other indirect effects of ACE 
on corporate tax revenues – through the debt-equity substitution effects and the consequent lower 
deduction of interest costs – and through the investment and economic expansion associated to an 
ACE  reform  are  not  taken  into  account.  Moreover,  the  ACE  was  also  introduced  to  replace  the 
Coordination  Centre  regime,  whose  cost  was  estimated  at  EUR  2  Billion  in  2005.  As  a  reaction, 
Belgium  has  decreased  the  rate  of  the  ACE  and  introduced  an  additional  “Fairness”  tax  on  some 
operations. 

Anecdotal evidence suggests however that the cost of ACE may have actually been increased 
by tax planning activities. This is for two reasons linked to the original design of the notional interest 
chosen in Belgium. First, instead of applying the ACE on new capital, the ACE is granted to the entire 
stock  of  equity.  This  may  have  provided  strong  tax  planning  incentives  to  artificially  restructure 
companies' activities to optimize the use of ACE, even with no changes in investment and/or external 
financing  choices.  Second,  this  may  have  been  facilitated  by  an  incomplete  anti-avoidance 
framework  specifically  targeting  transactions  between  related  parties,  such  as  intra-group  loans, 
asset  transfers,  and  equity  contributions  in  kind.  This  would  be  consistent  with  empirical  evidence 
according to which large companies have mostly benefited from the ACE; and aggregate investment 
seems not to have reacted to the decrease of the cost of capital induced by the ACE. The results of 
audits  by  tax  authorities  over  the  years  have  indeed  confirmed  the  use  of  several  ACE-related  tax 
planning  strategies.  Although  some  of  the  most  common  tax  avoidance  schemes  have  been  made 
more  difficult  over  time  by  changes  of  the  law  provisions  and  especially  by  issuing  administrative 
regulations, the ACE system in Belgium likely still remains prone to tax planning.   

Italy  introduced  an  ACE  in  2011.  The  ACE  base  is  defined  as  the  net  positive  variation  of 
equity compared to the situation at the end of 2010. Contrary to the Belgian system, the Italian ACE 

2 

 
 
 
 
is therefore incremental. Limits to the ACE base also stem from several specific anti-abuse provisions 
aimed  at  avoiding  a  cascading  of  ACE  benefits  within  groups  of  companies  subject  to  the  same 
unitary  control,  or  at  preventing  abuses  through  sales  of  assets  in  order  to  transform  "old  equity" 
into "new equity" that would attract the ACE allowance.  

Next, although the Belgian and the Italian ACE anti-avoidance frameworks share a similarity - 
the role of the general anti-avoidance provision as a firewall of last resort for the cases of abuses not 
covered  by  specific  rules,  or  not  even  conceived  by  the  legislator  –  the  specific  anti-avoidance 
provisions  of  the  Belgian  ACE  legislation  that  target  specific  abuses,  such  as  the  cascading  of  ACE 
benefits  through  participations  or  own  share  subscriptions,  do  not  specifically  target  transactions 
between related parties. This leaves room for transactions aimed at optimizing the ACE benefit, as in 
the  cases  of  intra-group  loans,  transfers  of  participations  and  creation  of  subsidiaries.  In  Italy,  the 
anti-avoidance  framework  is  instead  built  around  transactions  between  related  parties  that  can 
potentially trigger ACE abuses. The lack of reference to contributions in kind as a driver of the ACE 
base  dynamic  further  strengthens  the  framework.  Although  the  Italian  ACE  system  is  probably  not 
fully  immune  to  tax  planning,  the  presence  of  several  specific  anti-avoidance  provisions  targeting 
within-group flows of funds, together with its incremental feature based on the cash contributions, 
makes it arguably more robust to tax avoidance.  

Overall, from the comparison between the two regimes one can argue that the Italian system 
- with its incremental feature and a comprehensive anti-avoidance framework targeting transactions 
between  related  parties  -  seems  a  more  viable  option  for  an  ACE  reform  aimed  at  addressing  the 
debt bias in the corporate sector, while at the same time safeguarding the tax base at the domestic 
and international level. 

3 

 
 
 
 
1. Introduction  

Corporate income tax (CIT) systems generally allow for the deductibility of interest payments, 

while  the  return  to  equity  is  not  considered  as  a  deductible  expense.  At  the  corporate  level,  this 

asymmetry favours debt over equity as a means of funding investments. From an economic point of 

view, this debt bias is considered a problem because it may generate several distortions. Most notably, 

it may lead to an excessive leverage in the corporate sector. This can be associated to an excessively 

high level of bankruptcy costs and - by making companies more fragile - to a higher volatility of the 

economic  activity.  The  recent  financial  and  economic  crises  have  shown  how  harmful  can  be  the 

consequences  of  an  excessive  leverage,  in  particular  in  the  financial  sector. The  debt  bias  may  also 

fuel  international  profit shifting.  The  different  tax  treatment  of  debt  and  equity  creates  incentives to 

shift profits away from high towards low tax jurisdictions by increasing debt funding in the former, 

and  equity  funding  in  the  latter.  These  tax  planning  incentives  are  made  worse  by  the  mismatches 

across countries in the tax law definitions of debt and equity, especially related to the so-called hybrid 

securities.  The  available  empirical  evidence  supports  the  view  that  the  asymmetric  tax  treatment  of 

debt and equity affects companies' financial and profit shifting choices.2 The recent literature points to 

a possible role of the debt bias also for the banks’ financial choices.3 

Although in principle several tax systems are available to solve the debt bias problem, many 

of  them  are  difficult  to  implement  in  practice.4  The  Comprehensive  Business  Income  Tax  (CBIT) 

disallows  altogether  the  deductibility  of  interest  costs,  while  cash  flow  taxes  allow  for  immediate 

expensing of any financing cost. A promising tax system able to establish a symmetric tax treatment 

between debt and equity at the corporate level is the Allowance for Corporate Equity (ACE), not least 

because it has already passed the implementation test in several countries. 

2   For recent surveys of the empirical literature of the effects of debt bias on financial choices, see Feld et al. 
(2013)  and  de  Mooij  (2011).  As  for  the  effects  of  the  asymmetric  tax  treatment  of  debt  and  equity  on 
multinational choices, see for instance Huizinga et al. (2008). 

3   See Keen and de Mooij (2012), Heckemeyer and de Mooij (2013), and Hemmelgarn and Teichmann (2013). 
4   For a recent discussion of the debt bias problem and the alternative solutions, see Fatica et al. (2013). See 
also  Auerbach  et  al.  (2010)  and  Griffith  et  al.  (2010).  De  Mooij  and  Devereux  (2011)  provide  simulation 
evidence of the general equilibrium effects at the European level of the ACE and CBIT reforms.  

4 

 
 
 
                                                           
The ACE is a source-based corporate tax system that addresses the debt bias by combining the 

deductibility of actual interest costs with a deduction of a notional return to equity. This system has 

many attractive features that it shares with cash flow taxation.5 Notably, it makes the CIT neutral not 

only with respect to the financial choices, but – by exempting the normal return to capital and taxing 

economic rents only - also with respect to the marginal investment choices. In some versions, an ACE 

system also offsets distortions associated to misalignments between tax and accounting books, as in 

the case of accelerated depreciation.  

While the ACE constitutes an important improvement from a standard corporate income tax 

system,  it  has  also  some  potential  drawbacks.6  In  terms  of  tax  design,  it  does  not  fully  address  the 

distortions  to  choices  such  as  profit  shifting  and  location  decisions,7  albeit  those  would  arguably 

require a much more radical – and therefore difficult – reconsideration of the international tax system. 

Another important drawback of the ACE – probably the most relevant for the viability of the system – 

is  that  it  narrows  the  tax  base,  potentially  generating  a  revenue  shortfall.  On  the  one  hand,  this 

argument  does  not  seem  decisive  against  the  ACE,  considering  that  the  investment  expansion 

associated to an ACE reform may lower even substantially its long-run budgetary cost.8 On the other 

hand,  if  the  revenue  shortfall  were  recouped  by  increasing  the  CIT  rate,  the  distortions  to  discrete 

choices  mentioned  above  could  be  exacerbated.  Because  of  this  latter  consideration,  it  is  usually 

maintained that the ACE reform should be funded without increasing the CIT rate. 

As mentioned above, the ACE has been already enacted in several countries.9 In some cases - 

Croatia, Austria, and Italy at the beginning of the previous decade - it was repealed in the context of 

5   See Auerbach et al. (2010: 886-888). 
6   Some  of  the  economic  properties  of  the  ACE  have  been  challenged  recently  in  more  complicated  models 
featuring  agency  costs  and  credit  constraints  (see  Köthenbürger  and  Stimmelmayr,  2009,  and    Keuschnigg 
and Ribi, 2012). 
7   See Devereux (2012). 
8   See Griffith et al. (2010: 973-978) and de Mooij and Devereux (2011). 
9   For an overview of the real-world ACE systems, see Klemm (2007). For a more recent review, see Massimi 

and Petroni (2012).  

5 

 
 
 
                                                           
other comprehensive reforms featuring notably a decrease of the statutory tax rate. At the moment, in 

the EU, an ACE-type system is in force in Belgium, Italy and Portugal.10 11  

This paper reviews and assesses the experiences of Italy and Belgium with the aim of drawing 

some tax policy lessons. These two systems can be indeed taken as opposite reference points. In Italy, 

the ACE - introduced in 2011 - is generally considered as a stable feature of the corporate and business 

income  tax  systems.  It  has  been  strengthened  by  the  2014  budget  law  with  an  increase  of  the 

allowance  granted  to  investments  funded  by  equity,  even  in  the  context  of  the  current  challenging 

fiscal consolidation effort. In contrast, the Belgian ACE - introduced in 2006 - has been subject since 

its entry into force to heated debates about its budgetary cost and the prominent role by multinationals 

in benefiting from the reform. The system has been watered down over the last years, and its survival 

is  being  discussed.  The  assessment  of  the  Belgian  and  Italian  experiences  is  focused  on  (a)  the 

capacity  of  ACE  reforms  in  these  two  countries  to  effectively  induce  a  rebalancing  of  companies’ 

financial  structures,  and  (b)  on  the  two  related  concerns  about  the  actual  viability  of  ACE-type 

systems:  the shrinking  corporate tax  base  with the  consequent revenue losses and  the tax  avoidance 

opportunities that an ACE may generate.  

The  remainder  of  the  paper  is  as  follows.  In  section  2,  the  Belgium  ACE  is  described  and 

assessed. Special emphasis is given to the budgetary effects of the reform and the alleged role of tax 

planning in increasing its revenue costs. In section 3, we review and assess the Italian experience with 

ACE-type systems. The focus is on the incremental feature of the reforms implemented in Italy at the 

end of the 1990s and in 2011, and on the anti-avoidance framework in place to keep under control the 

10   In Portugal, a notional deduction of 5% is granted to SMEs for cash contributions on incorporation or for the 
equity capital increases. The allowance is permitted for four years and the tax benefit cannot be greater than 
EUR 200,000 over a three years period. Note that Portugal had a temporary ACE-type system for SMEs also 
from 2008 to 2013:  a deduction  was allowed  for SMEs against  the corporate income tax base equal to the 
product between the capital contributions in cash and a rate of 3%.  

11   An ACE-type system is also in force in Liechtenstein. The notional interest deduction is allowed on the stock 
of equity with a rate of 4% (2013). At the EU level Latvia applied an ACE-type from 2009 to 2013. It had the 
following  features:  the  ACE  base  was  the  retained  earnings  of  the  previous  tax  year  (which  made  it  an 
incremental  system);  the  notional  rate  was  the  weighted  average  of  interest  rates  on  loans  in  LVL  to  non-
financial companies made during the current tax period, as computed by the Bank of Latvia. 

6 

 
 
 
                                                           
potential revenue losses due to tax planning. Section 4 compares the two systems and draws some tax 

policy lessons. Section 5 concludes. 

2. The Belgian experience  

2.1 The introduction of the ACE in Belgium 

Belgium has introduced an ACE-type corporate tax system in 2006 (déduction pour capital à 

risque  or  intérêts  notionnels).  The  purposes  of  the  reform  were  threefold:  (i)  reducing  the  tax 

discrimination between debt and equity; (ii) addressing the risk of firms' relocation in a context of tax 

competition;  (iii)  providing  an  attractive  tax  system  for  capital-intensive  companies,  multinationals' 

headquarters, and treasury centres.12 The tax discrimination motive was important since the statutory 

corporate tax rate – the main driver of the difference in the tax treatment between debt and equity – is 

equal to 33.99%, a high level by international and European standards.13 Even more importantly,  the 

legislator  perceived  the  need  to  preserve  the  attractiveness  of  Belgium  for  multinationals,  given  the 

dismantlement  of  the  Coordination  Centre  regime  that  had  been  considered  harmful  under  the 

European  Code  of  conduct  for  business  taxation,  and  challenged  under  the  "State  aid"  examination 

procedure  (see  Box  1).  Concomitantly  with  the  ACE  reform,  registration  duties  on  capital  increases 

were abolished and several revenue raising measures were undertaken with the aim of compensating 

the budgetary costs of both the ACE and the repeal of registration duties.14 

Under  the  ACE,  a  corporation  is  granted  a  deduction  against  the  corporate  income  tax  base 

that is equal to the product between the (adjusted) equity - the ACE base - and a given notional rate, 

the ACE rate.  No investment in tangible or intangible assets is required to benefit from the allowance.  

The Belgian ACE applies to resident companies and non-resident companies with a permanent 

establishment or holding immovable properties in Belgium. The regime does not apply to firms which 

already benefit from specific tax regimes, as for instance to investment companies and - for a period of 

12   See Gerard (2006) and Valenduc (2009).  
13   Over the period 1998-2002 the statutory tax rate was equal to 40.17%. As of 2003 it is equal to 33.99% (see 

ZEW, 2013: A1). 

14   Among  those  measures,  the  existing  one-time  tax  credit  (granted  -  with  a  cap  -  to  firms  increasing  their 
equity) was abrogated. The other revenue-raising provisions included the repeal of the investment allowance 
(with  the  exception  of  the  R&D  and  environmentally-friendly  investments)  and  changes  in  the  exemption 
provisions for capital gains on stocks, which were made more stringent.  

7 

 
 
 
                                                           
three  years  -  to  Small-  and  Medium-sized  Enterprises  (SMEs)  setting  up  a  tax-exempt  investment 

reserve out of retained profits. 

Box 1. The coordination centre regime  

The coordination centres (Belgium resident companies or branches of non-resident companies) were introduced 
in  1982  to  improve  the  attractiveness  of  Belgium  to  foreign  investors.  They  could  carry  out  financial  and 
administrative activities for the benefit of the members of multinational groups.  

A coordination centre had to be part of a multinational group with consolidated capital of at least BEF 1 billion 
(about  EUR  24.8  mio)  and  a  turnover  of  at  least  BEF  10  billion  (about  EUR  248  mio).  The  definition  of  the 
group  was all the companies in  which common shareholdings  were at least equal to 20%. For the group to be 
considered  multinational,  some  conditions  had  to  be  fulfilled  regarding  the  presence  of  the  group's  companies 
outside their country of origin. Coordination centres matching the criteria were approved by a royal decree and 
could benefit of a favourable tax treatment for a period of 10 years. 

The coordination centres were liable to pay the corporate income tax at the standard rate. However, the tax base 
was  determined  as  a  percentage  of  certain  expenses  (so  called  cost-plus  system).  Notably,  personnel  and 
financial costs were not included. The mark-up was generally equal to 8%. Apart from corporate income tax, the 
coordination  centres  did  not  pay  the  capital  registration  duty  of  0.5%  and  the  estate  tax  on  the  immovable 
property owned by it. They were however subject to an annual tax equal to EUR 10 000 per full time employee 
up to a maximum of EUR 100 000.  

In 1999, the European Union judged this regime as an instrument of harmful tax competition under the Code of 
conduct  for  business  taxation  (1);  in  2003,  the  European  Commission  challenged  it  under  the  "State  aid" 
examination procedure. Therefore, the regime  was  gradually  withdrawn.  As  of 1 January 2011, it is no longer 
applicable. 

The following figure shows the typical structure of a coordination centre.  

COORDINATION CENTRE REGIME                                                                            

Parent 

Subsidiary 

Equity 

Dividends 

Interests 

Debt 

Coordination centre 
Tax base = 0 

Since the coordination centre's financial activity was virtually untaxed (i.e. corporate tax base = 0), the regime 
allowed  transforming  taxable  interests  at  the  level  of  the  parent  into  exempt  dividends.  Indeed,  the  interest 
payments - deducted by the subsidiary already from the CIT base - were untaxed at the level of the coordination 
centre. They were then distributed as dividends to the parent that could benefit of the 95% exemption under the 
participation  exemption  regime.  When  the  financial  funds  –  flowing  from  the  parent  to  the  subsidiary  via  the 
coordination centre  - were borrowed, there were basically two deductions against the income generated by the 
investment: one at the level of the parent and another at the level of the  subsidiary. The result  was a negative 
effective  marginal  tax  rate,  and  therefore  a  tax  subsidy  to  investments  financed  through  these  triangular 
structures (see Valenduc, 2009: 28). 

 (1) See EU Council, Representatives of the Governments of the Member States (1998), Resolution of the Council and the Representatives of 
the Governments of the Member States, meeting within the Council of 1 December 1997 on a code of conduct for business taxation. Official 
Journal  of  the  European  Communities,  C  002,  06/01/1998;  Primarolo  Report  (1999),  Report  of  the  Code  of  Conduct  Group  (Business 
Taxation) to ECOFIN Council, 29 November 1999. 

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2 The base and rate of the Belgian ACE  

a. The base of the Belgian ACE. 

The ACE base is computed by operating a series of adjustments to the accounting equity taken 

from the balance sheet of the tax year. According to Belgian accounting rules, “equity capital” (fonds 

propres) is composed of capital, share premiums, revaluation gains, reserves, carry-forward of profit 

and  losses,  and  capital  investment  subsidies.  For  the  purpose  of  computing  the  ACE,  this  “equity 

capital”  is  subject  to  some  adjustments  to  arrive  to  the  so-called  "adjusted  equity"  (fonds  propres 

corrigés).  

In practice, some components are not considered (i.e. capital subsidies) and several additional 

deductions  are  undertaken  with  the  aim  to  either  ensure  a  coherent  taxation  of  income  generated 

abroad, or to avoid "cascading" effects and abuses. The former set of deduction refers to assets located 

abroad in countries with which Belgium has a Tax Treaty in force to avoid double taxation. Since the 

income generated by these foreign assets (i.e. the net worth of foreign permanent establishments – PEs 

- and foreign real estate) is exempt in Belgium, the ACE benefit was originally not granted altogether. 

In 2013, however, this provision was declared illegal by the ECJ because contrary to the freedom of 

establishment.15 Consequently, the Belgian tax law has been amended to link more closely the ACE 

deduction to the profits of the foreign PEs and real estate.  According to the new provisions, the ACE 

allowance related to the net worth of PEs or to immovable properties located in a European Economic 

Area (EEA) Treaty Partner Country will be granted, albeit only to the extent that it is larger than the 

profits attributable to these assets.16 

15   In the Argenta Spaarbank case (C-350/11) a Belgian financial institution did not exclude the net assets of its 
Dutch permanent establishment in computing the ACE. The ECJ ruling was retroactive and gave companies 
the possibility to claim back up to five years of the excess of paid corporate taxes. An infringement against 
Belgium was started in 2009 on a similar issue regarding the exclusion of foreign immovable property from 
the ACE base. For a discussion of the Argenta Spaarbank case, see O'Shea (2014).  

16   If the profits of the PE (or immovable property) located abroad are exempt under a Treaty, then the ACE for 
the related equity was previously not granted, by correcting the ACE base in the first place. Under the new 
rules, the equity of the PE (or immovable property) located abroad is first considered in the computation of 
the overall ACE allowance, but then there is a deduction against this overall amount. For PEs (or immovable 
property) located outside the European Economic Area (EEA), the deduction is equal to the ACE related to 
their equity. This means that in this case there are no changes  with respect to the previous regime. Instead, 
for PEs or immovable properties located inside the European Economic Area (EEA), the deduction is equal 
to  the  minimum  between  the  profits  attributable  to  the  PE  (or  to  the  immovable  property)  and  the  ACE 

9 

 
 
 
                                                           
b. The rate of the Belgian ACE. 

The ACE rate is based on the monthly reported indices of 10-years government bonds17  with 

a series of specific rules (e.g. in each year the rate cannot exceed by more than 1 percentage point the 

rate applied in the previous year, and it could not be in any case larger than 3% (6.5% until 2011)). 

The rate is increased by 0.5% for SMEs.18 For 2012, e.g., the ACE notional rate was equal to 3%; for 

2013 it has been reduced to 2.742%.19  

c. Additional aspects of the Belgian ACE. 

Until 2012, the part of the deduction that remained unutilized could be carried forward for up 

to seven years. As for 2013, this carry-forward provision has been abolished, with grandfathering rules 

for the existing stock of unused deductions.  

With  effect  from  2013,  companies  other  than  SMEs  are  liable  to  pay  a  new  tax  called  the 

"Fairness Tax"  or  FaTa,  the  application  of  which is related to the  ACE  regime.  The  FaTa is indeed 

applicable  when  within  a  given  year  a  large  company  distributes  dividends  while  at  the  same  time 

(part  of)  its  taxable  profits  are  reduced  by  the  ACE  and/or  by  carried-forward  tax  losses.  If  these 

conditions  are  satisfied,  the  fairness  tax  applies  with  a  tax  rate  equal  to  5.15%  (5%  +  a  3%  crisis 

contribution  surtax).  The  FaTa  tax  base  depends  on  several  elements  such  as  the  amount  of  the 

distributed  profits,  the  corporate  tax  base  subject  to  the  standard  tax  rate,  and  a  composition  ratio 

measuring the relative importance of ACE and tax loss carry-forward in reducing the taxable corporate 

profit of the period.20 Taken together, the FaTa interacts with the ACE in three ways: first, the ACE is 

a trigger factor for the FaTa; second, soon or later the ACE allows distributing untaxed dividends that 

will directly feed the FaTa tax base; third, the ACE affects the composition factor that enters into the 

related to its equity. In other words, if the profits of the PE (or the immovable property) are lower than the 
ACE related to their equity, then the ACE is granted for the difference. That is the reason why if the PE (or 
the immovable property) records a loss, all the ACE related to its equity will be acknowledged. 

17   As for 2013, the reference is to the average of monthly reported indices of linear obligations (OLOs) in the 
month of July, August and September of the previous year. Until 2012, the reference was to the average over 
the whole previous year. 

18   According to the Belgian law, an enterprise is considered SME if it meets some criteria defined by the law in 

terms of total assets, total revenues and number of full time (equivalent) workers.  

19   The  ACE  rate  was  equal  to  3.442%,  3.781%,  4.307%,  4.473%,  3.80%,  and  3.425%  respectively  in  2006, 

2007, 2008, 2009, 2010, and 2011.  

20   Only  for the  first  year of application, the tax  will also depend on the dividends distributed out of earnings 

retained until 2013, deemed to stem from formerly built taxed reserves. 

10 

 
 
 
                                                                                                                                                                                     
calculation of the FaTa tax base. In summary, the “ACE-plus-FaTa” regime resembles somehow the 

systems  that  are  referred  to  as  partial  ACE  schemes  in  the  economic  literature,  and  precisely  those 

ACE regimes whereby a part of the profits is taxed at the ordinary rate, while the notional return to 

equity is taxed at a lower rate.21 This result is however achieved in a rather indirect way through the 

interaction with the FaTa. 

Let us turn now to the provisions of the Belgian ACE aimed at avoiding  "cascading" effects 

and abuses in the use of the allowance. 

2.3. The anti-avoidance framework 

The  anti-avoidance  framework  of  the  Belgian  ACE  is  rather  heterogeneous.  It  primarily 

includes the specific anti-avoidance rules of the ACE legislation. It also comprises regulations issued 

in 2008 and 2011 on specific cases of ACE abuses, and the (specific and general) anti-abuse rules of 

the Belgian tax law that can be applied to the ACE.22  

a. Specific anti-avoidance provisions of the ACE legislation 

The specific anti-abuse rules of the ACE legislation can be classified into two groups.  

The first group concerns own shares and other participations. With regard to own shares, the 

deduction of their value from the ACE base is needed to prevent abuses: a company increasing equity 

(by issuing new shares) and simultaneously subscribing it would indeed artificially boost its capital for 

the purpose of increasing the ACE base. This equity increase would not qualify for the ACE base. As 

regards  other  participations,  deductions  from  the  ACE  base  are  undertaken  for  the  shares  in  other 

companies  that  qualify  for  the  participation  exemption23  and  for  those  qualifying  as  fixed  financial 

21   See Klemm (2007). 
22   See the circular No. Ci.RH.840/592.613 (AFER no. 14/2008) and its two addendum released on 02.06.2008 

and on 20.06.2011.  

23   Under  the  participation  exemption  regime,  an  amount  equal  to  95%  of  dividends  is  exempted  from  the 
taxable  income  to  avoid  an  economic  double  taxation.  For  this  regime  to  apply  under  the  Belgian  tax  law 
several  conditions  have  to  be  fulfilled.  Among  others,  the  participation  has  to  be  at  least  10%  of  the 
subsidiary  capital  or  at  least  equal  to  EUR  2.5  mio.  Until  2010,  for  the  participation  exemption  regime  to 
apply,  another  condition  was  that  the  shares  had  to  be  recorded  into  the  balance  sheet  as  fixed  financial 
assets. 

11 

 
 
 
 
                                                           
assets.24 The correction related to the participation exemption aims at avoiding granting a double tax 

benefit  for  the  same  financial  flow  and  at  tackling  the  possibility  of  a  cascading  of  ACE  benefits 

through  a  chain  of  equity  injections  out  of  the  same  initial  equity  funds.  The  deduction  for  fixed 

financial assets can be interpreted as an additional firewall against the cascading of ACE benefits for 

the cases where these shares do not qualify for the participation exemption. Note that the correction for 

the participations qualifying for the participation exemption and as fixed financial assets makes in fact 

the  ACE  immaterial  for  resident  holding  companies,  since  for  them  the  correction  very  likely  will 

reduce the ACE base to zero. 

The second group of adjustments is more directly targeted at avoiding abuses. Assets whose 

costs  exceeds  business  needs  (e.g.  luxury  cars),  those  not  generating  periodic  taxable  income  (e.g. 

jewellery, artworks, precious metals) and real estate used by company directors, their spouses or their 

children have to be deducted from the accounting equity for the purpose of the ACE, since they would 

boost artificially the ACE base.  

b. Specific cases of ACE abuses targeted by the tax authorities  

The anti-avoidance framework also includes some specific cases of ACE abuses targeted by 

the tax authorities. In other words, after some years since the launch of the reform the tax authorities 

clarified  that  they  could  challenge  ex-post  specific  types  of  transactions  if  some  conditions  are  not 

satisfied.  Until  now,  two  kinds  of  transactions  have  been  put  under  the  spotlights.  The  first  type 

includes bilateral circular intra-group loans whereby a parent capitalizes a financing conduit subsidiary 

that in turn immediately grants a loan to the parent. In this case, the transaction generates deductible 

interest  payments  at  the  level  of  the  parent,  while  at  the  same  time  providing  an  additional  ACE 

allowance  for  the  subsidiary.  Moreover,  the  dividend  paid  to  the  parent  benefits  from  the  (95%) 

participation  exemption.25  Note  that  this  is  the  only  specific  case  of  intra-group  loans  that  has  been 

24   The correction for the participations qualifying for the participation exemption has been introduced recently 
(as  for  2013).  This  implies  that  the  ACE  related  to  such  participations  is  not  granted  even  if  these 
participations are held as a mere investment. The new provision can be related also to the change as for 2011 
of the conditions for the participation exemption regime to apply. 

25   Among others things, the anti-abuse legislation may be more likely applied when the transaction involves a 

limited number of companies.  

12 

 
 
 
                                                           
formally  targeted  by  tax  inspectors.  Intra-group  loans  involving  genuine  financing  companies 

providing financial services to several companies within the group are instead explicitly admitted by 

the tax authorities (see figure 1).  

The second kind of transaction explicitly targeted by the tax authorities is the conversion of 

shares  with  latent  capital  gains  into  a  loan,  through  a  transaction  between  related  parties  where  the 

acquirer has not sufficient means to fund the acquisition or to repay the intra-group loan. Thanks to 

this  transaction,  a  non-deductible  item  (the  participation  excluded  from  the  ACE  base)  is  converted 

into a qualifying asset (the loan), the tax exempt realized capital gain further increases the ACE base, 

and the interest deductibility at the level of the acquiring company reduces its taxable base (a case of 

double  dipping).  Note  that  normal  restructuring  transactions  -  aimed  for  instance  at  segregating 

groups’ holding from operational activities - are not targeted. 

Figure 1. Intra-group loans in the Belgian ACE and the anti-avoidance framework 

                         ADMITTED STRUCTURE                                                                  TARGETED STRUCTURE 

Parent 

Subsidiary 

Parent 

Equity 

Loan 

Equity 

Loan 

Financing company 

Financing company 

c. Specific and general anti-avoidance rules of the tax law that also apply to the ACE 

Limits to the ACE can derive from specific anti-abuse rules of the Belgian tax law that the tax 

authorities consider applicable also to the ACE. Among these anti-avoidance provisions, one targets 

the  deductibility  of  interest  costs,  which  it  is  in  general  possible  only  if  these  costs  are  incurred  to 

generate or retain taxable income26. This provision of the Belgian law - extended to the ACE – implies 

that  double  dip  structures  where  interest  deductions  are  claimed  in  Belgium  on  loans  taken  out  to 

26   See article 49 of the 1992 Income Tax Code. 

13 

 
 
 
 
                                                                                  
 
                                             
                                                                       
  
                         
 
     
 
 
 
 
                                                           
 
subscribe an equity increase can be challenged when the related transaction is not consistent with the 

company's statutory goals, or when it does not generate a positive pre-tax income (namely when the 

interest deduction exceeds the income of the ACE company).27   

Finally, the general anti-avoidance rule can be also applied to the ACE. One basic principle - 

based  on  the  jurisprudence  -  is  that  in  Belgium  taxpayers  have  the  right  to  perform  transactions  to 

minimize their tax liability (recherche de la voie légale la moins imposée) even if these transactions 

are carried out  in  an unusual  manner. This  principle  was recalled in the  2008 circular issued  by  the 

Belgian  authorities  dealing  with the anti-avoidance  provisions of the  ACE.  Over  time,  however,  the 

above  principle  has  been  somehow  weakened.  A  general  anti-avoidance  rule  was  introduced  in  the 

Belgium tax system in 1993. According to this rule, the tax authorities could re-characterize for tax 

purposes any transaction or series of transactions carried out by a taxpayer if it is possible to establish 

(by  presumption  or  proof)  that  the  target  was  indeed  tax  avoidance  and  if  the  new  characterization 

entails  similar  law  consequences  as  the  original  one.  The  taxpayer  can  however  challenge  the  tax 

authorities' presumption of tax avoidance by establishing that the transaction was based on legitimate 

or economic needs. In 2012 the general anti-avoidance rule was modified and it is now based on the 

abuse of law concept.  An abuse of law is deemed to occur when the taxpayer gets an advantage out of 

the application or the non-application of a tax provision that is not compatible with the objectives of 

the  tax  provision  or  contrary  to  its  legislative  intent.  If  the  tax  authorities  challenge  a  transaction 

identifying an abuse of law, to avoid a re-characterization of the transaction the taxpayer must prove 

that it was carried out to pursue other objectives than tax avoidance. 

27   See  the  circular  No.  Ci.RH.840/592.613,  page  6.  Other  specific  anti-avoidance  provisions  that  can  be  also 
applied to the ACE target: the use of deductions (and by extension also of the ACE) to reduce the taxation of 
profits stemming from an abnormal or gratuitous advantage; the trade of companies  with tax losses carried 
forward from the past, that can be extended to companies with unused ACE deductions. Since as for 2013 the 
new  unutilized  ACE allowances  will be lost, over time the latter provision  will become immaterial for the 
ACE.  

14 

 
 
 
 
 
 
                                                           
2.4 Assessment 

2.4.1 Debt bias and capital inflows 

Overall,  the  Belgian  ACE  seems  to  have  been  effective  in  reducing  the  gap  in  the  tax 

treatment of debt and equity - promoting more balanced financial structures - and in boosting capital 

inflows. Figure 2 illustrates the debt bias in Belgium over the period 1998-2012, showing the effective 

marginal tax rates (EMTR) on a new investment financed by new equity and by debt, respectively.28 

One  can  notice  the  decrease  of  the  EMTR  for  equity-financed  investments  as  from  2006  due  to  the 

introduction of the ACE. By 2009, thanks to the take-off of the reform and its strengthening with the 

increase of the notional ACE rate, the debt bias had halved with respect to 2005. Nevertheless, in spite 

of the ACE, Belgium showed a debt bias in 2012 that is just above the EU27 average.29 This is due to 

a combination of different factors, notably the fact that there remains a gap between the notional ACE 

rate and the market interest rate. 

Figure 2. EMTR in % on debt- and equity-financed new corporate investment, 1998-2012 

ACE 

Source: ZEW (2013) 

28   The reader is referred to the 2013  ZEW report for more information about the  tax parameters  used  for the 
computation of the EMTR, and to the 2008 ZEW report for a short description of the model at the basis of 
the figures (ZEW, 2008, 2013). A more comprehensive analysis of the modelling assumptions is Devereux 
and Griffith (1999).  For more specific analyses of the impact of the Belgium ACE on the cost of capital of 
alternative funding sources, see Eyckmans et al. (2006) and Gerard (2006).  

29   See European Commission (2013b: 62). In addition, the relatively high statutory corporate tax rate (the third 
highest,  after  France's  and  Malta's)  exacerbates  the  differences  between  the  EMTRs  for  debt  and  equity-
financing. 

15 

 
 
 
 
 
                                                           
As for 2013, with the introduction of the fairness tax – FaTa – the notional return to equity 

will not be exempt anymore and will be taxed at a rate as high as 5.15%. In terms of the well-known 

Devereux-Griffith framework30, the FaTa implies an increase of the EMTR and an upward shift of the 

EATR  curve,  larger  for  rates  of  return  that  are  closer  to  the  EMTR  and  negligible  for  the  rates  of 

return on the investment that tend to infinity. Although in general FaTa's final effects are likely to be 

small31, the tax may in some circumstances generate counterintuitive results. Indeed, depending on the 

profits and losses account - since other types of exempt incomes are affected by FaTa - there could 

even be the possibility that in some tax years a company may waive the ACE if the benefit stemming 

from the deduction is lower than the additional tax cost created by the application of the FaTa.32   

The reduction of the debt bias due to the ACE reform seems to have promoted more balanced 

financial structures. Princen (2012) provides econometric evidence of an ACE impact on the leverage 

of Belgian companies by between 2 and 7%. Results along the same lines can be found in Panier et al. 

(2013). The econometric evidence about the impact of the ACE on SMEs' financial structures appears 

more  inconclusive.33  This  can  be  probably  explained  by  the  concomitant  repeal  of  the  one-time  tax 

credit for new equity and by the fact that the investment reserve regime available to SMEs makes the 

ACE less attractive for such firms.  

As regards capital inflows, there was a strong growth of foreign direct investment in Belgium 

following the introduction of ACE. The reform seems then to have been successful also in improving 

the attractiveness of Belgium. The development was mostly due to equity injections by non-resident 

companies  into  Belgian  entities  that  were  acting  as  financing  companies  for  their  groups.  These 

financing  companies  played  often  the  role  that  was  previously  played  by  the  coordination  centres. 

30   See Devereux and Griffith (1999). 
31   For 2014, the projected revenue impact is EUR 165 million (see Project de plan budgétaire, Oct. 2013, 17-18 
(http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/ dbp/be_2013-10-15_dbp_fr.pdf). 
32   The choice of waiving the ACE is of discrete type and it will therefore be based on the comparison between 

EATRs in the two scenarios when the company would or would not claim the ACE.  

33   While  Van  Campenhout  and  Van  Caneghem  (2012)  do  not  find  any  significative  effect  (as  Panier  et  al., 
2013),  Kestens  et  al.  (2012) -  relying  on  a  much  larger  dataset  -  find  instead  that  the  ACE  did  result  in  a 
significant change of SMEs’ leverage.  

16 

 
 
 
                                                           
However, an important part of new equity was also due to new financing companies created when the 

ACE was introduced.34 

Overall, the ACE effect on companies' financial structures may have played a timely positive 

role by increasing the resilience of the Belgian companies to the financial crisis. These positive effects 

came however at a cost in terms of foregone corporate tax revenues.  

2.4.2 Budgetary impact of the reform 

When the reform has been introduced, the Government had estimated a direct revenue loss of 

about EUR 0.5 billion, corresponding approximately to 4.4% of the potential corporate tax revenues in 

2006.35 In 2008, the Belgian Central Bank had already estimated a gross corporate revenue loss for tax 

year 2006 equal to approximately EUR 2.4 billion (17.2% of the potential CIT revenues in 2006)36. 

Since then, yearly reports to the parliament on tax expenditures have exposed an increasing budgetary 

cost of the ACE, much higher than the initial government's and National Central Bank's estimates. 

Figure 3 presents the revenue losses due to the ACE over the period 2006-2011, in terms of 

CIT revenues. As the figure shows, the budgetary impact of the ACE increased substantially over the 

first  four  years.  Since  2009,  the  ACE  revenue  losses  represent  more  than  50%  of  the  overall  actual 

CIT  revenues  (more  than  1/3  of  the  potential  CIT  revenues).  Their  order  of  magnitude  has  become 

similar to that of the PEX regime for dividends.37 Over the more recent period 2009-2011, in spite of 

an increase in absolute terms (from EUR 5.5 to 6.2 billion), the ACE revenue loss appears stable in 

relative terms.  

34   See Banque Nationale de Belgique (2008: 16-22). 
35   The potential corporate tax revenues are equal to the sum of the effective tax revenues and the revenue loss 
associated to the ACE (i.e. the sum that would theoretically be collected without the ACE, albeit not taking 
into  account  dynamic  effects).  This  information  can  be  directly  compared  with  the  results  of  ex-ante 
estimates of the revenue losses associated to the  ACE based on balance sheet data. The initial  government 
estimate is much lower than the OECD's that had evaluated at about 10% the static ex-ante budgetary cost of 
the ACE reform in Belgium, through a micro-simulation model based on tax return and balance sheet data 
(OECD, 2007: 131-133). Also a more recent estimate - based on balance sheet data for 2005-2007 - points to 
a significantly larger revenue loss equal to 16.7% of corporate tax revenues (de Mooij, 2011). 

36   See Banque Nationale de Belgique (2008: 42-47). 
37   The PEX regime (Participation Exemption) for dividends represents the largest source of revenue losses in 
the Belgian corporate tax system. These revenue losses were equal to EUR 6.8, 6.0 and 8.7 bn in 2009, 2010 
and 2011 respectively. Notice that the PEX regime is considered – as the ACE – a structural feature of the 
system rather than a tax expenditure (dépense fiscale).  
17 

 
 
 
                                                           
The direct revenue impact of the ACE on CIT revenues is nevertheless only part of the story. 

In fact, one should consider not only the direct, but also the indirect effects of ACE on corporate tax 

revenues and on the revenues from other taxes. This requires bringing into the picture the companies' 

behavioural  responses  and  the  dynamic  effects  on  the  economy.  Indeed,  if  the  ACE  is  effective  in 

putting debt and equity on the same ground, then one should expect a change in the firms' financial 

choices: ceteris paribus, ACE deductions will replace a part of the interest deductions. This means that 

- for this part - the gross revenue cost will overestimate the impact of the ACE reform. Simple back-

of-the-envelope calculations, based on the econometric evidence quoted above, suggest that the gross 

revenue cost should be corrected by at least 5-15%.38  

Figure 3. The ACE revenue losses in terms of corporate tax revenues (%), 2006-2011 

Source:  our  elaborations  on  data  provided  in  Chambre  des  représentants  de  Belgique,  Inventaire  des 
exonérations,  abattements  et  réductions  qui  influencent  les  recettes  de  l’État  (2010:  1943/002;  2011: 
2521/002; 2012: 3070/002). Corporate tax revenues in terms of GDP are taken from the 2013 edition of the 
report "Taxation trends in the European Union". GDP figures are taken from EUROSTAT.  
Notes: Potential CIT revenues are equal to the sum of the actual CIT revenues and the revenue losses due to 
the ACE. 

38   Let us assume an initial leverage ratio (debt/assets) equal to 60% (based on the descriptive statistics provided 
in Princen, 2012), an average reduction of leverage by between 2 and 7 percentage-points (based on Princen's 
estimates, that is a new average leverage ratio between 53% and 58%) and an interest rate on debt equal to 
the ACE notional rate (defined as i). Given the above assumptions, the theoretical revenue losses associated 
with the ACE would be equal to either i*42*tau or i*47*tau, where tau is the corporate income tax rate and 
42  and  47%  are  the  share  of  equity  in  total  assets;  the  reduction  in  deductions  associated  with  reduced 
interest costs on debt will be equal to either i*2*tau or i*7*tau, that represents respectively about 5 and 15% 
of the ACE revenue losses.  

18 

 
 
 
 
 
 
                                                           
With  regard  to  the  dynamic  effects,  if  the  ACE  stimulates  capital  inflow  and  productive 

investment,  the  gross  cost  of  the  reform  will  tend  to  increase,  but  the  net  final  effect  on  public 

revenues could be much lower given the offsetting effects of investment expansion and capital inflows 

on  both  CIT  revenues  themselves  and  other  tax  bases.  These  offsetting  effects  may  be  particularly 

relevant if they are associated to very profitable investments.  

In addition to the general points just raised, there are some specific elements to be considered 

in  the  evaluation  of  the  net  revenue  consequences  of  the  ACE  reform.  First,  several  offsetting 

measures were undertaken to raise corporate tax revenues and therefore to fund at least partially the 

reform.39 Second and most important, the ACE was also introduced to replace the Coordination Centre 

Regime (henceforth, CCR). In the budgetary assessment of the ACE reform, one may argue that the 

budgetary cost of the CCR should be isolated in the budgetary assessment of the reform because at the 

end of the day for this part a deduction (the ACE) is replacing an exemption (the CCR). Moreover, 

since  the  ACE  is  less  favourable  than  the  CCR  (see  below),  there  could  have  been  even  a  positive 

budgetary impact from the transformation of coordination centres into financing companies subject to 

the ACE regime.  

Figure 4 presents some information about the revenue losses associated with the CCR since 

2005, the year preceding the inception of the ACE regime.  In 2005, the revenue losses amounted to 

about EUR 2 billion, corresponding to about 1/5 of the actual CIT revenues. The fall of the budgetary 

cost over time is obviously due to the regime's phasing out and it can be to some extent seen together 

with  the  increasing  cost  of  the  ACE  regime  visible  in  figure  Y.  Taking  into  account  a  series  of 

offsetting factors, the National Central Bank indeed estimated that the net revenue impact of the ACE 

in  2006  could  be  brought  down  substantially  from  EUR  2.4  billion  to  between  EUR  0.14  and  0.43 

billion (corresponding to between 6 and 18% of the gross cost, or between 1.2 and 3.7% of actual CIT 

revenues).  

39   In  the  Belgian  National  Central  Bank's  2008  analysis,  the  offsetting  measures  were  worth  about  EUR  0.7 
billion,  corresponding  to  about  1/3  of  the  estimated  gross  revenue  loss  in  2006  (See  Banque  Nationale  de 
Belgique, 2008, table 10).   

19 

 
 
 
 
                                                           
Figure 4. Coordination centre regime: revenue losses in terms of actual CIT revenues, 2005-2010 

ACE 

Source: Chambre des représentants de Belgique, Inventaire des exonérations, abattements et réductions qui 
influencent  les  recettes  de  l’État  (2010:  1943/002;  2011:  2521/002;  2012:  3070/002).  Corporate  tax 
revenues in terms of GDP are taken from the 2013 edition of the report "Taxation trends in the European 
Union". GDP figures are taken from EUROSTAT. 

2.4.3 The alleged role of tax planning 

While the gross revenue cost of the ACE reform should not be taken at face value, anecdotal 

evidence suggests that it may have been swollen by tax planning activities.40 The direct CIT revenue 

cost  of  the  ACE  may  have  been  increased  by  the  way  the  ACE  system  has  been  implemented  in 

Belgium.  Granting  the  deduction  only  to  the  new  equity  cumulated  starting  from  a  certain  point  in 

time – as opposed to the equity stock – could have reduced the budgetary impact of the reform in the 

short run.  It  was  however probably  seen  as incompatible  with the  aim  of  replacing  the  coordination 

centre regime. The reference to the entire stock of equity has provided strong tax planning incentives 

to  artificially  restructure companies'  activities  to optimize  the  use  of  ACE,  even  with  no  changes  in 

investment  and/or  external  financing  choices.41  This  has  been  facilitated  by  the  lack  of  an  anti-

40   Since the launch of the reform, ACE related tax planning by multinationals has been discussed in the media. 
See,  for  instance,  http://help.tijd.be/?op=detail&articleId=8942692&nodeId=3154  or  http://www.rtbf.be 
/info/belgique/detail_interets-notionnels-arcelormittal-le-cas-de-trop-chat-a-12h?id= 791 6153.  

41   See  the  discussion  in  Valenduc  (2009:  41-50).  The  role  of  ACE  as  a  tax  planning  tool  in  Belgium  is 
highlighted for instance in Wijkamp (2007) and Eicke (2009). For a discussion on how to optimize the tax 
benefits out of the Belgian ACE, see Colmant et al. (2006). See also Vanhaute (2008: 351-354). 

20 

 
 
 
 
 
                                                           
avoidance  framework  targeting  specifically  transactions  between  related  parties,  notably:  (i)  intra-

group loans; (ii) asset transfers; and (iii) equity contributions in kind. 

For the ACE to mimic the CCR, apart from the reference to the stock of equity, another crucial 

condition is the absence of specific anti-avoidance provisions for intra-group loans (see Box 2). The 

lack of such provisions has generated incentives to set up double-dipping structures, whereby interest 

costs are claimed for loans financing the equity injections that trigger the ACE deduction. In the cases 

of structures involving Treasury Centres and Financing Conduit Entities, it has been even possible for 

the  companies  injecting  the  equity  to  be  granted  a  loan  by  the  same  company  receiving  the  equity 

contributions.  This  scenario  is  consistent  with  the  spectacular  flow  of  equity  capital  into  Belgian 

companies following the ACE introduction that was redirect abroad as loans granted to other group's 

companies.42  Note  that  in  principle  double-dipping  structures  combining  interest  deductibility  and 

ACE  allowance  are  possible  not  only  within  multinational  groups,  but  also  at  the  domestic  level. 

Indeed,  while  there  is  a  specific  anti-avoidance  rule  providing  that  the  ACE  base  of  the  domestic 

parent will be decreased by the ACE base created at the level of the financing company, the rule is 

only  relevant  when  the  parent  has  a  positive  ACE  base.  Instead,  when  the  parent  is  a  domestic 

company  performing  (also)  holding  activities,  it  is  possible  that  its  ACE  base  is  already  reduced  to 

zero given the correction for the participations in other companies. In such case, all additional equity 

injected into the financing company will generate additional ACE base for the latter company without 

decreasing the ACE base of the parent (i.e. the ACE base cannot be negative). If the tax base of the 

parent is initially positive enough (more likely in the case of a mixed holding), taking up a loan to fund 

the equity contribution will generate an additional tax saving through the deduction of interest costs. 

The  absence  of  specific  anti-avoidance  rules  targeting  intra-group  loans  may  also  have 

triggered a cascading of ACE benefits. In this respect, note that the correction of the ACE base for the 

participations qualifying for the PEX and as fixed financial assets only tackles the possibility of ACE 

cascading  through  chains  of  equity  injections  alone.  In  principle,  ACE  cascading  is  also  possible 

42   See  Banque  Nationale  de  Belgique  (2008:  16-24)  for  figures  regarding  capital  flows  following  the 

introduction of the ACE. 

21 

 
 
 
                                                           
through  chains  combining  equity  injections  and  intra-group  loans.  Figure  5  shows  two  possible 

structures  -  one  international  and  one  domestic  -  that  would  allow  doubling  the  ACE  allowance 

associated to an initial genuine equity increase43. In both cases, the trick is channelling through intra-

group  loans  the  funds  that  have  already  benefited  from  the  ACE  to  a  group's  company  in  an  "ACE 

indifference"  status  -  foreign  company  or  domestic  company  with  a  zero  ACE  base  and  an  initial 

positive  tax  base44  -  that  then  injects  equity  into  another  domestic  group's  company.  In  the 

international example, the case when the foreign company injecting the equity (B1) is not the same as 

the  one  taking  on  the intra-group  loan  (A1)  would  be  more  opaque,  and  arguably  it  would  be  more 

difficult to be detected by the tax authorities and challenged ex-post under the general anti-avoidance 

rule. The same holds true if the foreign company injecting the equity (B1) does not target the domestic 

company  whose  ACE  base  increased  in  the  first  place  (S1),  but  rather  another  domestic  company 

belonging to the same group (S2).  

Box 2. The ACE and the coordination centre regime 

Some of the tax planning incentives of the Belgian ACE are a direct consequence of the way the ACE has been 
implemented to allow  it to  mimic the coordination centre regime (although less effectively). The figure below 
compares the two tax regimes.  

                COORDINATION CENTRE REGIME                                                                           ACE 

Parent 

Subsidiary 

Parent 

Subsidiary 

Equity 

Dividends 

Interests 

Debt 

Equity 

Dividends 

Interests 

Debt 

Coordination centre 
Tax base = 0 

Financing company 
Tax base = Interests - ACE 

With the  ACE, thanks to a triangular structure, interest income of the  financing company (that  would be fully 
taxed  at  CIT  if  directly  paid  to  the  parent)  is  transformed  into  (95%  exempted)  dividends.  While  in  the 
coordination centre regime this was achieved by exempting the financial activity of the coordination centre, with 
the  ACE  this  can  be  achieved  by  reducing  the  tax  base  of  the  conduit  financing  company  thanks  to  the  ACE 
deduction.  

In a domestic context, generally the ACE base would be reduced by the amount of the participations qualifying 
for the participation exemption or as fixed financial assets. In other words, the reduction of tax base at the level 
of  the  domestic  financing  company  thanks  to  the  ACE  related  to  the  equity  injected  by  the  domestic  parent 

43   In  the  example,  it  is  assumed  that  the  limits  to  the  deductibility  of  interest  costs  at  the  domestic  and 

international level are not binding.  

44   The initial positive tax base has to be large enough to allow the deductibility of the additional interest costs. 
22 

 
 
 
 
 
                                                                     
 
                                             
                                                                       
  
                         
 
     
 
 
                                                           
 
 
would be offset by an increase of tax base at the level of the domestic parent, due to the correction of the ACE 
base  associated  to  the  participation  into  the  conduit  financing  company.  In  other  words,  the  ACE  base  of  the 
parent is decreased by the ACE base created in the domestic financing company.    

This is not however the case when the parent is a foreign company. To fix ideas, imagine that the foreign parent 
company provides 1,000 of equity to the Belgian financing company, which in turn provides a loan of the same 
amount to a foreign or domestic subsidiary. Assume for illustrative purposes that the interest rate is 5% and the 
rate of the ACE is 3%. If the domestic subsidiary has an Earnings Before Interest and Taxes (EBIT) of 100, then 
after deduction of its interest payment to the financing company of 50, its taxable profit is 50 (i.e. 100-50), which 
leads  to  a  tax  liability  of  16.995  at  the  statutory  tax  rate  of  33.99%  applicable  in  Belgium.  The  net  profit  of 
33.005 (i.e. 50-19.995) is paid to the foreign parent company in the form of a dividend where it often benefits 
from a participation exemption (often at 100%). The tax base of the financing company is made of the interest 
received (50), minus the ACE (30), that is 20. This means a tax liability in Belgium of 6.798. The after-tax profit 
is then paid to the parent company as dividend, where it also benefits from the participation exemption. For the 
group, the total tax liability is 16.995 + 6.798 = 23.793. The same example without the ACE would lead to a tax 
liability of 33.99 (16.995 + 16.995), that is the statutory Belgian tax rate. Note that the same analysis applies if 
the  company  injecting  equity  is  a  domestic  holding  company  that  already  has  an  ACE  base  reduced  to  zero 
because of the corrections for the participations. 

If on top the foreign parent (or the domestic mixed holding with a zero ACE base and an initial positive tax base) 
takes  out  a  bank  loan  to  fund  the  equity  injection  into  the  Belgian  financing  company,  it  may  be  entitled  to 
deduct interest costs against its own corporate tax base, and therefore the consolidated tax liability will be even 
lower (by how much will depend on the statutory tax rate of the country where the parent is located). This is a 
typical case of double dipping. A more aggressive scheme is the one where companies injecting equity fund the 
transaction  through  loans  granted  by  the  same  companies  whose  capital  they  are  subscribing.  This  type  of 
scheme can be challenged ex-post by tax authorities under some circumstances (see par. 2.3). 

The possibility for related companies to undertake easily transactions between them has made 

possible to increase artificially the ACE base in a variety of ways. An often reported technique used to 

optimize the use of ACE – based again on the specific status of foreign companies or domestic holding 

with  a  zero  ACE  base  –  has  been restructuring  the  participations  held  within the  group:  since  these 

have to be deducted from the ACE base, the ACE benefits have been maximized placing them into the 

companies for which the ACE was either of little interest - such for instance a domestic holding - or of 

no interest, such for instance a foreign group company.45 

45   See for instance Quaghebeur (2007) and Peeters and Hermie (2011: 15). 

23 

 
 
 
 
 
 
 
 
 
 
                                                           
Figure 5  
Cascading of ACE benefits through intra-group loans: international and domestic structures 

Country A 

A1 

(2) 

Loan 

S1 

(1) 

Equity 
  + E 

International structure 

(3) 

Loan 

(4a) 

Equity 

Country B 

B1 

(4b) 

Equity 

S2 

ACE Country  

ΔACE Base S1 = + E 
(2*E in case 4a) 

ΔACE Base S1 = + E 
(in case 4b) 

ΔTotal ACE Base  = 2*E  

Domestic structure 

(1) 

Equity 
  + E 

(2) 

Loan 

C1 

(3) 

Equity 

MIXED 
HOLDING 

C2 

ΔACE Base C1 = + E  

ΔACE Base Holding = - E  

ΔACE Base C2 = + E  

ΔTotal ACE Base  =   

•  E if the initial ACE base of the mixed holding was ≥ E 

• 

2*E if the initial ACE base of the mixed holding was ≤0. 

24 

 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
        
 
 
                                           
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
Another  way  to  optimize  the  use  of  the  ACE  has  been  creating  subsidiaries  through  equity 

contributions  in  kind.46  The  following  example  is  taken  from  the  2008  National  Central  Bank's 

publication (see figure 6). It shows how the company A - with a total value of assets worth 400 and an 

initial  equity  and  ACE  base  equal  to  100  -  could  triple  the  ACE  base  by  creating  an  all-equity 

subsidiary B, and subscribing its equity capital through an asset contribution worth 300. Further tax 

benefits are possible by allocating appropriately profits between the two entities in order to exploit to a 

maximum  extent  the  deductions  of  interest  and  ACE  at  the  level  of  the  parent  and  the  subsidiary, 

respectively.47 

Figure 6. Optimize the use of ACE by creating a subsidiary 

Source: Banque Nationale de Belgique (2008: 14) 

Some  of  the  described  tax  planning  schemes  –  some  types  of double  dipping  structures and 

transfers  of  participations  –  have  been  made  more  difficult  over  time  by  issuing  administrative 

regulations (see par. 2.3).48 However, this kind of solution is arguably less effective than specific anti-

avoidance  law  provisions. Moreover,  double  dipping  seems  to  remain  an open  issue  for the  Belgian 

ACE.49 

46   See Banque Nationale de Belgique (2008: 14).  
47   See also Mignolet  (2010: 87). 
48   Note  also  the  new  stricter  provisions  as  for  2013  for  the  definition  of  the  ACE  base  that  have  made  more 

difficult the ACE cascading through chains of equity injections.  

49   See Chambre des Représentants de Belgique (2013), Project de Loi-Programme, 21 June, p. 8 ( http://www. 

lachambre.be/doc/  flwb/pdf/53/2853/53k2853014.pdf#search="2853/014).   

25 

 
 
 
 
 
                                                           
The results of audits by tax authorities over the years have confirmed the use of ACE-related 

tax planning strategies.50 It is difficult to disentangle the genuine revenue losses associated with the 

ACE given the shrinking corporate tax base from the revenue losses due to tax planning. However, it 

is  not  inconsistent  with  tax  planning  considerations having  played  a  role  in the  ACE  direct revenue 

loss the empirical evidence according to which: (a) large companies have mostly benefited from the 

ACE, since this class of companies are arguably more active in using tax optimization techniques; (b) 

subsidiaries  seem  to  have  responded  more  strongly  to  the  introduction  of  the  ACE51;  and  (c)  the 

aggregate investment seems not to have reacted to the decrease of the cost of capital induced by the 

ACE.52  

2.4.4 The way forward 

The revenue losses associated with the ACE, the evidence of a limited impact on investment 

and  employment,  and  the  important  role  played  by  large  companies/multinationals  in  using  the 

deduction have since the beginning spurred a heated debate about this reform. This is at the basis of an 

increasing scrutiny by the tax authorities of ACE-related transactions and more recently of the reaction 

by  the  legislator  aimed  at  watering  down  the  ACE  regime.  As  we  have  seen,  the  Belgian  tax 

authorities reacted to the alleged cases of ACE's related tax planning already in 2008 when a circular 

was  issued  dealing  with  the  anti-avoidance  provisions  applicable  to  the  ACE  regime  and  an 

assessment  action  plan  was  launched.  In  2011  an  addendum  to  the  above  circular  was  released 

focusing on specific schemes that were discovered during tax audits.  

At the legislative level, over the last years the ACE regime is being progressively weakened 

with  the  reduction  of  the  ACE  notional  rate,  the  elimination  of  the  carry-forward  for  the  unutilized 

ACE, and lastly with the introduction of the fairness tax which has basically transformed the Belgian 

50   See for instance Sénat de Belgique (2011a, 2011b). 
51   Panier et al. (2013) provide econometric evidence of an ACE effect on the financial structures of stand-alone 

companies equal to between 26% and 42% of the effect estimated for subsidiaries. 

52   See Princen (2012, p. 15). Valenduc (2011) analyses the effective taxation on corporate sector finding a clear 
downward trend following the introduction of the ACE. He also finds an increase of gross profitability and a 
stable size of the corporate sector. Overall, he argues that the available empirical evidence is consistent with 
a behaviour by companies consisting in locating equity in Belgium  without engaging in any real economic 
activity on the Belgian territory.   

26 

 
 
 
                                                           
ACE  in  a  partial  ACE  scheme.  Other  specific  proposals  have  circulated  on  the  same  vein,  such  as 

excluding  from  the  ACE  base  the  minimum  equity  needed  for  incorporation  or  even  the  statutory 

reserve the companies must maintain.  

Very  recently,  the  ECJ  decision  on  the  Argenta  Spaarbank  case  stirred  uncertainty  over  the 

ACE  and  has  reignited  the  debate  about  its  abolition.  Other  less  drastic  reform  proposals  being 

discussed  include  making  the  system  incremental  as  in  Italy  and/or  tying  the  ACE  deduction  to 

variables such as actual investment, employment, and valued added generated in Belgium.53 

The analysis above suggests however that the problem does not lie in the ACE-system per se   

– which seems to have brought economic benefits – but in the way in which it has been implemented, 

granting the allowance to all the existing equity, and accepting the existence of various loopholes that 

allow for tax planning and which are not closed effectively by the current tax measures. Instead, these 

current measures aim at limiting the use of ACE.  

53   See Castanheira (2013). 

27 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
3. The Italian experience  

3.1 The introduction of the ACE in Italy 

In Italy, the corporate tax system has provided historically strong incentives to debt-funding. 

Figure 7 shows the level of the statutory tax rate on corporate profits at which it was possible to deduct 

interest costs over the period 1982-2012. In 1996, at the peak, every additional Euro of interest costs 

made  possible  a tax saving  of  0.53 cents  at  the  corporate  level.  With a  few  exceptions (see  below), 

there  was  no  tax  saving  for  an  additional  Euro  of  equity  costs.54  The  tax  treatment  of  the  return  to 

equity and debt at the personal level either exacerbated the tax advantage to debt – in particular over 

the eighties – or mitigated it only to a limited extent.55 

Figure 7. The tax value of interest costs for corporations, 1982-2012  

(tax savings in % of interest paid) 

Notes: the figure takes into account the corporate income tax (IRPEG until 2003 and Ires afterwards) 
and - for the period 1982-1997 - the local income tax (Ilor).  

Italian companies  have  been  traditionally  characterized  by  a  relatively  high  reliance  on debt 

finance.56  This is especially  true  for  SMEs,  representing  an  important  part  of  the corporate  sector.57  

54   Between 1992 and 1997, the disadvantage to equity was even bigger due to the wealth tax levied at a rate of 

0.75%. 

55   See Alworth and Arachi (2001). 
56   See, for instance, Bordignon et al. (2001) and the references therein. For more recent data, see for instance 

IMF (2013: 22-25).  

28 

 
 
 
 
 
 
 
                                                           
Figure  8  presents  country  average  debt-asset  ratios  in  2007  for  companies  covered  by  the  ORBIS 

database. In 2007, Italy presented the highest leverage at the EU level at 67%, 9 p.p. higher than the 

EU average.  

Factors  related  to  information  problems  and  other  market  imperfections,  alongside  the 

importance  in  Italy  of  family-based  firms58,  are  likely  to  have  played  a  more  important  role  than 

taxation  in  driving  firms'  financial  choices,  especially  for  smaller  firms.  However,  the  role  of  the 

strong tax-related debt bias cannot be understated59, especially for larger firms. 

Figure 8. Average debt-asset ratio of firms in EU countries, 2007 

EU-average 58% 

Source: De Mooij and Devereux (2009: 32). 
Notes: Country averages obtained from the ORBIS database. 

Since the 1990s several tax measures were introduced either to address directly the debt-bias 

problem or having indirectly consequences on it. In 1996 a comprehensive tax reform was undertaken 

and  enforced  starting  from  1997.  The  statutory  tax  rate  on  profits  was  dramatically  reduced  by 

substituting the so-called "local income tax" (Ilor) – levied on profits at a flat rate of 16.2% – with a 

new  value  added  tax  of  income  type  -  called  Imposta  Regionale  sulle  Attivita'  produttive,  IRAP  - 

featuring a very broad tax base and a low tax rate equal to 4.25%. This change allowed reducing the 

57   See Banca d'Italia (2009) and IMF (2013). 
58   For recent data, see ISTAT (2013: 65-67). 
59   See, for instance, the discussions in Bordignon et al. (1999) and Bernasconi et al. (2005). 

29 

 
 
 
 
 
                                                                                                                                                                                     
average  effective  tax  rate on  profits,  which is  an  important  determinant  for  international investment 

and locational choice by multinationals. Crucially, the new tax was neutral with respect to the firms' 

financial  choices,  since  interest  costs  were  not  deductible  against  the  IRAP  tax  base.  Another 

important element of the reform was the introduction of a mechanism – called Dual Income Tax (DIT) 

–  aimed  at  reducing  the  tax  burden  on  equity-financed  investment.  This  was  achieved  by  taxing  a 

given notional return to equity at a reduced tax rate of 19% rather than at the ordinary corporate tax 

rate of 37%. This means that the DIT was in fact a “partial” ACE scheme.  

In  2001,  a  new  government  entered  into  power  and  adopted  a  new  corporate  tax  reform. 

Among  other  measures,  the  statutory  tax  rate  was  decreased  from  37%  to  33%  and  the  imputation 

system  for  dividends  was  substituted  by  a  participation  exemption.  The  DIT  was  first  progressively 

weakened and then repealed as for 2004.60 Specific provisions aimed at limiting the thin capitalization 

of large companies were introduced in the form of thin capitalization rules with a debt-to-equity ratio 

to  qualified  shareholder  of  5  (lowered  to  4  in  2005),  except  for  holdings  and  companies  with  a 

turnover lower than about EUR 5.2 million which were not subject to the rules.  

In  2008,  the  corporate  tax  system  experienced  another  major  tax  reform.  The  corporate  tax 

rate was further reduced from 33% to 27.5% and the IRAP tax rate from 4.25% to 3.9%. The revenues 

losses were financed through several tax base broadening measures: the depreciation rules were made 

less generous and an earning stripping rule limiting the deductibility of interest costs substituted the 

2004 thin capitalization regime. Although the new provisions for interest costs can be considered more 

burdensome than the thin cap rule - since they apply to all companies - their relevance in addressing 

the  debt  bias  is  questionable  because  the  mechanism  works  through  a  postponement  of  the 

deductibility of interests exceeding certain thresholds, rather than through their non-deductibility tout 

court.    

Against the above background, the Allowance for Corporate Equity (ACE) was introduced in 

Italy at the end of 2011 in the context of the fiscal policy package enacted to deal with the financial 

60   Apparently, one of the reasons for the repeal by the new government was the reduction of the CIT revenues 

in the DIT years for which the DIT was considered mostly responsible (see Guerra, 2002).  

30 

 
 
 
                                                           
and sovereign debt crises. The aims were promoting firms’ capitalization and boosting growth.61 The 

new  regime  applies  to  all  enterprises.  In  what  follows,  we  focus  on  corporations  (see  Box  3  for  a 

description of the ACE for unincorporated businesses)62.  

Box 3. The ACE for business income taxed under the personal income tax 

The  ACE  introduced  in  2011  -  as  the  previous  DIT  regime  -  also  applies  to  individual  entrepreneurs  and 
partnerships.  An  important  condition  to  be  fulfilled  in  order  for  a  business  to  get  the  ACE  benefit  is  keeping 
ordinary accounting books. 
In contrast with the ACE for corporations, the ACE regime for personal income tax (PIT) business entities is not 
incremental. Indeed, the ACE base is given by the stock of equity resulting from the balance sheet. This can be 
explained by the difficulties to apply the rules for corporations to other businesses.  
The anti-avoidance provisions set out for the corporations also hold for the PIT business entities. If, for instance, 
a partnership grants a loan - or if it makes a contribution in cash– to a controlled corporation or to a partnership, 
its ACE base will be reduced by the amount of the loan or cash contribution. 
The ACE rate is the same as the one the corporations apply to determine the amount of the deduction. 
The  ACE  for  PIT  entities  is  a  deduction  against  business  income.  This  deduction  is  not  considered  for 
determining both the nominal tax rates and the amount of tax credits; therefore it does not affect altogether  the 
progressivity of the personal income tax. Leaving aside the tax credits, this rule implies an effective taxation of 
the notional return to equity for unincorporated firms ranging from 0% to 20%. As regards the unused part of the 
deduction  in  a  given  tax  year,  while  for  individual  entrepreneurs  this  can  be  carried  forward  with  no  time 
limitations, for partnerships it is attributed pro rata to the partners and it can be used to reduce their PIT tax base. 
One interesting difference between the  DIT and the  ACE regarding the PIT entities  is  that the  DIT allowance 
was  originally  granted  only  if  the  taxpayer  had  undertaken  some  choices  deemed  meritorious,  namely  the 
reduction  of  debt  and  "real"  investments,  as  opposed  to  financial  ones.  The  same  rules  originally  applied  to 
permanent establishments of non-resident companies. After some years, however, for PIT entities the conditions 
on  the  destination  of  new  equity  were  abolished,  and  it  was  decided  to  adopt  the  "full  stock"  approach.  For 
permanent establishments it was decided to apply the same rules as resident companies.  

The  ACE  for  corporations  is  a  deduction  against  the  corporate  income  tax  base  meant  to 

approximate the cost of equity.63 There are no conditions regarding the type of investment. The regime 

applies to resident companies and permanent establishments of non-resident companies. 

61   See  Ceriani  (2012).  Interestingly,  in  the  law  the  relief  is  denominated  ACE,  but  the  acronym  stands  for 

"Aiuto alla Crescita Economica" (Aid to Economic Growth).  

62   The description of the ACE legislation is mostly based on the accompanying report to the Ministerial Decree 
on ACE (issued on March 14, 2012), and on the circulars on ACE issued by Assonime (2012),  ABI (2012) 
and Agenzia delle Entrate (2014). 

63   The  ACE  is  not  deductible  against  the  IRAP  tax  base.  However,  this  is  irrelevant  for  the  debt-equity  bias 
because - as we have argued before - IRAP does not affect financial choices. However, this is true only for 
non-financial  firms.  For  banks,  the  interest  costs  are  instead  deductible  also  against  the  IRAP  tax  base. 
Therefore, in the banking sector IRAP broadens the tax wedge between debt and equity. This implies that - 
from an economic point of view - in the banking sector the ACE should be allowed also against the IRAP tax 
base, if the goal is full neutrality of corporate taxation with respect to financial choices in the financial sector. 

31 

 
 
 
 
 
 
                                                           
3.2 The base and rate of the Italian ACE  

a. The base of the Italian ACE. 

The ACE allowance is calculated by applying a notional interest rate to a net equity base, the 

so-called ACE base. A core part of the ACE legislation is the emphasis on the concept of liquidity in 

the  computation  of  the  ACE  base.  In  the  ACE  reform,  this  may  reflect  the  prudent  approach  of  the 

Italian legislator from a budgetary point of view, which is also at the basis of the ACE anti-avoidance 

set of rules (see below). The ACE has several similarities with the previous DIT regime (see box 4).64 

Box 4. Comparison between the ACE and the previous DIT regime 

The new ACE regime has a structure similar to the Italian Dual Income Tax (DIT), in force from 1997 to 2003, 
mentioned above. Like the former DIT regime, the new ACE refers only to the new equity invested starting from 
a certain date. In the DIT system, however, this incremental equity was magnified by a multiplier (1.2 in 2000, 
1.4  in  2001)  to  speed  up  the  transition  towards  the  long-run  regime  where  the  tax  benefit  would  have  been 
granted to all the equity.  
Unlike the DIT, the ACE provides for the complete exemption of the notional return to equity, rather than taxing 
it at a reduced tax rate. Moreover, in the ACE regime there are no limits to the average effective tax rate, while 
under the DIT system this rate could not be less than a given threshold (27%). 
In the DIT regime, the notional return was based on the average return of public and private bonds, and it could 
be increased by up to three percentage points as a compensation for greater risk. It is interesting to note that in 
2000  the  rules  for  the  determination  of  the  notional  interest  rate  were  changed,  introducing  the  possibility  of 
different rates depending on the location, dimension and type of economic activity. However, the new provisions 
were never applied.  
The new ACE legislation is therefore based on the former Italian DIT, with some adaptations compared to the 
DIT period of the tax system (e.g. the new consolidation and look-through regimes as for 2004), the civil law 
(the corporate law reform as  for 2003), and the accounting framework. With regard to the latter element, note 
that  as  for  2005  Italy  has  adopted  the  International  Accounting  Standards  (IAS)/International  Financial 
Reporting Standards (IFRS), not only for consolidated accounts, but also for individual financial statements of 
listed companies. 

The  ACE  base  is  defined  as  the  net  positive  variation  of  equity  as  for  the  end  of  2010. 

Contrary to the Belgian system, the Italian ACE is therefore incremental. The notion of equity relevant 

for the allowance is the accounting one.65 The net variation of equity stems from the accumulation of 

(algebraic  sums  of)  specific  flows.  The  flows  entering  with  a  positive  sign  are  the  contributions  in 

cash66  and  the  retained  profits  feeding  reserve  provisions  satisfying  some  specific  conditions;  the 

64   See the Annex for additional information about the DIT regime. 
65   For  permanent  establishments  of  non-resident  companies,  the  main  reference  for  the  ACE  base  is  to  the 

increase of the so-called free capital ("fondo di dotazione").  

66   To benefit from the ACE, the contributions in cash have to confer the status of shareholder. On this basis,  
cash  inflows  related  to  the  issue  of  hybrid  securities  –  featuring  elements  of  both  debt  and  equity  –  are 
excluded  from the  ACE benefit. The criterion allows a simpler application of  the  ACE rule, especially  for 

32 

 
 
 
                                                           
flows entering with a negative sign are the profits and reserves distributions. This "flow approach" can 

be considered simpler than the "stock approach" of comparing stock values in two points in time since 

it  directly  focuses  on  the  few  components  which  are  deemed  relevant  by  the  legislator,  while  the 

alternative would have required as many adjustments as the number of the components considered not 

relevant.  

The choice of the reserve provisions relevant for the tax benefit can be driven by several goals. 

For instance, if the goal is that of maximizing the incentives effects of the ACE, while minimizing at 

the same time the initial revenue losses, one may want to exclude those reserves that are compulsory 

by  law.  In  Italy,  the  adopted  approach  has  been  excluding  from  the  ACE  base  those  provisions 

representing valuation profits which cannot be distributed to shareholders,67 and those provisions built 

out  of  "true"  profits  which  neither  can  be  distributed,  nor  used  to  cover  losses,  nor  to  increase  the 

capital. As an example of the latter type of reserves, one can mention the reserve for own shares that 

non-IAS companies buying own shares are obliged to set up68.  

The qualified ACE base cannot exceed the net worth of the company existing at the end of the 

tax year. Given the "flow approach" in computing the ACE base discussed above, this limit was set in 

order to take into account the effect of losses on net worth (note indeed that accounting losses do not 

"enter" the algebraic sum to compute the ACE base).  In the case of repeated losses, the ACE could 

have been based on a "virtual" equity. The mechanism is built in a way that losses first decrease the 

non-ACE part of net worth; and only when the latter is exhausted, the ACE base starts being affected 

by losses. However, the decrease of the ACE base due to losses is just temporary: if the net worth is 

IAS adopters that have to disentangle the equity, debt, and eventually derivative components of the security 
for the representation into the balance sheet. The extension of the ACE benefit to hybrids would have indeed 
required the precise identification of the ACE base in these cases, and arguably this would have complicated 
the legislation. 

67   This  means  that  for  IAS  adopters  the  valuation  components  which  enter  the  profit  determination  (for 
instance,  the  accrued  capital  gains  for  financial  securities  of  the  portfolio  HFT  -  Held  For  Trading)  are 
relevant for the determination of the ACE base.  

68   IAS companies do not set up any reserve following the purchase of own shares that directly decreases their 
equity. Specific provisions ensure an equal ACE-treatment of the own shares transactions, irrespective of the 
accounting regime.  

33 

 
 
 
                                                                                                                                                                                     
increased - even by components which in the first place are not ACE-valuable (as the contributions in 

kind) - the ACE benefit due to, say, a former contribution in cash is re-installed.  

b. The rate of the Italian ACE. 

The  notional  ACE  rate  is  based  on  the  average  returns  on  Treasury  bonds,  and  it  can  be 

increased of up to three percentage points as a compensation for greater risk. However, it was set at 

3% for the first three years of the new regime. The 2014 financial stability law has recently increased 

the ACE notional rate to 4%, 4.5% and 4.75% for 2014, 2015 and 2016, respectively.  

c. Additional aspects of the Italian ACE. 

If the ACE is larger than the net taxable income, the excess can be carried forward indefinitely 

and can increase the ACE allowance of the next periods without being subject to the limits of tax loss 

carry-forward.69 Indeed, in the computation of the tax bill, the ACE steps in only once the net taxable 

income is computed, therefore also after possible tax losses – actual and carried forward - have been 

considered.  This  means  that  the  ACE  relief  cannot  itself  determine  tax  losses.  Given  the  existing 

limitations to tax loss carry-forward, this specific provision is favourable to taxpayers.  

3.3 The anti-avoidance framework 

a. Specific anti-avoidance provisions of the ACE legislation 

Other limits to the ACE base stem from the specific anti-abuse provisions aimed at avoiding a 

cascading  of  ACE  benefits  within  groups  of  companies  subject  to  the  same  unitary  control,  or  at 

preventing  abuses  through  sales  of  assets  in  order  to  transform  "old  equity"  into  "new  equity"  that 

would attract the ACE allowance. As a matter of fact, this is one of the most important parts of the 

Italian ACE legislation, dealing indirectly with the revenue losses that may stem from an ACE reform 

due to tax planning reasons. The notion of group is broad, including not only resident companies, but 

also  resident  business  entities  subject  to  the  personal  income  tax  (both individual  entrepreneurs  and 

69   With  regard  to  the  carry-forward  regime  of  unused  ACE  allowances,  a  specific  regime  is  in  place  for 
companies participating to the tax consolidation regime. Under this regime, the unused ACE at the level of 
the subsidiary is automatically attributed to the parent and it can be used to reduce the consolidated taxable 
income. The possible unused part at the level of the parent is re-attributed back to the subsidiary, and it can 
be brought forward and used in the following years with the same rules.   

34 

 
 
 
                                                           
partnerships).70  According  to  the  specific  anti-avoidance  provisions,  the  contributions  in  cash,  the 

remunerations for the sale of a business (azienda) or parts of a business, the loans, the acquisition (or 

increments) of control participations - within a group - all involve a reduction of the ACE base for the 

domestic entity making the contributions, or buying the business or parts of a business, or granting the 

loan, or acquiring the participations.  71  Under some conditions, the above anti-avoidance provisions 

will not trigger a reduction of the ACE base if the company injecting somehow the funds into another 

group's company had previously increased the ACE base by retaining profits.72 

Other  specific  anti-avoidance  provisions  are  directed  to  some  types  of  non-resident 

companies.  These  companies  are  not  a  direct  target  of  the  anti-avoidance  provisions  because  they 

cannot directly gain from the ACE. However, they can be involved in avoidance schemes as vehicles 

to re-direct back in Italy contributions that did already profit from the ACE. In order to deal with such 

cases, two types of provisions have been introduced: (i) one is directed to the cash contributions made 

by  non-resident  companies  located  in  countries  that  have  not  agreed  to  implement  the  exchange  of 

information for tax purposes; (ii) the other to the cash contributions made by non-resident companies 

located  in  countries  that  do  allow  the  exchange  of  information.  While  in  the  first  case,  the 

contributions  will  have  always  to  be  deducted  from  the  ACE  base  (given  the  difficulty  of  their 

assessment),  in  the  second  the  deduction  is  conditional  on  the  existence  of  control  by  the  Italian 

company.  

The  rules  for  non-resident  companies  seem  to  leave  room  for  a  cascading  of  ACE  benefits 

through triangulations with foreign companies controlling subsidiaries in Italy. However, the existence 

70   The notion of “control” is defined with reference to the Civil law. A company is considered to be controlled 
if:  another  company  holds,  directly  or  indirectly,  the  majority  of  the  votes  at  the  shareholders’  meeting  or 
sufficient votes to exert a determinant influence in the shareholders’ meeting; or if the company is under the 
significant influence of another company due to a special contractual relationship. 

71   Apart  from  other  minor  differences,  in  the  computations  of  the  former  DIT  base  a  deduction  was  also 
operated  for  the  increments  with  respect  to  the  base  date  of  the  stock  of  financial  instruments  other  than 
shareholding.  This  provision  aimed  at  incentivizing  investments  in  tangible  assets  and  at  avoiding  specific 
abuses through the trading of financial assets through related parties (See Ministero delle Finanze, 1998, p. 
8). 

72   The company injecting  funds into another group's company avoids the correction of its ACE base if it can 
prove  that:  i)  it  has  not  received  contributions  from  other  group's  companies;  ii)  it  has  not  received  loans 
from  other  group's  companies  that,  in  their  turn,  had  previously  received  contributions  from  other  group's 
companies (see Agenzia delle Entrate, Circolare n. 12/E, 23 Maggio 2014). 

35 

 
 
 
                                                           
of  stricter  rules  for  foreign  companies  resident  in  a  "black  list"  country  or  resident  in  a  "white-list" 

country and controlled by an Italian company makes it clear that the ant-avoidance system applicable 

to companies resident in "white-list" countries focusses on the most dangerous case, while at the same 

time  avoiding  penalizing  the  equity  injections  into  Italian  subsidiaries.  This  implies  that  the  equity 

injections by a foreign company resident in a white-list country into an Italian subsidiary could easily 

fall under the spotlight of the tax authorities if the Italian subsidiary had already increased its equity 

and funds had been channelled abroad via say intra-group loans (see below the discussion about the 

general anti-avoidance rule). 

One notable feature of all the above specific anti-avoidance provisions is the fact that they are 

automatic, in the sense that the firm has to directly apply them when it files the tax return. However, it 

is envisioned the possibility to ask for the disapplication of such provisions, by presenting an advance 

ruling, proving that in the specific case there is no ACE cascading. Another important feature of all the 

above  anti-avoidance  provisions  but  the  one  regarding  the  loans  is  the  fact  that  they  involve  a 

permanent  reduction  of  the  ACE  base.  In  other  words,  once  the  conditions  for  the  ACE  base 

sterilization are in place, there will be a permanent reduction of the ACE base even if these conditions 

will  not  hold  anymore  in  the  future,  or  even  over  the  same  tax  year.  For  credits,  the  reduction  is 

instead just temporary: this means that once the conditions for sterilization are not satisfied anymore, 

the initial ACE benefit is re-installed. 

b. General anti-avoidance rule and the ACE 

With  regard  to  the  tax  avoidance  incentives,  one  reason  of  concern  about  the  Italian  ACE 

regards its incremental nature and the consequent possibility for companies to re-categorise their old 

capital as new capital through liquidations and start-ups, increasing in this way the revenue cost of the 

reform in the short run.73 These types of tax planning schemes are indeed not covered explicitly by any 

specific  anti-avoidance  provision.  The  main  reason  has  probably  to  do  with  the  fact  that  in  many 

73   In general, among other things the incentive to set up such tax planning  schemes depends on the extent to 
which the assets have been already written off in the tax accounts and the gap between the rate of return on 
assets and the notional return to equity (Griffith et al., 2010: 980-981). 

36 

 
 
 
                                                           
instances the company's transaction costs of such avoidance schemes are larger than the tax savings 

they  would  allow.    In  any  case,  the  list  of  specific  anti-avoidance  provisions  is  not  intended  to  be 

exhaustive,  and  there  is  always  the  possibility  to  rely  on  the  general  anti-avoidance  rule  for  any 

residual abuse of ACE.74 In this case, however, the tax authority has to prove the existence of an actual 

benefit  stemming  from  the  ACE  cascading  contrary  to  the  spirit  of  the  law,  the  mere  possibility  of 

taking advantage of the ACE cascading being not sufficient to challenge the company's choices.  

3.4 An assessment of the Italian experience with ACE-type reforms 

3.4.1 Tax design  

The  introduction  of  an  ACE-type  corporate  tax  system  has  strengthened  the  tax  design  of 

capital and business taxation, bringing the Italian system closer to a Dual Income Tax (DIT), namely a 

system where earnings are taxed at progressive rates while capital income is taxed at a flat rate below 

the  highest  rate  of  the  personal  income  tax  rate  structure.75  The  extension  of  the  ACE  to 

unincorporated businesses is in this respect a necessary step for the overall consistency of the taxation 

of  business  income  and  for  the  overall  neutrality  between  debt  and  equity,  at  least  for  investments 

financed out of domestic funds.76 A step to further improve the design of the ACE could be to ensure 

that the notional income for unincorporated businesses is taxed at a unique flat rate, simplifying the 

present system where it is instead taxed at a rate ranging from 0 to 20% (see Box 3).77  

74  The reference is to article 37-bis of Presidential Decree No. 600 of 1973, entered into force in 1997, which 
sets out a general principle of artificiality of tax arrangements, listing a number of cases where this can be 
applied. Note that in recent years several Supreme Court decisions, based on constitutional principles, appear 
to have widened the possibility by tax authorities to challenge and overturn tax schemes, relying on the abuse 
of law concept.   

75   See  Arachi  and  Santoro  (2011),  IMF  (2012),  and  Arachi  (2013).  Notice  that  as  for  2012  the  taxation  of 
dividends  and  interests  (other  than  government  debt)  has  been  increased.  The  flat  tax  rate  is  now  20% 
(previously 12.5%).  

76   The Italian system, after the introduction of an ACE extended also to unincorporated businesses, resembles 
somehow  the  "income  tax  regime"  advocated  for  Britain  by  Griffith,  Hines  and  Sørensen  in  the  Mirlees 
Review (Griffith et al., 2010: 981-986). 

77   Another  measure  needed  for  a  more  rational  tax  system  for  capital  income  is  getting  rid  of  the  distinction 
between  qualified  shareholdings  (i.e.  "substantial"),  taxed  partially  at  progressive  PIT  rates,  and  non-
qualified shareholdings, taxed at a flat rate of 20%, as interest income (see Arachi, 2013). 

37 

 
 
 
 
 
 
                                                           
3.4.2 Debt bias 

With  regard  to  corporate  business  income,  the  2011  ACE  reform  has  decreased  the  cost  of 

capital for equity-financed investments and therefore the tax bias between debt and equity. Figure 9 

shows that the tax wedge between equity and debt - measured as the difference between the EMTRs 

equity-  and  debt-funded  investment  -  has  fallen  in  2012  by  almost  30%  as  a  result  of  the  ACE.78 

Thanks to the reform, Italy showed in 2012 a debt bias below the EU average.79 The bias is expected 

to decrease further over the following years given the increase of the notional ACE rate provided by 

the 2014 financial stability law. This measure will indeed narrow the gap between the market interest 

rate  assumed  for  the  computation  of  the  EMTR  figures  (5%)  and  the  notional  ACE  rate.  Available 

simulation evidence based on tax return data shows that in terms of average effective taxation the ACE 

effects appear larger for SMEs (although, in relative terms they benefit from the ACE less than larger 

companies)80,  companies  belonging  to  groups,  export-oriented  companies  and  multinationals.81 

Clearly, it is too early for an assessment of the effects of the ACE reform on firms' indebtedness. This 

is even more so considering the difficult conjuncture the Italian economy is into after the financial and 

sovereign debt crises.  

Some useful evidence is nevertheless available for the ACE-type reform enacted at the end of 

the 1990s with the Italian Dual Income Tax (DIT). As the figure G shows, also the DIT was effective 

in reducing the tax discrimination between debt and equity. Indeed, as for 2002 the increase of the tax 

wedge  following  the  DIT  repeal  is  obvious.82  On  the  basis  of  the  existing  empirical  evidence,  the 

reduction  of  the  tax  wedge  between  debt  and  equity  was  effective  in  balancing  firms'  financial 

structures. Staderini (2001) analysed the effects of the DIT reform focusing on the period 1993-1998. 

She measured the relative advantage of debt over equity through a Miller index, taking into account 

78   See also ISTAT (2013a, 2013b), Arachi et al. (2012), Caiumi et al. (2013). 
79   See European Commission (2013b: 62). See also Center for Business taxation (2012) 
80   However, this larger benefit for the smaller companies will tend to disappear and even to reverse in the long 
run,  where  the  reduction  of  the  average  effective  tax  rate  will  tend  to  be  higher  for  larger  companies  (see 
ISTAT, 2014: 235).  

81   See ISTAT (2013b: 26-27; Allegato statistico: 44-46) and ISTAT (2014: 229-236) 
82   See also Bordignon et al. (1999, 2001). 

38 

 
 
 
                                                           
not only the corporate taxation, but also the taxation of interests and dividends at the personal level. 

According to her computations, the Miller index dropped by almost 50% as a result of the DIT (from 

57% in 1996 to 29% in 1998). The long-run effect of this change on the leverage ratio was estimated 

to be as high as about -4.3%. Results in the same vein can be found in Bernasconi et al. (2005) that 

estimated a strong reduction of the probability of issuing debt following the enactment of the DIT. 

Figure 9. EMTR in % on debt- and equity-financed new corporate investment in Italy, 1998-2012 

DIT repeal 

ACE 

                         Source: ZEW (2013) 

3.4.3 Budgetary impact of incremental ACE-type reforms 

As  regards  the  budgetary  assessment  of  the  Italian  incremental  ACE  reform,  one  needs  to 

distinguish between the short and the long run. As for the short-run impact, among other things this 

depends  on  the  rollout  of  the  reform  and  the  economy's  cyclical  situation.  At  present,  data  is  only 

available for tax year 2011.83 In 2011, the first year of introduction, about 205,000 companies used the 

ACE, representing 20% of the total number of companies (30% of the number of companies with a 

positive taxable income). The CIT budgetary cost was about EUR 0.41 bn, corresponding to 1.3% of 

the 2011 actual CIT revenues. The revenue shortfall due to the ACE for PIT entities was instead about 

83   See http://www.finanze.gov.it/stat_dbNew2011/contenuti/analisi_dati_2011_ires.pdf. 

39 

 
 
 
 
                                                           
0.22 bn.84 The actual revenue loss for companies has been half of the forecast made at the end of 2011. 

This  is  likely  due  to  the  fact  that  the  reform  was  enacted  at  the  end  of  2011  (with  no  time  left  for 

behavioural  responses)  and  to the  weakness of the  economy,  which  was  reflected  into the corporate 

sector balance sheets. The weak economic recovery is probably also one of the reasons for the recent 

downward  revision  of  the  overall  ACE  revenue  loss  forecasts  in  the  context  of  the  ACE  measures 

undertaken by the 2014 financial stability law.85 As time will go on, new equity will replace old equity 

and  the  budgetary  cost  will  likely  increase.  The  time  needed  to  get  to  the  final  regime  depends  on 

many factors and it is difficult to make conjectures. During the DIT period, after five years the ratio 

between the DIT base and total equity for the companies benefiting from the DIT was about 50% (see 

the following figure 10 and Annex 1). Simulation evidence of the effects of the ACE - based on tax 

return data, shown in ISTAT (2014) - is broadly consistent with the actual figures of the DIT period: 

after five years - in 2015 - the ratio ACE base/total equity for about 95% of companies benefiting from 

the ACE will be between 40% and 50%.86  

Turning  to  the  long-run  impact  of  the  reform,  the  available  measurements  of  the  gross 

budgetary cost of a generic ACE reform in Italy give very contrasting results, reflecting probably the 

diversity of the measurement approach: while de Mooij (2011) – using a very short sample of Italian 

companies – provided a balance sheet measure of the CIT revenue loss equal to 12.6%, de Mooij and 

Devereux  (2011)  –  using  a  general  equilibrium  model  parameterized  on  the  basis  of  some  basic 

features of the corporate tax system and the corporate sector – simulated an hypothetical reduction of 

CIT revenues approximatly equal to 50%.87  

84   See Senato della Repubblica (2013: 76). 
85   While at the launch of the reform at the end of 2011 it was forecasted an increasing revenue cost from about 
EUR 1 to 3.4 bn by tax year 2014 (3% and 9% of 2011 CIT revenues, respectively), the recent forecasts point 
to  an  increasing  revenue  loss  which  should  reach  about  EUR  2.4  bn  by  tax  year  2016  (6%  of  2011  CIT 
revenues).  

86   See ISTAT (2014: 235-236). 
87   In a hearing at the Italian parliament, Vitaletti (2011) quoted an estimate based on balance sheet data of the 
gross revenue losses of an ACE-type reform in Italy equal to approximatly half of the overall CIT revenues, 
but he did not provide details regarding the assumptions made. 

40 

 
 
 
 
 
                                                           
Figure 10. The speed of convergence of the incremental DIT towards the full DIT 

Notes:  1997  is  not  available  and  it  has  been  assumed  that  the  figure  is  half  the  one  in  1998.  "DIT  base"  is  the 
difference between the (sum of the) increments and the (sum of the) decrements as for September 1996, corrected for 
the  cases  where  this  difference  was  higher  than  equity  (see  par.  3.2).  "Total  Equity"  was    reported  by  taxpayers 
filling the DIT section of the tax return.  

   Source: own elaborations from data MEF-Dipartimento delle Finanze. 

We are not aware of measures or estimates of the long-run budgetary cost of the ACE reform 

taking into account the specific features of the Italian CIT (such as the carry forward of tax losses and 

the tax consolidation regime), the Italian ACE provisions (such as the carry forward of unused ACE 

allowances, the anti-avoidance framework and the limits to reserve provisions relevant for the benefit), 

and of the structure of the Italian corporate sector (distribution of tax payments, profitability, etc.). In 

any  case,  these  measures  or  estimates  would  be  subject  to  a  high  degree  of  uncertainty,  given  the 

multiplicity of interrelated elements potentially affecting the final outcome.88

4. A comparison between the two regimes and a tax policy assessment  

Table 1 summarizes the most important elements of the Italian and Belgian ACEs and sets the 

scene  for  a  comparison  of  the  two  regimes  and  a  tax  policy  assessment.  Some  of  the  differences 

between the two systems have been emerging recently due to the changes of the Belgian ACE enacted 

in the attempt to limit its revenue losses, such as the introduction of the Fairness Tax and to the repeal 

of the carry forward of the unused ACE allowances.  

88   The  Annex  provides  an  assessment  of  the  static  budgetary  impact  of  the  DIT,  based  on  tax  return  data, 

including a sensitivity analysis of some of the most relevant parameters driving the results.  

41 

 
 
 
 
 
 
 
                                                           
The provisions for setting the ACE notional rate have some interesting features, such as the 

special treatment for SMEs in Belgium, and the potential increase of the base rate as a compensation 

for  greater  risk  in  Italy.  However,  arguably  these  provisions  can  be  considered  less  relevant  for  the 

comparison, not least because - as we have seen for instance in Italy - governments tend to get around 

them  when  facing  budgetary  pressures.  In  what  follows,  we  comment  on  the  residual  differences 

between the two systems. 

Table 1. A comparison between the Italian and Belgium ACEs 

ACE Base 

ACE Rate 

Belgium 

Italy 

Full accounting equity 

Incremental accounting equity 

Average long-term (10y) Treasury 
bonds'  rates  with  a  cap  (3%)  (+ 
0.5% for SMEs) 

Average  Treasury  bonds'  rates  + 
up  to  3%  as  compensation  for 
greater risk 

Notional return to capital 

Taxed under the FaTa 

Exempt 

Scope 

Corporate sector 

Corporate sector and non-
corporate business sector 

Conditions on the destination of 
funds 

Anti-avoidance provisions 
targeting intra-group transactions 

ACE carry forward 

No 

No 

No 

A. The incremental feature.  

No 

Yes 

Yes 

The most relevant difference between the Belgium and Italian ACEs regards the definition of 

the  ACE  base.  While  in  Belgium  the  ACE  allowance  is  granted to  the  full  stock  of  equity,  in  Italy 

companies are entitled to deduct a notional return only for the new equity cumulated after the reform. 

Although  the  two  systems  provide  basically  the  same  incentives  for  investment  and  address  in  the 

same way the debt bias problem, they are different along at least two dimensions. First, the full equity 

system entails windfall gains for the capital already installed. In this sense, it is less efficient that the 

incremental  ACE.  Second and  most  important,  the  two  systems  have  a  very  different  impact  on the 

public budget over the short and medium term. Since in the long-run all equity will benefit from the 

ACE,  the  latter  difference  is  mostly  an  issue  of  transition.  However,  one  should  not  understate  the 

42 

 
 
 
 
 
advantage  of  the  incremental  ACE  in  terms  of  a  better  matching  between  costs  and  benefits  of  the 

reform. 

The rationale for an ACE reform in an open economy with high capital mobility is related to 

the capital flight triggered by the taxation of the normal return to capital (say the going market interest 

rate)  through  a  source-based  corporate  income  tax.89  In  the  long-run,  the  exemption  of  the  normal 

return to capital via an ACE system will stimulate domestic and inbound investments. Over time, this 

will tend to raise the pre-tax returns of the domestic immobile factors of production (land, labour) to 

such an extent that, even if all the lost revenues due the ACE were recouped through higher taxes on 

these factors90, these will likely be better off, ending up with higher net-of-tax returns. While generally 

the  CIT  revenues  will  decrease  following  an  ACE  reform,  over  time  the  increase  of  employment, 

wages,  and  GDP  associated  to  the  investment  expansion  will  boost  not  only  the  corporate  tax 

revenues,  but  also  the  other  tax  revenues.  In  the  long-run,  the  overall  budgetary  cost  of  the  ACE 

reform  will  therefore  be  lower.91  By  matching  over  time  the  budgetary  costs  of the  reform  with  the 

above economic and budgetary benefits, an incremental ACE appears a more viable and stable reform 

with respect to a standard ACE: it can be more easily implemented since it does not entail big revenue 

losses in the short run; it gets gradually stronger over time as its benefits unfold, strengthening in this 

way the tax design of the corporate income tax towards a more efficient system.  

One potential drawback of the incremental ACE is the possibility for a company to get around 

the  incremental  provision  in  order  to  benefit  from  the  allowance  on  "old"  equity,  through  sales  of 

assets/participations  within  groups,  or  by  combining  liquidations  and  start-ups.  This  could  partially 

nullify the advantage of the incremental ACE over the standard regime. In order to prevent this, anti-

avoidance rules need to be in place. As we have seen, the Italian anti-avoidance provisions tackle the 

89   See  Griffith  et  al.  (2010:  973-978).  Note  however  that  if  the  reform  entails  an  increase  in  the  statutory 
corporate tax rate to keep the reform revenue-neutral, then companies with rents that are not location-specific 
can choose the relocate. 

90   Note that both in Belgium and Italy the ACE reforms were not financed adjusting the corporate tax rates. 
91   Some  simulation  evidence  can  be  found  in  de  Mooij  and Devereux  (2009).  For  instance,  in  the  case  of  an 
ACE financed through non distortionary taxes, the final gross budgetary cost is about ¼ of the initial one. 
43 

 
 
 
                                                           
first cases. The second case is not explicitly targeted, but it can be considered to fall within the scope 

of the general anti-avoidance rule.  

B. The anti-avoidance framework 

The discussion about possible abuses aimed at maximizing the benefits in an incremental ACE 

brings us to the comparison between the Belgian and the Italian ACE anti-avoidance frameworks. Let 

us  start  from  an  important  similarity:  the  role  of  the  general  anti-avoidance  provision  based  on  the 

abuse of law concept as a firewall of last resort for the cases of abuses not covered by specific rules, or 

not even conceived by the legislator. One may argue that that residual role played by the general anti-

avoidance rule in the two systems tends to make them more equal that it may appear in the first place. 

However,  it  is  important  to  highlight  that  the  protection  of  a  general  anti-avoidance  rule  cannot  be 

considered as strong as that of a set of well-targeted specific anti-avoidance rules, not least because 

specific  rules  have  to  applied  ex  ante,  while  a  general  anti-avoidance  rule  has  just  a  chance  to  be 

applied ex post.  

In  Belgium,  the  specific  anti-avoidance  provisions  of  the  ACE  legislation  target  specific 

abuses, like the cascading of ACE benefits through participations or own share subscriptions, or the 

case  of  assets  inflating  the  ACE  base  but  that  are  not  used  for  the  company's  activity.  One  notable 

feature of these law provisions is that they do not target transactions between related parties. As we 

have seen, this leaves room for transactions aimed at optimizing the ACE benefit, as in the cases of 

intra-group loans, transfers of participations and creation of subsidiaries. In Italy, the anti-avoidance 

framework is instead built around transactions between (resident) related parties that can potentially 

determine abuses in the use of the ACE. Within-group cash contributions, loans, asset transfers, and 

acquisitions  or  increments  of  control  participations,  all  determine  a  correction  of  the  ACE  base  in 

order  to  avoid  cascading  effects.  Specific  anti-avoidance  provisions  are  in  place  to  tackle  abuses 

through triangular transactions involving foreign entities that can be used to get around the rules for 

resident entities. The lack of reference to contributions in kind as a driver of the ACE base dynamic 

further strengthens the framework. 

44 

 
 
 
Although the Italian ACE system is probably not fully immune to tax planning, the presence 

of several specific anti-avoidance provisions targeting within-group flows of funds, together with its 

incremental feature based on the cash contributions, makes it arguably more robust to tax avoidance. 

For instance, taking as a reference some of the tax planning schemes described for Belgium:  

(i)    in  the  Italian  ACE  it  is  not  possible  to  inflate  the  ACE  benefits  by  simply  creating  a 

subsidiary because contributions in kind are not relevant for the ACE base;  

(ii)   double  dipping  structures  combining  interest  deductibility  and  ACE  allowance  could  in 

principle  be  implemented  also  in  Italy,  but  they  seem  only  possible  in  less  "aggressive" 

forms, thanks to the anti-avoidance rule targeting intra-group loans;92   

(iii)  the anti-avoidance rule targeting intra-group loans makes it impossible in Italy to cascade the 

ACE benefits through the triangulation with a domestic holding company with a zero ACE 

base;93  

(iv)  the anti-avoidance provisions targeting equity contributions by foreign companies make it in 

some cases unfeasible (foreign company resident in a "black list" country), and in other cases 

more  difficult  (foreign  company  resident  in  a  "white  list"  country),  a  cascading  of  ACE 

benefits through triangulations within multinational groups.94 95 

92   Let  us  assume  a  resident  company  A  with  an  ACE  base  equal  to  zero.  It  may  be  e.g.  a  company  that  has 
moved into an "ACE irrelevance" state because some of its transactions fell in the previous periods within the 
scope  of  the  specific  anti-avoidance  provisions.  This  company  may  be  used  as  vehicle  for  double  dipping 
structures within the group. More precisely, company A may take out a bank loan and then inject the funds as 
equity  capital  into  other  group's  companies.  With  this  scheme,  the  ACE  base  of  the  latter  companies  will 
increase, the ACE base of A will continue to be zero and, moreover, A will benefit from a deduction for the 
interest costs on the loan. At the end of the day, at the group level there would be a double deduction for the 
same flow of funds, and the investments funded through these structures would be subsidized. A more subtle 
and aggressive way to set up such double dipping structure is when company A borrows the funds from the 
group's companies whose share capital it subscribes. This latter scheme is not possible in Italy because of the 
specific  anti-avoidance  provisions  targeting  intra-group  loans  that  would  correct  the  ACE  base  of  the 
companies  receiving  the  equity  contributions  and  then  grating  the  loan,  offsetting  in  this  way  the  initial 
increase of the  ACE base. Instead, in Belgium this type of scheme  may be challenged only ex post and in 
specific cases (not including generally internal group banking), as specified by the administrative regulations 
issued in 2011. 

93   In terms of the domestic example in figure 5 (par. 2.3.3), in Italy the ACE base of C1 would decrease by the 
amount of the loan granted to the holding. At the level of the group, the ACE base increase would then be 
equal  to  E,  corresponding  to  the  increase  at  the  level  of  C2  (in  the  case  the  ACE  base  of  the  holding  is 
initially zero). 

94   Given  the  international  example  of  figure  5  (par.  2.3.3),  if  B1  is  resident  in  a  "black  list"  country  or  it  is 
resident in a "white list" country and is controlled by Italian companies (S1 and/or S2), the ACE base of S1 

45 

 
 
 
                                                           
Table 2 summarizes the different protection level provided by the specific anti-avoidance rules in 

the Belgian and Italian ACE systems with reference to the tax planning schemes described above. 

While a more pervasive anti-avoidance framework appears necessary to improve the design of 

an  ACE  system,  it  also  entails  some  costs.  First,  it  may  increase  the  complexity  of  the  tax  system, 

generating administrative and compliance costs. Second and more importantly, a more pervasive anti-

abuse set up may generate some hidden costs by increasing the uncertainty for companies regarding 

the  tax  treatment  of  otherwise  legitimate  transactions,  though  having  effects  in  terms  of  ACE.  The 

above  problems  can  be  arguably  minimized  by  an  effective  advance  ruling  procedure  -  that  would 

allow companies to get the green light from the tax authorities regarding the tax treatment of a given 

transaction - and possibly by administrative regulations clarifying the position of tax authorities with 

regard to the admitted and/or targeted transactions.  

C. The scope of the allowance.  

Another  interesting  difference  between  the  Italian  and  Belgian  ACE  systems  regards  their 

scope. In Belgium, the allowance is limited to the corporate sector. This means that there is a different 

tax treatment of the normal return to capital between incorporated and unincorporated entities: in the 

corporate sector, it is exempt; in the non-corporate sector, it is taxed under the personal income tax at a 

marginal rate that can be as high as 50% (plus municipal surcharges). In Italy, the ACE regime applies 

not  only  to  companies,  but  also  to  individual  entrepreneurs  and  to  partnerships.  In  principle,  this 

allows achieving a better coherence in the taxation of business income, and it should trigger efficiency 

gains, addressing the distortions in the choice of the organizational form.96  

(or  S2)  would  be  reduced  by  E.  At  the  level  of  the  group,  therefore,  there  would  not  be  any  ACE  base 
increase  since  the  higher  ACE  base  for  S1  would  be  offset  by  a  decrease  either  of  its  ACE  base  or  of  the 
ACE base of S2. 

95   In the international example of figure 5 (par. 2.3.3), if S1 and S2 are subsidiaries of a multinational group and 
the  foreign  company  injecting  the  equity  is  resident  in  a  white-list  country,  in  principle  it  is  possible  a 
cascading  of  ACE  benefits  as  the  one  described  for  the  Belgian  ACE.  Note  however  that  the  existence  of 
specific  provisions  to  avoid  triangulations  through  foreign  companies  in  other  circumstances  makes  the 
above  case  an  obvious  target  of  the  tax  authorities  that  could  be  easily  challenged  under  the  general  anti-
avoidance provision.  

96   See Griffith et al. (2010: 981-986). 

46 

 
 
 
 
                                                                                                                                                                                     
Tax planning, ACE base definition and specific anti-avoidance provisions                                                          

of the Belgian and Italian ACE legislations 

Table 2 

Tax planning scheme 

Setting up a new subsidiary through equity contributions in kind 

Double dipping structure combining ACE and interest deductibility  

External debt raised: 

Belgium 

YES 

Italy 

NO 

At home by a company with an ACE base equal to zero (a) 

YES 

YES 

Abroad by (c): 

foreign parent resident in a “white-list” country 

foreign company resident in  a “white-list” country and 
controlled by the resident company  

YES 

foreign company resident in a “black-list” country 

YES 

NO 

NO 

Internal debt raised: 

At home by a company with an ACE base equal to zero (a) 

YES (b) 

NO 

Abroad by (c): 

foreign parent resident in a “white-list” country 

foreign company resident in  a “white-list” country and 
controlled by the resident company  

YES 

foreign company resident in a “black-list” country 

YES 

NO 

NO 

Cascading of ACE benefits (triangulation with a:) 

Domestic entity with an ACE base equal to zero (a) 

YES 

NO 

Foreign entity resident in a (c): 

               “white-list” country (foreign parent) 

               “white-list” country and controlled by the resident company  

YES 

                “black-list” country 

YES 

NO 

NO 

Notes:  
(a) it is assumed that the domestic company with the ACE base equal to zero has an initial tax base large enough to benefit from the 
additional deduction of interest costs;  
(b)  this  type  of  scheme  may  be  challenged  only  ex  post  and  in  specific  cases  (not  including  generally  internal  group  banking),  as 
specified by the administrative regulations issued in 2011. 
(c) "white-list" country is a country that allows the exchange of information for tax purposes; "black-list" country is a country that 
does not allow the exchange of information for tax purposes. 

D. The destination of funds.  

In both the Belgian and Italian regimes, there are no conditions on the destination of equity 

funds in order to benefit from the ACE allowance. A possibility for reducing the revenue losses of the 

ACE regime could be to grant the allowance only to specific types of investments, such as those in 

47 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
R&D, or in tangible assets. In some cases, these limits may be set up also as anti-abuse firewalls, as in 

the  former  Italian  DIT  where  there  were  specific  provisions  limiting  in  some  circumstances 

investments in financial assets. The limits to types of investment could be enacted also as an attempt to 

reap to a maximum extent the dynamic economic benefits of the ACE reform discussed above.  

However, there are some potential drawbacks in setting limits to the investments, which are 

similar  to  those  raised  for  tax  expenditures.97  These  limits  would  likely  complicate  the  system, 

increasing compliance and administrative costs, as for instance in the cases of borderline investments. 

Moreover, the modified ACE regime would be also subject to lobbying pressures for the inclusion of 

types  of  investments  among  the  ones  getting  the  allowance.  Overall,  the  case  for  such  kind  of 

modification of the ACE regime is not at all clear. 

E. Broad vs. narrow definition of equity 

In principle, another possibility to reduce the gross budgetary cost of the ACE – considered 

for instance  among  the  possible future changes  of  the  Belgian  ACE  – is to  limit the  allowance  to a 

narrower  definition  of  equity.  One  may  for  instance  exclude  the company's  minimum  equity  capital 

and those reserve provisions that are compulsory by the law. As we have seen, in Belgium there are 

not  such  rules.  In  Italy,  there  are  some  limitations  on  the  reserve  provisions  that  can  benefit  of  the 

allowance.  In  principle,  these  types  of  solutions  may  maximize  the  incentive  effects  of  the  ACE  - 

granting a tax benefit only for voluntary equity capital/injections – while at the same time limiting to 

some extent the ACE revenue shortfall. However, the budgetary impact is likely to be very modest.98 

Moreover,  this  type  of  measure  may  end  up  being  relatively  more  disadvantageous  for  smaller 

companies.   

97   See, for instance, European Commission (2013b: 55). 
98    For  instance,  for  Italy  by  taking  into  account  the  minimum  capital  requirements  for  joint  stock  companies 
(EUR  100  000)  and  limited  liabilities  companies  (EUR  20  000),  and  the  minimum  legal  reserve  provision 
(1/5  of  the  minimum  capital  requirement),  in  2011  the  reduction  of  the  revenue  shortfall  of  a  hypothetical 
textbook  ACE  would  be  only  about  0.5%  of  the  CIT  revenues  (Source:  elaborations  on  data  available  on 
http://www.finanze.gov.it/stat_dbNew2011/contenuti/analisi_dati_2011_ires.pdf). 

48 

 
 
 
 
 
                                                           
F. Accounting vs. tax equity.  

An interesting common element of the two systems with respect to the textbook ACE is the 

missing  link  between  the  ACE  base  and  the  tax  accounts.  This  follows  from  the  fact  that  both  in 

Belgium (where taxation follows generally accounting) and – implicitly – in Italy the reference point 

for the ACE base is the accounting definition of equity, which is accrual-based.  

The effects of temporary misalignments between tax and accounting are sterilized from a net 

income point of view – and therefore from an equity point of view – by the registration of deferred tax 

assets  (DTAs)  and  deferred  tax  liabilities  (DTLs)  into  the  balance  sheet.  As  a  result,  one  of  the 

economic benefits of the textbook ACE is not achieved, namely that of making irrelevant from a cost 

of capital point of view the differences between accounting and tax books.99 Deferred tax accounting 

would allow in principle to "switch-on" the ACE neutrality property with respect to the misalignments 

between tax and accounting income by adjusting the ACE base for the value of the DTAs and DTLs 

written  into  the  balance  sheet:  the  DTAs  should  increase  the  ACE  base,  while  the  DTLs  should 

decrease it. 

5. Conclusion 

This paper discusses the experiences of Belgium and Italy in applying an ACE-type system. 

Our aim is to derive some tax policy lessons for the implementation of a well-functioning, more stable 

and more robust ACE system. The focus is on the capacity of an ACE reform to effectively induce a 

rebalancing of firms’ financial structures, and on the two common concerns about its actual viability, 

somehow  interrelated:  the  shrinking  corporate  tax  base  with  consequent  revenue  losses,  and  the  tax 

avoidance incentives that it may generate.  

The  ACE-type  system  implemented  in  Italy  –  with  its  incremental  feature  and  its 

comprehensive  tax  avoidance  framework  –  can  be  considered  close  to  a  best  practice.  Such  kind  of 

99   See the IMF report on the Italian "legge di delega fiscale" (IMF, 2012). See also Oxford Center for Business 
Taxation (2012: 9). Note that this feature of the real-world ACEs – with respect to the textbook ACE - ends 
up  being  in  some  cases  advantageous  for  the  taxpayer  (when  a  deferred  tax  liability  is  registered  in  the 
balance sheet; example: accelerated depreciation); in other cases, disadvantageous (when a deferred tax asset 
is  registered  in  the  balance  sheet;  examples:  tax  loss  carryover  or  –  for  Italy  -  the  rules  limiting  the 
deductibility of loan losses provisions for the banking sector, in force until 2013). 

49 

 
 
 
 
                                                           
reform can be more easily implemented than a textbook ACE, since its revenue losses are limited over 

the  short-  and  medium-term.  By  matching  over  time  its  direct  increasing  budgetary  costs  with  its 

increasing economic and (direct and indirect) budgetary benefits associated to the induced investment 

expansion, this type of reform gets gradually stronger over time, strengthening in this way the design 

of  the  taxation  of  business  income  towards  a  more  efficient  system.  The  anti-avoidance  framework 

targeting intra-group transactions limits the revenue losses due to the tax planning operating through 

changes  of  the  internal  financing  structure,  and  indirectly  favours  a  rebalancing  of  the  external 

financing structure, which should be arguably the most important goal of an ACE reform. 

At the opposite, the performance of the ACE-type system in Belgium – featuring an allowance 

granted  to  the  full  stock  of  equity  and  a  looser  anti-avoidance  framework  –  is  rather  controversial. 

While this reform seems to have brought some economic benefits in terms of a reduction of leverage, 

since  the  beginning  it  has  also triggered  large  and  increasing  revenue  shortfalls.  The  anti-avoidance 

framework  of  the  Belgian  ACE  –  and  in  particular  the  lack  of  provisions  for  transactions  between 

related parties, such as intra-group loans – is an integral part of its design, given the initial goals of 

replacing  the  coordination  centre  regime  and  of  improving  the  attractiveness  of  Belgium  for 

multinationals.  Tax  optimization  schemes  have  indeed  allowed  de  facto  a  reduction  of  the  average 

burden  of  the  corporate income  tax.  However,  the  effects  of a lax anti-abuse  system  may  well  have 

been  underestimated.  From  an  economic  point  of  view,  the  possibility  of  double  dipping  structures 

combining  interest  deductibility  and  ACE  allowance(s)  may  have  added  distortions  by  subsidizing 

certain types of investments, while at the same time leaving basically unchanged the incentive to take 

on  debt.  From  a  budgetary  point  of  view,  the  incentives  to  optimize  the  use  of  the  ACE  especially 

within  group structures  has  increased  the  revenue  shortfall, as it is  witnessed  by  the  reaction  by  tax 

authorities  and  by  the  legislator  after  just  a  few  years  since  the  launch  of  the  reform.  The  many 

legislative measures undertaken to limit the budgetary cost of the ACE have not addressed the crucial 

problem  of  the  loopholes  in  the  anti-avoidance  framework.  On  top  of  that,  these  measures  seem  to 

have  generated  instability  and  complexity  in  the  corporate  tax  system  and  uncertainty  over  the 

50 

 
 
 
prospects of the ACE reform, undermining in this way the same goal of improving the attractiveness 

of the country for multinational groups. In terms of tax design, it appears particularly unwarranted the 

introduction of a new tax – the Fairness Tax – also to limit the revenue losses of the ACE.  

While there is not a one-size-fits-all solution exportable as such in other countries, the ACE 

type system implemented in Italy may serve as a good example of a viable solution for an ACE reform 

to address the debt bias in the corporate sector. The Belgian ACE experience seems instead to show 

that forcing a tax system - the ACE - imagined to achieve a certain target – the reduction of debt bias 

and leverage in the corporate sector – to achieve (also) other targets, in this case the replacement of the 

Coordination Centre Regime and the indirect reduction of the corporate tax burden through a lax anti-

avoidance  framework,  may  have  unintended  consequences,  impairing  the  performance,  the  stability 

and the same acceptability of the system.  

51 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annex 

The Italian Dual Income Tax (DIT): an assessment of the static budgetary impact                               

based on tax return data 

In the period 1997-2003, Italy applied a corporate tax system called Dual Income Tax (DIT) 

which shares many features with the current Allowance for Corporate Equity (ACE). The main goal of 

the  DIT  was indeed incentivizing  firms'  capitalization  by  re-balancing  the tax treatment  of  debt  and 

equity through a lower taxation of the notional return to equity.  

The DIT was an incremental regime since it referred to the new equity invested starting from a 

certain date. In order to speed-up the transition towards the final regime – where the tax benefit would 

have been granted to all equity – the incremental equity was magnified by a multiplier equal to 1.2 in 

2000 and 1.4 in 2001.  

The notional return was based on the average return of public and private bonds, and it could 

be increased by up to three percentage points as a compensation for greater risk. It was set at 7% from 

1997 to 2000, 6% in 2001, 3% in 2002 and 2003.  

Unlike the standard ACE, the DIT provided just for a reduced taxation of the notional return 

of equity, rather than for the complete exemption. The notional return to equity was indeed taxed at 

19%, while the ordinary rate was 37% until 2000, 36% in 2001 and 2002, and 34% in 2003. Moreover, 

in  the  DIT  system  the  effective  tax rate  could  not  be  less  than  a  given  threshold  (27%),  which  was 

eliminated as from 2002.  

Specific  anti-abuse  rules  were  set  in  place  to  prevent  a  cascading  of  DIT  benefits  within 

groups  of  companies  and  also  to  incentivize  investments  in  tangible  assets  as  opposed  to  financial 

assets. 

Alongside the general DIT regime, there was an alternative, more advantageous, specific DIT 

regime for newly listed companies with the notional return to equity taxed at 7% rather than 19%, and 

with the minimum tax rate equal to 22 rather than 27% (for the first three years after listing).  As for 

2002 there was also another alternative, optional, DIT regime for all companies. Under this regime, the 

multiplier was 1.4, the notional tax rate was equal to 5.7% in 2002 and 5% in 2003, but there was a 

minimum rate equal to 30% (22% for listed companies). 

The DIT regime was initially applied to all economic sectors, but the financial sector. It was 

applied to the financial sector in 2000. The preferential tax treatment of the notional return to equity 

tax rate was however calculated on the equity cumulated as for 1997. 

Although the DIT was abolished at the end of 2003, it was progressively watered down from 

2001 by freezing at the end of June 2001 the equity relevant for the computation of the allowance, and 

by reducing the notional rate. 

52 

 
 
 
 
Note that the DIT regime was not applied by all the corporations increasing equity in the DIT 

period. As for 1999, alternative temporary tax deductions were also provided for investments in new 
tangible assets funded through equity100. In other words, given an investment in tangible assets funded 

(partially)  with  equity,  a  firm  could  benefit  for  some  years  of  these  alternative  tax  reductions  and 

benefit afterwards of the DIT allowance for the equity increase associated to these tangible assets.  

In  what  follows  we  provide  some  tax  return  information  about  the  DIT  regime  and  some 

figures regarding its static long-run revenue losses. 

Figures  A1  and  A2  present  some  data  regarding  the  use  of  the  DIT  over  the  period  1998-
2003101. Focusing on the sub-period 1998-2001, figure A1 shows that the DIT was used by about 15% 

of all the companies, corresponding to about 1/3 of the companies paying taxes.  

Figure A2 shows the cumulative distributions by income classes of the number of taxpayers 

and the DIT revenue losses in 2000. As it is clearly visible, the DIT was used relatively more by larger 

companies. Indeed, the 5% largest companies in terms of taxable income did account for almost 86% 

of the overall CIT revenues and almost 90% of the DIT revenue losses in 2000 (companies belonging 

to the last income class – income larger than about EUR 2.5 mio, 0.6% of taxpayers – did account for 

about 65% of the overall CIT revenues and almost 72% of the DIT revenue losses). 

Figure A1. DIT use over the period 1998-2003 

Notes:  1997  is  not  available.  "DIT  companies"  are  the  companies  benefiting  from  the  DIT  (number  of 
companies with taxable income partly taxed at 19%); "Total companies" are those companies that filled the tax 
return; "Companies paying  CIT" are the companies with a positive tax bill. 
Source: own elaborations from data MEF-Dipartimento delle Finanze. 

100  Law 133 of 1999 and Law 383 of  2001. 
101  Data for 1997 are not available. 

53 

 
 
 
 
 
 
                                                           
Figure A2. Number of taxpayers and DIT revenue losses, cumulative distributions by income class 
(year 2000) 

                                Source: own elaborations from data MEF-Dipartimento delle Finanze 

Figure A3 presents data about the actual revenue losses due to the DIT.102 These are computed 

by multiplying the yearly notional return to equity and the difference between the standard corporate 

income tax rate and the reduced 19% rate. The revenue losses are then compared with the actual CIT 

revenues augmented with the revenue losses themselves ("potential CIT revenues"). Non surprisingly, 

the figure shows an increasing budgetary cost until 2001, consistent with the incremental feature of the 

DIT reform. In 2001 the revenue losses peaked at about EUR 2 bn, corresponding to about 6% of CIT 

revenues. As for 2002, the budgetary cost decreased as a consequence of the gradual dismantlment of 

the  reform  by  the  new  government  appointed  in  2001.  The strong  increases in  2000  and  2001  were 

partly due to the application of the "Super DIT" in 2000 and 2001 - when the equity net increments 

were  multiplied  by  1.2  and  1.4  respectively  -  and  to  the  extension  of  the  DIT  also  to  the  financial 

sector.  

102  The revenue losses also take into account the effect of the limit on the effective average tax rate applied until 

2001.  

54 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
Figure A3.   The revenue losses due to DIT in terms of corporate income tax revenues 

Notes: 1997 is not available.  "Potential CIT revenues" are equal to the sum of the actual corporate income tax 
revenues and the CIT revenues losses due to DIT. 
Source: own elaborations from data MEF-Dipartimento delle Finanze. 

One  crucial  aspect  of  the  Italian  DIT  was  the  fact  that  the  benefit  was  granted  only  to  the 

equity  accumulated  from  a  certain  point  in  time.  In  the  long  run,  however,  new  equity  would  have 

replaced old equity and therefore in principle the tax benefit would have been granted to all the equity. 

Tax return  data  provide  some  interesting  information  about  the  "speed  of  convergence" towards  the 

long-run  system  for  taxpayers  benefiting  from  the  DIT.  Indeed,  in  order  to  get  the  tax  benefit 

taxpayers were required to provide information about the total equity since this variable was taken into 

account in the computation of the DIT base.  

Figure  A4  shows  the  ratio  between  net  increments  of  equity  and  total  equity103.  The ratio – 

built out of aggregate data –  is likely to be biased downwards for two reasons. First, the two sets of 

taxpayers declaring the DIT base and the total equity do not match perfectly - with the first set being 

always smaller than the second one. Second, the diffusion of the reform over time induces a downward 

bias  because  for  the  new  companies  benefiting  from  the  DIT  the  ratio  was  lower.  In  spite  of  these 

problems,  the  ratio  can  be  considered  informative  since  the  matching  of  the  two  sets  of  taxpayers 

declaring the DIT base and the total equity is very high (approximatly equal to 93%) and – with regard 

to the second point - as figure A1 shows there was not such a steep increase in the use of the DIT over 

time.  Moroever,  note  that  the  existence  of  alternative  temporary  tax  benefits  for  investments  in 

tangible assets funded (partially) through equity gave an upward push to the ratio since 1999. Again 

focusing on the period until 2001, the figure shows that after five years the DIT base was approximatly 

equal  to  50%  of  the  "long-run"  DIT  base  for  companies  benefiting  from  the  reform.  Simulation 

103  The figures for 2000 and 2001 take into account the effect of the multipliers applied in those years. 

55 

 
 
 
 
 
 
                                                           
evidence  based  on  tax  return  data  of  the  effects  of  the  ACE  shown  in  ISTAT  (2014)  is  broadly 

consistent  with  the  actual  figures  of  the  DIT  period:  after  five  years  -  in  2015  -  the  ratio  ACE 

base/total  equity  for  about  95%  of  companies  benefiting  from  the  ACE  will  be  between  40%  and 
50%.104 

Figure A4. The speed of convergence of the incremental DIT towards the full DIT 

Notes: 1997 is not available and it has been assumed that the figure is half the one in 1998. The figures for 2000 and 
2001 take into account the effect of the multipliers applied in those years. "DIT base" is the difference between the 
(sum of the) increments and the (sum of the) decrements as for September 1996, corrected for the cases where this 
difference is higher than equity (see par. 3.2). "Total Equity" was reported by taxpayers filling the DIT section of the 
tax return.  

   Source: own elaborations from data MEF-Dipartimento delle Finanze. 

One  important  part  of  the  DIT  legislation  dealt  with  the  anti-abuse  provisions  aimed  at 

avoiding a "cascading" of DIT deductions within group of companies and at promoting investments 

deemed  desiderable  from  an  economic  point  of  view.  Figure  A5  provides  information  about  the 

quantitative importance of these anti-abuse rules in limiting the gross revenue losses of the DIT. 

While in the first years the anti-avoidance provisions were in the aggregate very important - 

accounting for more than 40% of the total equity increments - their relevance decreased over time. To 

some extent, this was due to the multipliers applied to the incremental DIT base in 2000 and 2001 that 

made the anti-avoidance provisions relatively less important. This was probably due also to the fact 

that,  in  the  beginning,  the  DIT  could  have  been  used  relatively  more  by  larger  companies  and 

companies  belonging  to  groups,  for  which  the  anti-avoidance  constraints  were  more  likely  to  be 

binding. In 2001 the correction of the equity's net increment was about 20%: given EUR 100 of DIT 

base stemming from the net increments, EUR 20 were disallowed for the computation of the notional 

return  to  equity  subject  to  19%.  Probably,  the  diffusion  over  time  of  the  tax  benefit  to  smaller 

104  See ISTAT (2014: 235-236). 

56 

 
 
 
 
 
 
                                                           
companies - for which these anti-abuse rules are arguably less important - would have further reduced 

in the aggregate the importance of the anti-abuse provisions in limiting the static revenue losses of the 

DIT.  On  the  other  hand,  the  predominance  of  large  companies  and  companies  belonging  to  groups 

both  in  terms  of  overall  CIT  revenues  and  DIT  revenue  losses  makes  in  principle  the  anti-abuse 

provisions relevant in the assessment of the budgetary cost of the DIT (and the ACE) even in the long-

run.   

Figure A5. The anti-avoidance corrections under the DIT regime, 1998-2003 

Notes: 1997 is not available. "Equity net increment" is the difference between equity increments and decrements 
as for September 1996 (corrected for the cases where this difference is higher than equity; see par. 3.2).  
Source: own elaborations from data MEF-Dipartimento delle Finanze. 

The availability of data regarding total equity for companies benefiting from the DIT makes  

possible to provide some figures of the revenue losses of a DIT system without its incremental feature. 

It  also  makes  possible  to  have  a  broad  idea  of  the  revenue  losses  of  a  hypothetical  textbook  ACE 

system in the DIT period, i.e. a system where the notional return to the full stock of equity was exempt 

altogether rather than being taxed at 19%. It is important to highlight that the following figures can be 

interpreted as long-run revenue losses of the incremental DIT or ACE regimes only in a loose sense, 

because  they  do  not  take  into  account  the  dynamic  impact  of  the  additional  investments  which  are 

required in incremental DIT and ACE regimes in order to move from the short to the long-run and in 

order to generate corporate income tax losses. Figure A6 presents the results.  

Focusing only on the companies benefiting from the reform, the hypothetical budgetary cost 

of a "full stock" DIT is at the peak in 2000 about 27% of corporate tax revenues. A hypothetical ACE 

regime could have been more costly, with a revenue loss that would have been equal at the peak in 

57 

 
 
 
 
 
2000 to about 55%. The strong increase of the revenue cost in 2000 is mostly due to the upward jump 
with respect to 1999 of the declared total equity, from about EUR 364 bn to EUR 600 bn.105     

Bringing  into  the  picture  the  companies  that  did  not  benefit  from  the  DIT  would  further 

increase the hypothetical long-run budgetaty cost of the DIT reform. However, a mere projection of 

the  equity-based  estimates  obtained  for  companies  benefiting  from  the  DIT  to  the  rest  of  the 

companies would likely result in a overstatement of the static revenue cost for at least three reasons.  

Figure A6. Long-run DIT (and ACE) revenue losses of the icremental DIT (ACE)  
(only companies benefiting from the DIT) 

Notes: The potential DIT (ACE) revenue losses are computed considering the total equity reported by 
taxpayers  that  used  the  DIT.  The  potential  CIT  revenues  are  equal  to  the  sum  of  the  actual  CIT 
revenues and the actual revenue losses due to the DIT.  

             Source: own elaborations from data MEF-Dipartimento delle Finanze 

First, one has to consider the case of loss-making companies. This is a relevant phenomenon: 

for instance, over the DIT period about 50% of all companies had no taxable profit and hence did not 

pay  the  corporate  income  tax.  Since  the  tax  bill  of  these  companies  is  nil,  in  principle  there  are  no 

short-run  DIT  revenue  losses  associated  with  their  equity.  On  the  one  hand,  it  is  true  that  at  the 

individual level companies belonging to this class could cumulate unused DIT  allowances that have 

the potential to reduce their tax bill once the company makes profit. On the other hand, in the long-

run, among other things revenue losses associated to the class of loss-making companies will depend 

on the joint probability of moving out of the loss state and having a positive tax base. The persistence 

of  the  loss-making  state,  the  influence  of  the  tax  loss  carry-forward  in  limiting  the  probability  of  a 

positive tax base, and the fact that unused DIT allowance would be lost if a company goes bankrupt, 

105  EUR 130 bn is the increment of total equity declared by the financial sector between 1999 and 2000.  

58 

 
 
 
 
 
                                                           
all induce to claim that the potential DIT revenue loss associated with loss-making companies would 
have been limited.106 107 

Second, as regards the companies with a positive tax base that did not benefit from the DIT 

(about 2/3 of all the companies paying taxes), the static revenue losses crucially depend on the reasons 
why they did not exploit the new possibility to reduce their tax bill.108  109 One reason may have to do 

with the novelty of the reform. This is consistent with the fact that the DIT was mainly used by large 

companies, arguably having better tax practitioners and consultants and with a easier and less costly 

access to information. If this were the main reason for the low take-off of the DIT, one would expect 

an  increasing  use  of  the  DIT  over  time.  As  a result, it  would  be  legitimate  to  extend  our  results for 

companies benefiting from the DIT to the other companies. However, there is another explanation for 

the low use of the DIT that has to do with the relationship between capital and property structures. The 
importance of family-based firms in Italy is well-known.110 These firms are less prone to retain profits 

- since these profits feed directly families' consumption and savings - and less prone to raise external 

equity,  for  the  fear  of  loosing  control  over  the  company.  Under  this  explanation,  extending  our 

estimates  for  companies  benefiting  from  the  DIT  to  the  other  companies  would  overstate  the  static 

revenue  losses  of  the  DIT  system  because  the  choice  of  not  using  the  DIT  (or using  it  not  to  a full 

extent) would have persisted even in the long-run. 

Third, as we have previously shown the distributions of corporate tax bills and of the revenue 

losses  associated  with  the DIT  are  highly  asymmetrical:  large  companies  constitute the  bulk  of  CIT 

revenues and DIT revenue losses. This implies that the residual revenues at stake that can be lost as a 

result  of  the  diffisuon  of  the  DIT  use  are  not  as  important  as  the  revenues  that  would  have  been 

directly reduced by the DIT for companies benefiting from the reform from the beginning.  

More  generally,  in the evaluation of the  static  long-run  impact  of  the  DIT  (ACE)  reform  of 

figure A6 we have used the actual yearly notional rates. Arguably, in the DIT period these rates were 

106  In his computations of the revenue losses associated to the ACE regime for a set of countries including Italy, 
De  Mooij  (2012)  assumes  a  reduction  of  50%  of  the  equity-based  ACE  revenue  losses  associated  to  loss-
making companies.  

107  According  to  the  simulation  evidence  shown  in  ISTAT  (2014:  235),  in  the  long-run  the  percentage  of 

companies benefiting from the ACE should be about 50%. 

108  See Santoro (2004) for a discussion of the reasons why companies did not benefit from the DIT. 
109  The DIT regime was not applied by all the companies increasing equity in the DIT period also because as for 
1999 alternative temporary tax reductions were available for investments in new tangible assets (Law 133 of 
1999 and Law 383 of 2001). Given an investment in tangible assets (partially) funded by equity, a company 
could  benefit  for  some  years  of  these  alternative  tax  reductions  and  benefit  afterwards  of  the  DIT  for  the 
equity  increase  associated  to  the  investment.  However,  it  is  likely  that  the  companies  benefiting  from  the 
alternative  temporary  regime  filled  the  box  of  the  tax  return  containing  the  DIT  data.  In  fact,  the  same 
instructions  of  the  tax  return  allowed  companies  to  provide  DIT  data  even  if  they  just  envisioned  the 
possibility of benefiting from the DIT in the future. Consistently with this guess, over the period 1998-2003 
the  total  number  of  taxpayers  providing  information  about  their  total  equity  was  always  larger  than  the 
number of taxpayers benefiting effectively from the DIT allowance in terms of reduced tax bills. 

110  This is a persistent feature of the Italian economy. According to data for 2011, more than 70% of all Italian 

businesses are family-based (see ISTAT, 2013a: 65-67). 

59 

 
 
 
                                                           
generous, being larger than the long-term government bond yield that - according to the literature111 - 
represents  an  important  reference  point  for  setting  the  notional  rate.112  Moreover,  the  choice  of  the 

notional rates (as well as the Super DIT mechanism) in the DIT period has to be seen in conjunction 

with the fact that the system was incremental. Therefore, for a long-run estimate of the budgetary cost 

of  the  DIT  it  seems  more  reasonable  using  as  a  starting  point  a  notional  rate  in  line  with  the 

government bond rates.    

For the above reasons, making inference even  simply about the long-run static budgetary cost 

of an incremental DIT (or an ACE) is a difficult task.  In order to shed light on the relative importance 

of different elements, it is possible to undertake a simple sensitivity analysis.  

Table A1 presents the tentative results of such a sensitivity analysis based on tax return data 

for  the  year  2000,  where  we  have  considered  the  effect  of  different  assumptions  regarding  the 

corporate  income  tax  rate,  the  notional  interest  rate,  the  role  of  anti-avoidance  corrections,  and  the 

revenue losses for companies that did not benefit from the DIT. As regards the corporate income tax 

rate, we have considered both the actual statutory corporate tax rate in force in 2000 (37%) and the 

present  corporate  tax  rate  (27.5%).  This  can  be  justified  considering  that  in  terms  of  GDP  the 

corporate tax revenues in the DIT period were similar to the one in recent years (between 2.0% and 

2.5% of GDP) and considering that - given the same amount of CIT revenues – a deduction of 1 Euro 

against  the  corporate  income  will  entail  a  lower  cost,  the  lower  is  the  CIT  rate.  With  regard  to  the 

notional rate, we have considered both the rate applied in 2000 (7%) and a rate in line with the 10-

years  government  bond  rate  in  those  years  (5%).  As  for  the  anti-avoidance  provisions,  we  have 

evaluated the possibility that in the aggregate the anti-abuse rules will reduce the equity-based ACE 

base by an arbitrary 20%. Finally, as regards the ACE revenue losses for firms not benefiting from the 

DIT, we have considered two scenario, H1 and H2. H1 is the most pessimistic in terms of the long-run 

budgetary cost of the reform. Under this scenario, we assume a deduction against corporate income of 

the  notional  income  associated  with  all  the  equity  of  the  5%  largest  taxpayers  (so  both  the  ones 
benefiting from the DIT and the other113) and a loss of all the corporate tax revenues associated with 

the  95%  smallest  taxpayers.  Under  H2,  we  assume:  (i)  a  deduction  against  corporate  income  of  the 

notional income associated with all the equity of the 5% largest taxpayers declaring the total equity in 

the tax form for the application of DIT; (ii) a deduction against corporate income of ½ of the notional 

return to equity for the 5% largest taxpayers who did not declare the total equity for the application of 

111  See Fane (1987) and Bond and Devereux (1995, 2003). 
112  In the DIT period the 10-year Government Benchmark bond  yields in Italy  were the  following: 1997: 6.8; 

1998: 4.9; 1999: 4.8; 2000: 5.6; 2001: 5.2; 2002: 5.0; 2003: 4.2 (Source: ECB, Financial market data).  

113  For the companies belonging to the group of the 5% largest entities, that did not benefit from the DIT and 
that  therefore  did  not  declare  their  total  equity,  we  assume  that  total  equity  is  equal  to  the  average  of  the 
income class to which they belong. This assumption is not applied to companies belonging to the group of 
the  95%  smallest  taxpayers,  since  for  them  the  low  take-off  of  the  DIT  –  and  therefore  the  lack  of 
information for total equity - makes the average less informative regarding their total equity.  

60 

 
 
 
                                                           
the DIT; and (iii) a loss of ½ of all corporate tax revenues of the 95% smallest taxpayers. H2 expresses 

the idea that there can be structural reasons limiting the full use of the DIT by companies that did not 

use it after 4-5 years since its inception.  

The main result from table A1 is the large uncertainty surrounding the estimate of the static 

long-run impact of an ACE system. The revenue losses indeed vary from 24.2% to 63.4% of corporate 

tax revenues, depending on the different assumptions.  

Table A1. The static long-run revenue loss of an ACE system, sensitivity analysis (year 2000) 

Scenario 

CIT rate 

ACE notional rate  

Anti-avoidance  

Hypothesis regarding  

Revenue losses 

 (%) 

(%) 

20% Correction  (a) 

revenue losses (b) 

EUR bn.  As a % of CIT revenues (c) 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

37 

37 

37 

37 

37 

37 

37 

37 

27.5 

27.5 

27.5 

27.5 

7 

5 

7 

5 

7 

5 

7 

5 

5 

5 

5 

5 

NO 

NO 

YES 

YES 

NO 

NO 

YES 

YES 

NO 

YES 

NO 

YES 

H1 

H1 

H1 

H1 

H2 

H2 

H2 

H2 

H1 

H1 

H2 

H2 

19.0 

14.7 

15.2 

11.7 

15.3 

11.5 

12.3 

9.2 

11.9 

9.5 

9.1 

7.2 

63.4% 

49.0% 

50.7% 

39.2% 

51.3% 

38.5% 

41.0% 

30.8% 

39.8% 

31.9% 

30.3% 

24.2% 

Notes:  
(a) Anti-avoidance correction is assumed to be 20% of total equity;  
(b) Under H1, it is assumed a deduction against corporate income of the  notional income associated with all the equity of the 5% largest 
taxpayers and a loss of all the corporate tax revenues of the 95% smallest taxpayers; under H2, it is assumed: - a deduction against corporate 
income of the notional income associated with all the equity of the 5% largest taxpayers declaring the total equity in the tax form for the 
application of DIT; - a deduction against corporate income of ½ of the notional return to equity for the 5% largest taxpayers who did not 
declare the total equity for the application of the DIT; and a loss of ½ of all corporate tax revenues of the 95% smallest taxpayers; 
(c) The corporate tax revenues are augmented with the actual revenue losses due to DIT in 2000. 
Source: own elaborations from data MEF-Dipartimento delle Finanze. 

61 

 
 
 
 
 
 
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65 

 
 
 
 
 
 
 
 
TAXATION PAPERS 

Taxation  Papers  can  be  accessed  and  downloaded  free  of  charge  at  the  following  address: 
http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_papers/index_en.htm 

The following papers have been issued. 

Taxation Paper No 43 (2014): Financial Activities Taxes, Bank Levies and Systemic Risk. Written by 
Giuseppina Cannas, Jessica Cariboni, Massimo Marchesi, Gaëtan Nicodème, Marco Petracco Giudici, 
Stefano Zedda 

Taxation  Paper  No  42  (2014):  Thin  Capitalization  Rules  and  Multinational  Firm  Capital  Structure. 
Written by Jennifer Blouin, Harry Huizinga, Luc Laeven and Gaëtan Nicodème 

Taxation Paper No 41 (2014): Behavioural Economics and Taxation. Written by Till Olaf Weber, Jonas 
Fooken and Benedikt Herrmann. 

Taxation  Paper  No  40  (2013):  A  Review  and  Evaluation  of  Methodologies  to  Calculate  Tax 
Compliance  Costs.  Written  by  The  Consortium  consisting  of  Ramboll  Management  Consulting,  The 
Evaluation Partnership and Europe Economic Research 

Taxation  Paper  No  39  (2013):  Recent  Reforms  of  Tax  Systems  in  the  EU:  Good  and  Bad  News. 
Written  by  Gaëlle  Garnier,  Aleksandra  Gburzynska,  Endre  György,  Milena  Mathé,  Doris  Prammer,  
Savino Ruà, Agnieszka Skonieczna. 

Taxation Paper No 38 (2013): Tax reforms in EU Member States: Tax policy challenges for economic 
growth  and  fiscal  sustainability,  2013  Report.  Written  by  Directorate-General  for  Taxation  and 
Customs Union and Directorate-General for Economic and Financial Affairs, European Commission 

Taxation  Paper  No  37  (2013):  Tax  Reforms  and  Capital  Structure  of  Banks.  Written  by  Thomas 
Hemmelgarn and Daniel Teichmann 

Taxation  Paper  No  36  (2013):  Study  on  the  impacts  of  fiscal  devaluation.  Written  by  a  consortium 
under the leader CPB 

Taxation Paper No 35 (2013): The marginal cost of public funds in the EU: the case of labour versus 
green taxes Written by Salvador Barrios, Jonathan Pycroft and Bert Saveyn 

Taxation Paper No 34 (2012): Tax reforms in EU Member States: Tax policy challenges for economic 
growth  and fiscal sustainability. Written by  Directorate-General for Taxation  and Customs Union  and 
Directorate-General for Economic and Financial Affairs, European Commission. 

Taxation  Paper  No  33  (2012):  The  Debt-Equity  Tax  Bias:  consequences  and  solutions.  Written  by 
Serena Fatica, Thomas Hemmelgarn and Gaëtan Nicodème 

Taxation Paper No 32 (2012): Regressivity of environmental taxation: myth or reality? Written by Katri 
Kosonen 

Taxation  Paper  No  31  (2012):  Review  of  Current  Practices  for  Taxation  of  Financial  Instruments, 
Profits and Remuneration of the Financial Sector. Written by PWC 

Taxation  Paper  No  30  (2012):  Tax  Elasticities  of  Financial  Instruments,  Profits  and  Remuneration. 
Written by Copenhagen Economics. 

Taxation Paper No 29 (2011): Quality of Taxation and the Crisis: Tax shifts from a growth perspective. 
Written by Doris Prammer. 

Taxation Paper No 28 (2011): Tax reforms in EU Member States. Written by European Commission 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxation  Paper  No  27  (2011):  The  Role  of  Housing  Tax  Provisions  in  the  2008  Financial  Crisis. 
Written by Thomas Hemmelgarn, Gaetan Nicodeme, and Ernesto Zangari 

Taxation Paper No 26 (2010): Financing Bologna Students' Mobility. Written by Marcel Gérard. 

Taxation Paper No 25 (2010): Financial Sector Taxation. Written by European Commission. 

Taxation Paper No 24 (2010): Tax Policy after the Crisis – Monitoring Tax Revenues and Tax Reforms 
in EU Member States – 2010 Report. Written by European Commission. 

Taxation  Paper  No  23  (2010):  Innovative  Financing  at  a  Global  Level.  Written  by  European 
Commission. 

Taxation Paper No 22 (2010): Company Car Taxation. Written by Copenhagen Economics. 

Taxation  Paper  No  21  (2010):  Taxation  and  the  Quality  of  Institutions:  Asymmetric  Effects  on  FDI. 
Written by Serena Fatica. 

Taxation  Paper  No  20  (2010):  The  2008  Financial  Crisis  and  Taxation  Policy.  Written  by  Thomas 
Hemmelgarn and Gaëtan Nicodème. 

Taxation Paper No 19 (2009): The role of fiscal instruments in environmental policy.' Written by Katri 
Kosonen and Gaëtan Nicodème. 

Taxation  Paper  No  18  (2009):  Tax  Co-ordination  in  Europe:  Assessing  the  First  Years  of  the  EU-
Savings Taxation Directive. Written by Thomas Hemmelgarn and Gaëtan Nicodème. 

Taxation Paper No 17 (2009): Alternative Systems of Business Tax in Europe: An applied analysis of 
ACE and CBIT Reforms. Written by Ruud A. de Mooij and Michael P. Devereux.    

Taxation Paper No 16 (2009): International Taxation and multinational firm location decisions. Written 
by Salvador Barrios, Harry Huizinga, Luc Laeven and Gaëtan Nicodème. 

Taxation  Paper  No  15  (2009):  Corporate  income  tax  and  economic  distortions.  Written  by  Gaëtan 
Nicodème. 

Taxation  Paper  No  14  (2009):  Corporate  tax  rates  in  an  enlarged  European  Union.  Written  by 
Christina Elschner and Werner Vanborren. 

Taxation  Paper  No  13  (2008):  Study  on  reduced  VAT  applied  to  goods  and  services  in  the  Member 
States of the European Union. Final report written by Copenhagen Economics. 

Taxation  Paper  No  12  (2008):  The  corporate  income  tax  rate-revenue  paradox:  evidence  in  the  EU. 
Written by Joanna Piotrowska and Werner Vanborren. 

Taxation Paper No 11 (2007): Corporate tax policy and incorporation in the EU. Written by Ruud A. de 
Mooij and Gaëtan Nicodème. 

Taxation Paper No 10 (2007): A history of the 'Tax Package': The principles and issues underlying the 
Community approach. Written by Philippe Cattoir. 

Taxation Paper No 9 (2006): The Delineation and Apportionment of an EU Consolidated Tax Base for 
Multi-jurisdictional  Corporate  Income  Taxation:  a  Review  of  Issues  and  Options.  Written  by  Ana 
Agúndez-García. 

Taxation  Paper  No  8  (2005):  Formulary  Apportionment  and  Group  Taxation  in  the  European  Union: 
Insights from the United States and Canada. Written by Joann Martens Weiner. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxation Paper No 7 (2005): Measuring the effective levels of company taxation in the new member 
States : A quantitative analysis. Written by Martin Finkenzeller and Christoph Spengel.   

Taxation  Paper  No  6  (2005):  Corporate  income  tax  and  the  taxation  of  income  from  capital.  Some 
evidence  from  the  past  reforms  and  the  present  debate  on  corporate  income  taxation  in  Belgium. 
Written by Christian Valenduc.  

Taxation  Paper  No  5  (2005):  An  implicit  tax  rate  for  non-financial  corporations:  Definition  and 
comparison with other tax indicators. Written by Claudius Schmidt-Faber. 

Taxation Paper No 4 (2005): Examination of the macroeconomic implicit tax rate on labour derived by 
the European Commission. Written by Peter Heijmans and Paolo Acciari. 

Taxation Paper No 3 (2005): European Commission Staff Working Paper. 

Taxation Paper No 2 (2004): VAT indicators. Written by Alexandre Mathis. 

Taxation  Paper  No  1  (2004):  Tax-based  EU  own  resources:  an  assessment.  Written  by  Philippe 
Cattoir.