SME taxation in Europe : an empirical study of applied corporate income taxation for SMEs compared to large enterprises.
Date: 2015-07-20
Institutions: Directorate-General for Enterprise and Industry
Subjects: competition, corporation tax, large business, small and medium-sized enterprises, tax system

SME taxation in Europe  

– An empirical study of applied corporate income taxa-
tion for SMEs compared to large enterprises 

CIP Programme 186/PP/ENT/CIP/12/F/S01C24 

Written by Valdani Vicari & Associati SRL (VVA) 
and Centre for European Economic research (ZEW) 
May – 2015 

CIP PROGRAMME 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EUROPEAN COMMISSION 

DG for Internal Market, Industry, Entrepreneurship and SMEs  
Directorate F —Entrepreneurship & SMEs 
Unit F.3 — SME Access to Finance 
E-mail:  GROW-F3@ec.europa.eu  

European Commission 
B-1049 Brussels 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EUROPEAN COMMISSION 

SME taxation in Europe  

– An empirical study of applied corporate income taxa-
tion for SMEs compared to large enterprises 

CIP Programme 186/PP/ENT/CIP/12/F/S01C24 

2015 

DG for Internal Market, Industry, Entrepreneurship and SMEs 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

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Luxembourg: Publications Office of the European Union, 2015 

ISBN 978-92-79-44335-0 
doi: 10.2769/027673 

© European Union, 2015 

Reproduction is authorised provided the source is acknowledged. 

Printed in Belgium 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

TABLE OF CONTENTS 

1.  CORPORATE  INCOME  TAX  BURDENS  FOR  SMALL  &  MEDIUM-SIZED 

ENTERPRISES IN THE EU: EVIDENCE FROM A CROSS-COUNTRY STUDY ......... 12 

2.  EXECUTIVE SUMMARY .............................................................................. 14 

2.1.  Executive summary (English) ............................................................ 14 
2.1.1.  Main objectives .................................................................... 14 
2.1.2.  Study design and methodology .............................................. 14 
2.1.3.  Main results ........................................................................ 15 
2.1.4.  Overall conclusions and policy recommendations ..................... 17 
2.2.  Zusammenfassung (German/Deutsch) ............................................... 19 
2.2.1.  Hauptziele ........................................................................... 19 
2.2.2.  Untersuchungsdesign und Methodik........................................ 19 
2.2.3.  Ergebnisse .......................................................................... 20 
2.2.4.  Fazit und Handlungsempfehlungen ......................................... 23 
2.3.  Résumé (French/Français) ................................................................ 24 
2.3.1.  Objectifs principaux .............................................................. 24 
2.3.2.  Structure de l’étude et méthodologie ...................................... 24 
2.3.3.  Principaux résultats .............................................................. 25 
2.3.4.  Conclusions générales et Recommandations ............................ 28 

INTRODUCTION AND STUDY SCOPE ........................................................... 29 

FINANCIAL RATIO ANALYSIS ..................................................................... 32 

4.1.  Tax over EBITDA ............................................................................. 33 
4.2.  TAX over EBIT ................................................................................. 38 
4.3.  TAX over EBT .................................................................................. 41 
4.4.  Cash Ratio ...................................................................................... 45 
4.5.  Quick Ratio ..................................................................................... 50 
4.6.  Debt Ratio ...................................................................................... 54 
4.7.  Conclusions .................................................................................... 57 

3. 

4. 

5.  ANALYSIS  OF  SME-SPECIFIC  PROVISIONS  AND  R&D  INCENTIVES  IN 

NATIONAL TAX CODES ............................................................................. 59 

5.1.  Outline of the qualitative analysis and definition of SMEs ...................... 59 
5.2.  Classification of tax incentives ........................................................... 59 
5.3.  Favourable  R&D  incentives  for  all  enterprises  in  the  EU  and  other 

selected countries ............................................................................ 61 
5.4.  SME taxation in Europe and in other selected countries ........................ 62 
5.5.  Summary of results: general trends and patterns ................................ 63 

6.  EFFECTIVE  TAX  BURDENS  FOR  SMES  COMPARED  TO  LSES  USING  THE 

EUROPEAN TAX ANALYZER ........................................................................ 69 

6.1.  The European Tax Analyzer ............................................................... 69 
6.1.1.  Description of the European Tax Analyzer ............................... 69 
6.1.2.  Effective average tax burden (corporate level) ......................... 71 
6.1.3.  Overall  effective  average  tax  burden  (corporate  and 

shareholder level) ................................................................ 72 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.1.4.  Model corporations ............................................................... 73 
6.2.  Overview of tax incentives (R&D & SME incentives) ............................. 74 
6.3.  Comparison of effective tax burdens .................................................. 74 
6.3.1.  LSEs ................................................................................... 76 
6.3.1.1.  Effective tax burden 2013 (corporate level) ............... 76 
6.3.1.2.  Development  of  effective  tax  burdens  in  selected 

countries (corporate level) ....................................... 78 
6.3.1.3.  Sensitivity analysis (corporate level) ......................... 80 
6.3.1.4.  Interim conclusions ................................................. 81 
6.3.2.  Medium-sized corporations .................................................... 81 
6.3.2.1.  Effective tax burden 2013 (corporate level) ............... 81 
6.3.2.2.  Effective 

tax  burden  2013 

(overall 

level: 

corporation and shareholder) ................................... 84 
6.3.2.3.  Interim conclusions ................................................. 86 
6.3.3.  Small corporations ............................................................... 86 
6.3.3.1.  Effective tax burden 2013 (corporate level) ............... 86 
6.3.3.2.  Development  of  effective  tax  burdens  in  selected 

countries (corporate level) ....................................... 89 
6.3.3.3.  Interim conclusions (corporate level) ........................ 91 
6.3.3.4.  Effective 

tax  burden  2013 

(overall 

level: 

corporation and shareholder) ................................... 91 
6.3.4.  Micro corporations ................................................................ 92 
6.3.4.1.  Effective tax burden 2013 (corporate level) ............... 92 
6.3.4.2.  Development  of  effective  tax  burdens  in  selected 

countries (corporate level) ....................................... 94 

6.3.4.3.  Effective 

tax  burden  2013 

(overall 

level: 

corporation and shareholder) ................................... 96 
6.4.  Summary ....................................................................................... 98 
6.4.1.  Corporate level .................................................................... 98 
6.4.2.  Overall  level  (corporate  and  shareholder  level  for  medium-

sized, small and micro corporations) ...................................... 99 
6.4.3.  Sensitivity analysis ............................................................... 99 

7.  COMPARISON  OF  EFFECTIVE  TAX  RATE  OF  SMES  AND  CROSS-BORDER 

INVESTMENT OF LSES ............................................................................ 100 

7.1.  Tax planning opportunities of multinational enterprises ...................... 100 
7.2.  Setup of the Devereux-Griffith Model ............................................... 104 
7.3.  Effective  average  tax  rate  -  national  investments  of  stand-alone 

corporations .................................................................................. 110 
7.4.  Effective average tax rate - cross-border investments ........................ 112 
7.5.  Summary of results ....................................................................... 117 

8. 

IMPACT OF CIT ON SMES AND LSES ACROSS THE COMPANY LIFE-CYCLE ..... 119 

8.1.  Overall comparison of tax rates between LSEs and SMEs .................... 120 
8.2.  Impact of CIT on entrepreneurial activity levels ................................. 123 
8.2.1.  Prevalence of special CIT provisions for entrepreneurship ....... 124 
Impact of CIT on entrepreneurship ....................................... 125 
8.2.2. 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

8.3.  Impact of CIT rates on the financial structure of companies ................ 127 
8.3.1.  CIT rates and venture capital finance ................................... 127 
8.3.2.  CIT rates and debt/equity mix ............................................. 128 
8.4.  CIT rates and the choice of legal structure ........................................ 131 
8.4.1.  Definition of limited liability company ................................... 131 
Impact of taxation on the choice of legal structure ................. 131 
8.4.2. 
8.5.  The impact of CIT rates on company growth ..................................... 134 
8.5.1.  Evidence of impact from the case studies and the survey ........ 134 

8.6.  Impact  of  CIT  deductions,  allowances,  incentives,  depreciation 

schemes ....................................................................................... 136 
8.6.1.  Prevalence of specific provisions in CIT codes ........................ 137 
Impact of SME specific provisions ......................................... 137 
8.6.2. 
Impact of R&D tax incentives on SMEs .................................. 140 
8.6.3. 
8.6.3.1.  Prevalence of R&D tax incentives ............................ 140 
8.6.3.2.  Impact on SMEs ................................................... 141 
Impact of depreciation mechanisms on SMEs ......................... 143 
8.7.  Impact of CIT on administrative burden and compliance costs ............. 145 
8.8.  Summary of conclusions ................................................................. 148 

8.6.4. 

9.  KEY FINDINGS AND RECOMMENDATIONS ................................................. 149 

ANNEX 1 

1 GLOSSARY 

2 REFERENCES 

3 OVERVIEW  OF  DATA  COLLECTION  METHODOLOGY  AND  QUALITY 

ASSURANCE 

3.1 Desk research to feed into the analysis of SME-specific provisions and 

R&D incentives in national tax codes 

3.2 Desk research to feed into the case studies 

3.3 Online survey of tax advisers 

4  SUMMARY  TABLES  AND  COUNTRY  REPORTS  OF  SME-SPECIFIC  PROVISIONS 

IN NATIONAL TAX CODES 

4.1 Summary Tables 

4.2 Country Reports 

5  AN  EMPIRICAL  STUDY  OF  APPLIED  CORPORATE  INCOME  TAXATION  FOR 

SMES COMPARED TO LARGE ENTERPRISES 

5.1 Generation of model corporations for the European Tax analyzer 

5.1.1 Description of AMADEUS and our Sampling Process 

5.1.2 Data accuracy and consistency 

5.1.3 Determination of the Model Corporations 

5.1.4 Macroeconomic Data and other Assumptions 

5.1.5 Final Steps for Model Corporations 

5.1.6 Sensitivity analysis 

5.2 R&D incentives implemented 2009-2013 (European Tax Analyzer)  

5.3 SME incentives implemented 2009-2013 (European Tax Analyzer)  

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

5.4 Detailed calculation results (Effective Tax Burden, corporate level)  

5.5 Sensitivity analysis (Effective Tax Burden, large corporation, corporate 

level)  

5.6  Sensitivity  analysis  (Effective  Tax  Burden,  medium-sized  corporation, 

corporate level)  

5.7 Sensitivity analysis (Effective Tax Burden, small corporation, corporate 

level)  

5.8 Sensitivity analysis (Effective Tax Burden, micro corporation, corporate 

level)  

5.9  Detailed  calculation  results  (Effective  Tax  Burden,  corporate  and 

shareholder level for medium-sized, small and micro corporation)  

6  DEVEREUX-GRIFFITH  MODEL  (DETAILED  RESULTS  AND  SENSITIVITY 

ANALYSIS)  

6.1 Implemented SME Tax incentives (2009-2012)  

6.2 Effective average Tax rates (2009-2012)  

6.3 Sensitivity analysis 

6.3.1 Interpretation and results 

6.3.1.1 Real interest rate 

6.3.1.2 Inflation rate 

6.3.1.3 Pre-tax rate of return 

6.3.2 Detailed Results - Tables 

6.3.3 Detailed Results - Graphs 

6.4 Micro regime in Romania and Slovenia 

6.4.1 Romania 

6.4.2 Slovenia 

6.5  International  Tax  law  on  cross-border  investments  and  optimal 

behaviour by corporations 

7  CASE  STUDY  1:  IMPACT  OF  SPECIAL  CIT  RATES  FOR  SMES  ON  SUPPLY  OF 

VENTURE CAPITAL 

7.1 Introduction 

7.2 The impact of special CIT rates on the supply of venture capital 

7.2.1 Theoretical explanations 

7.2.2 A brief review of empirical studies 

7.2.3  The  impact  of  CIT  special  rates  on  the  supply  of  venture 

capital in the EU 

7.3 Country profiles 

7.3.1 France 

7.3.2 Italy 

7.3.3 The Netherlands 

7.3.4 The United Kingdom 

7.4 Conclusions 

7.5 References 

8 CASE STUDY 2: IMPACT OF SPECIAL CIT RATES FOR SMES AFFECTING THE 

START-UP PHASE 

8.1 Introduction 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

8.2 The impact of CIT special rates on entrepreneurship 

8.2.1 Theoretical explanations 

8.2.2 A brief review of empirical studies 

8.2.3 The impact of CIT on entrepreneurship in the EU 

8.3 Country profiles 

8.3.1 Belgium 

8.3.2 France 

8.3.3 The Netherlands 

8.4 Conclusions 

8.5 References 

9  CASE  STUDY  3:  IMPACT  OF  SPECIAL  CIT  RATES  FOR  SMES  ON  LEGAL 

STRUCTURE 

9.1 Introduction 

9.2 The impact of CIT special rates for SMEs on legal form structure 

9.2.1 Theoretical explanation 

9.2.2 A brief review of empirical studies 

9.2.3 The impact of CIT on legal structure in the EU 

9.3 Country profiles 

9.3.1 Ireland 

9.3.2 Romania 

9.3.3 Estonia 

9.4 Conclusions 

9.5 References 

10 CASE STUDY 4:  IMPACT OF SPECIAL CIT RATES FOR SMES ON FINANCIAL 

STRUCTURE 

10.1 Introduction 

10.2 The impact of CIT special rates for SME on financial structure 

10.2.1 Theoretical explanations 

10.2.2 A brief review of empirical studies 

10.2.3 The impact of special CIT rates on SMEs financial structure in 

the EU 

10.3 Country profiles 

10.3.1 Ireland 

10.3.2 Belgium 

10.3.3 Italy 

10.4 Conclusions 

10.5 References 

11  CASE  STUDY  5:  IMPACT  OF  SPECIAL  CIT  RATES  FOR  SMES  ON  ORGANIC 

GROWTH DECISIONS 

11.1 Introduction 

11.2 The impact of CIT special rates on organic growth 

11.2.1 Theoretical explanations 

11.2.2 A brief review of empirical studies 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

11.2.3  The  impact  of  special  CIT  rates  on  SMEs  organic  growth  in 

the EU 

11.3 Country profiles 

11.3.1 Belgium 

11.3.2 Romania 

11.3.3 Spain 

11.4 Conclusions 

11.5 References 

12 CASE STUDY 6: IMPACT OF CIT ON EXTERNAL GROWTH DECISIONS 

12.1 Introduction 

12.2 The impact of CIT on external growth decisions 

12.3 Country profiles 

12.3.1 Poland 

12.3.2 Spain 

12.3.3 The United Kingdom 

12.4 Conclusions 

12.5 References 

13  CASE  STUDY  7:  IMPACT  OF  DEDUCTIONS  ON  TAX  PLANNING  AND 

PRACTICES 

13.1 Introduction 

13.2 The impact of CIT deductions/allowances on SMEs 

13.3 Country profiles 

13.3.1 Luxembourg 

13.3.2 United Kingdom 

13.4 Conclusions 

13.5 References 

14 CASE STUDY 8: IMPACT OF R&D INCENTIVES ON SMES 

14.1 Introduction 

14.2 The impact of R&D incentives on SMEs 

14.2.1 Theoretical explanations 

14.2.2 The impact of tax deductions schemes for R&D on SMEs 

14.3 Country profiles 

14.3.1 Austria 

14.3.2 Germany 

14.3.3 Italy 

14.4 Conclusions 

14.5 References 

15 CASE STUDY 9: IMPACT OF DEPRECIATION ON SMES 

15.1 Introduction 

15.2 The impact of depreciation on SMEs 

15.2.1 Theoretical explanations 

15.2.2 The impact of depreciation on SMEs 

15.3 Country profiles 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

15.3.1 Finland 

15.3.2 Italy 

15.3.3 The Netherlands 

15.4 Conclusions 

15.5 References 

16  CASE  STUDY  10:  IMPACT  OF  CIT  ADMINISTRATIVE  BURDEN  AND  TAX 

COMPLIANCE ON SMES 

16.1 Introduction 

16.2  The  impact  of  CIT  administrative  burden  and  compliance  costs  on 

SMEs 

16.2.1 Theoretical explanations 

16.2.2 The impact of CIT on administrative burden in the EU 

16.3 Overview of country specific measures 

16.3.1 Austria 

16.3.2 Belgium 

16.3.3 Bulgaria 

16.3.4 Croatia 

16.3.5 Estonia 

16.3.6 Finland 

16.3.7 France 

16.3.8 Germany 

16.3.9 Greece 

16.3.10 Ireland 

16.3.11 Italy 

16.3.12 Lithuania 

16.3.13 Luxembourg 

16.3.14 Netherlands 

16.3.15 Poland 

16.3.16 Romania 

16.3.17 Slovenia 

16.3.18 Spain 

16.3.19 Sweden 

16.3.20 The United Kingdom 

16.4 Conclusions 

16.5 References 

17 CASE STUDIES INTERVIEWS 

18 TAX ADVISERS SURVEY RESULTS 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

1.  CORPORATE  INCOME  TAX  BURDENS  FOR  SMALL  &  MEDIUM-
SIZED  ENTERPRISES  IN  THE  EU:  EVIDENCE  FROM  A  CROSS-
COUNTRY STUDY 

This  report  analyses  tax  incentives  for  SMEs  in  20  EU  Member  States  and  5 
non-EU countries between 2009 and 2013. Its findings and recommendations are 
based  on  a  comprehensive  review  of  tax  codes,  modelling  of  tax  burdens  using  two 
different  models,  a  descriptive  analysis  of  company  financial  ratios,  and  the  percep-
tions of tax advisers and companies in each country.  

The key findings of the report are:  

1.  Corporate income tax burdens across Europe are significantly different 
from  one  country  to  another.  While  Italy,  Germany,  Finland  and  Belgium 
exhibit some of the highest fiscal burdens, Ireland, Estonia and Bulgaria are at 
the other end of the spectrum.  

2.  Only  five  countries  (France,  Greece,  Bulgaria,  the  UK  and  the  Netherlands) 
treat SMEs more beneficially than LSEs in terms of the actual burden of 
taxes paid. 

3.  SME  tax  incentives  are  not  as  frequently  implemented  as  R&D  tax  in-
centives. Mostly, reduced tax rates are employed to support SMEs. Tax cred-
its,  additional  deductions  and  accelerated  depreciation  schemes  are  rare  and 
often related to very restrictive eligibility criteria.  

4.  Most SME tax incentives only benefit micro and small enterprises. Medi-
um-sized corporations basically benefit only from R&D tax incentives, whereas 
small  and  micro  corporations  additionally  incur  relief  from  SME  tax  incentives 
that range from 2.5% to over 50%.  

5.  There is an  increasing significance of SME  tax incentives between 2009 
and 2013. However, this cannot be seen as clear evidence for SME-related tax 
competition among Member States.  

6.  R&D tax incentives are more advantageous for SMEs, but LSEs can cir-
cumvent  high  tax  burdens  with  the  help  of  optimized  location  and  fi-
nancing strategies.  In many Member States, the latter more than offset the 
advantages  incurred  by  small  and  micro  corporations  due  to  SME  tax  incen-
tives.  

7.  Corporate income tax is perceived to have a rather limited influence on 
SME decisions concerning financing, legal structure and investment. At 
the same time, a large body of empirical literature has found tax provisions to 
impact financing decisions, the choice of legal form, as well as investment deci-
sions. A positive impact on the level of investment has been shown for R&D tax 
incentives.  Interviews  with  SMEs  confirm  these  findings,  as  entrepreneurs  re-
port  that  investment  deductions,  accelerated  depreciation  schemes  and  other 
incentives considerably lower SME tax burdens and help them invest more.  

8.  SMEs perceive the relatively high compliance burden related to taxes to 

be particularly problematic. 

Based on the above findings, the report recommends that:  

1.  Tax  incentives  should  not  be  explicitly  connected  to  the  size  of  corpo-
rations  but  rather  designed  to  encourage  “desirable”  outcomes  such  as  inno-
vation and investment.  

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

2.  All tax incentives need to fulfil basic requirements such as transparen-

cy, effectiveness and neutrality.  

3.  Tax credits, granted as a percentage of specified investment costs (e.g. 
acquisition  costs  of  certain  assets),  could  be  used  to  support  SMEs 
through  the  tax  code.  The  size  of  these  tax  credits  should  be  limited  to  a 
maximum  threshold.  In  addition  to  limiting  revenue  losses,  this  ensures  rela-
tively higher relief for SMEs compared to  LSEs. By setting the percentage and 
the  threshold,  each  Member  State  could  individually  determine  how  generous 
the incentive shall be and up to which size  corporations should benefit signifi-
cantly from the measure. 

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SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

2.  EXECUTIVE SUMMARY  

2.1.  Executive summary (English) 

2.1.1.  Main objectives 

Lately,  tax  avoidance  strategies  by  numerous  multinational  enterprises  have  been 
prominently  discussed  in  the  media.  As  a  consequence,  the  question  arises,  whether 
small and medium-sized enterprises (SMEs) are at a competitive disadvantage as they 
often cannot utilize these strategies due to their limited size. On the other hand, many 
countries provide small enterprises with different forms of relief in order to account for 
this disadvantage.  

The  European Commission’s Directorate  General  for  Internal Market,  Industry,  Entre-
preneurship and SMEs therefore commissioned VVA together with ZEW to carry out a 
study  on  “SME  taxation  in  Europe  –  an  empirical  study  of  applied  corporate  income 
taxation  for  SMEs  compared  to  large  enterprises”.  This  study  has  the  overall  goal  to 
provide an in-depth analysis of SME and R&D tax incentives for 20 EU Member States 
(Austria,  Belgium,  Bulgaria,  Croatia,  Estonia,  Finland,  France,  Germany,  Greece,  Ire-
land, Italy, Luxembourg, Lithuania, the Netherlands, Poland, Romania, Slovenia, Swe-
den, Spain, and the United Kingdom) and - in some parts of the analysis - five non-EU 
countries (Canada, China, Japan, Switzerland, and the USA) for the period from 2009 
to 2013.  

The main objectives of the study are the following1: 

 

 
 

to identify key competitive advantages and disadvantages resulting from corpo-
rate income tax (CIT) for SMEs and LSEs; 
to identify good SME CIT practices; 
to  suggest  solutions  to  overcome  possible  distortions  and  disadvantages  for 
SMEs with regard to CIT. 

2.1.2.  Study design and methodology 

The analysis was carried out in five steps. 

1)  A  financial  ratio  analysis  providing  an  overview  of  how  SMEs  structure  their 
business  and  how  they  compare  to  large  enterprises  (LSEs)  in  terms  of  debt, 
liquidity and taxation.  

2)  A qualitative analysis of SME and R&D tax incentives summarizing which incen-
tives  are  available  in  Europe  and  which  requirements  these  incentives  should 
fulfil to be considered good practice. We provide insight about which countries 
provide  reliefs  for  SMEs,  which  forms  of  relief  they  provide  to  which  types  of 
corporations and whether there were any major trends with respect to SME and 
R&D tax incentives during the period from 2009 to 2013. 

3)  The  results  of  the  qualitative  analysis  are  the  foundation  for  the  quantitative 
inquiry with the European Tax Analyzer which allows evaluating the actual im-
pact  of  tax  incentives  on  effective  tax  burdens  in  a  national  context.  In  doing 
so,  we  empirically  developed  model  corporations  for  each  size  class  (micro, 

1 The findings of the whole study are reported in section 9. 

14 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

small,  medium-sized  and  large  corporations)  and  analysed  effective  tax  bur-
dens for these model corporations.  

4)  The  next  section  extends  the  quantitative  analysis  by  including  cross-border 
activities. Using the Devereux-Griffith approach enabled us to compare the re-
lief provided by SME tax incentives to those savings that LSEs can reap by op-
timizing location and financing strategies with regard to corporate income taxa-
tion. 

5)  The last section complements the above results by providing further insight on 
the  effects  of  SME  and  R&D  tax  incentives  on  corporations’  decision-making. 
Information was gathered by means of in-depth case studies, surveys and desk 
research  from  three  different  sources:  affected  corporations  from  the  Member 
States, tax advisors from the Member States and previously conducted empiri-
cal studies on the impact of taxes and tax incentives on financing, investment 
behaviour and the choice of legal form. 

All in all, the study combines the results of different methodological approaches (sec-
tion  9).  The  desk  research  in  the  financial  ratio  analysis  provides  an  overview  of  the 
competitive  situation  of  SMEs  compared  to  LSEs  as  well  as  an  overview  of  available 
tax  incentives  for  them.  The  impact  on  effective  tax  burdens  is  evaluated  with  two 
different quantitative approaches. Lastly, the actual impact of CIT and related tax in-
centives  on  entrepreneurial  decision-making  is  empirically  examined  and  once  again 
complemented by desk research from previous empirical findings.  

Naturally, the empirical results need to be used with  caution due to difficulties in ob-
taining a fully representative sample. In addition, given ongoing political discussions, it 
is crucial that the conclusions and recommendations of the empirical research are con-
sidered  in  light  of  the  objectives  of  the  study.  Nevertheless  the  report  provides  evi-
dence based insights for ongoing discussions around corporate income taxation in Eu-
rope. 

2.1.3.  Main results 

The main results of the financial ratios analysis are:  

  Tax regimes across Europe are significantly different from  one another, ranging 
from  very  low  tax  burdens  (i.e.  Ireland,  Estonia,  and  Bulgaria)  to  countries 
where the tax burden is relatively high (i.e. Italy, Germany, and Finland). 

  Only  five  countries  seem  to  favour  small,  medium-sized  and  micro  enterprises 
(France, Greece, Bulgaria, the UK and the Netherlands) in terms of the tax bur-
dens compared with LSEs. 

  The industry analysis shows that while there seems not to be a particularly high 
difference  in  taxation  between  SMEs  and  LSEs  in  the  commercial  sector,  enter-
prise size makes more of a difference regarding taxation in the construction, ho-
tels & restaurants and manufacturing sectors. 

The main findings of the qualitative analysis of tax incentives provided for SMEs and 
R&D activities are: 

  Tax relief for SMEs is rarer than for R&D activities. Countries with various incen-
tives in place are Belgium, Spain, France and  Japan. On the  other hand, seven 
countries  (e.g.  Austria,  Bulgaria,  Estonia,  Italy,  Slovenia,  Sweden  and  Switzer-
land) do not have any special regimes for SMEs at all. 

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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

  Special tax rates are the predominant tax measure to support SMEs. Special tax 
rates, however,  exhibit unfavourable properties compared to other  forms of  re-
lief and should not be considered as good practice. 

  EU Member States do not uniformly limit the eligibility to tax incentives for SMEs 
by  referring  to  the  criteria  employed  in  the  Commission  Recommendation  of  6 
May 2003 on the SME definition. 

  Discrimination  concerning  tax  incentives  between  medium-sized,  small  and  mi-
cro corporations takes place. In fact, medium-sized corporations are rarely eligi-
ble for SME tax incentives whereas micro corporations benefit extensively. 

  Explicit differentiation of LSEs and SMEs with respect to R&D tax incentives rare-
ly occurs (e.g. France, the UK, Canada, and Japan). Benefits from the generally 
applicable R&D tax incentives, however, might frequently be larger for SMEs be-
cause they are less likely to be subject to restrictions on maximum permissible 
reliefs. 

With  regard  to  the  quantitative  analysis  of  effective  tax  burdens  on  domestic  invest-
ments, the main results of this study are: 

  Medium-sized enterprises virtually do not benefit from SME tax incentives in the 
countries  considered  in  this  study  (apart  from  the  UK).  Reductions  in  effective 
tax  burdens  for  medium-sized  corporations  can  be  mainly  traced  back  to  R&D 
tax  incentives.  These  reductions  range  between  0.93%  (i.e.  Luxembourg)  and 
25.24% (i.e. Ireland). 

  For  small  corporations,  SME  tax  incentives  become  effective  in  five  countries 
(e.g.  Belgium,  France,  Ireland,  Spain  and  the  United  Kingdom).  The  reductions 
in  effective  tax  burdens  -  only  attributable  to  SME  tax  incentives  -  range  be-
tween  2.54%  (i.e.  Belgium)  and  29.47%  (i.e.  Spain).  For  R&D  tax  incentives, 
small  corporations  often  derive  relatively  higher  benefits  than  LSEs  due  to 
threshold provisions. 

  Substantial effects of SME tax incentives occur for micro corporations (i.e. reliefs 
amount up to 53.05%). Overall, tax reliefs provided by SME incentives turns out 
to  be  much  larger  than  the  reliefs  derived  from  R&D  incentives,  mainly  due  to 
reduced tax rates. 

  Effective tax burden reductions from R&D tax incentives range from 0.98% (i.e. 

Luxembourg) to roughly 20% (i.e. Lithuania) for LSEs. 

  For  most  countries,  an  increasing  significance  of  R&D  and  SME  tax  incentives 

can be observed over time. 

  The impact of SME and R&D tax incentives on the effective tax burden diminish-
es by roughly 50% in most of the countries if shareholder taxation is additionally 
taken into consideration. 

  The effect of R&D and SME incentives differs considerably across industries. This 

 

can be explained foremost by industry specific R&D intensities. 
Investments financed by equity capital face higher effective tax burdens than in-
vestments financed by debt capital. As SMEs usually face difficulties in obtaining 
debt, they are likely to suffer a competitive tax disadvantage compared to LSEs. 

The  quantitative  analysis  of  effective  tax  burdens  on  domestic  and  cross-border  in-
vestments produced the following results: 

  LSEs  locate  their  activities  in  different  countries.  Therefore,  LSEs  benefit  from 
cross-country tax differentials compared to SMEs that operate domestically. 
  LSEs  can  further  reduce  their  effective  tax  burdens  by  allocating  functions  in 

several countries in the areas of financing and intellectual property. 

  Considering tax-minimizing strategies, LSEs in 75% of the sample countries face 

a lower effective tax burden compared to SMEs. 

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enterprises 

  Nevertheless,  even  when  assuming  unrestricted  tax  optimizing  strategies  by 
LSEs,  France,  Spain,  Belgium,  Lithuania  and  the  Netherlands  provide  lower  ef-
fective tax burdens for SMEs compared to LSEs. 

Finally, the main findings of the case studies and the tax adviser survey are: 

  CIT  is  seen  by  entrepreneurs  as  one  of  many  factors  that  impact  on  entrepre-
neurial activity and business performance. However, compared with other types 
of  taxes,  companies  of  different  sizes  tend  to  be  less  worried  about  CIT  than 
about input taxes such as labour or social security contributions. 

  When dealing with issues related to access to finance, financial or legal structure 
of their corporations, entrepreneurs tend not to base their choices on the impact 
that CIT rates will have, but on various non-tax factors, such as entrepreneurial 
culture and background, credit availability, strategic decisions related to the po-
sitioning on the market. 

  The choice of the legal structure might be affected by the difference between PIT 

 

(personal Income tax) and CIT rates. 
In entrepreneurs’ opinion R&D tax incentives, deductions and special or acceler-
ated depreciation rates are very important tools for corporations. 

  SMEs are slightly more affected than LSEs by the administrative and compliance 
costs  surrounding  CIT.  The  vast  majority  of  SMEs  rely  on  outside  professional 
assistance to comply with their CIT, because they are usually too small in terms 
of human resources to have the necessary knowledge and expertise available in-
ternally. 

2.1.4.  Overall conclusions and policy recommendations 

Considering  the  level  of  CIT  burdens  for  SMEs  and  LSEs,  tax  regimes  across  Europe 
vary  significantly.  While  SMEs,  in  particular  micro  corporations,  receive  preferential 
treatment  in  several  European  countries,  others  do  not  provide  any  SME  specific  tax 
incentives.  SMEs  –  not  being  able  to  utilize  international  tax  planning  strategies  as 
well as suffering a comparatively high compliance burden – can be expected to be at a 
competitive  disadvantage  in  these  countries.  Should  policy  makers  decide  to  discuss 
about  the  modalities  of  supporting  enterprises  through  tax  incentives,  these  should 
not be explicitly connected to the size of corporations, though, but rather to encourage 
desirable outcomes such as innovation and investment. Otherwise, the growth of cor-
porations is hampered and new distortions impeding the efficiency and transparency of 
the tax system are introduced. 

In  the  first  place,  we  therefore  emphasize  the  importance  of  generally  fair,  simple, 
predictable  and  transparent  tax  codes.  This  is  an  incremental  part  of  an  attractive 
business  environment  for  all  enterprises  (including  SMEs)  and  it  has  the  advantage 
that disproportionally high compliance burdens for SMEs are reduced.  

Second,  each  tax  incentive  needs  to  fulfil  basic  requirements  such  as  transparency, 
effectiveness  and  neutrality.  We  therefore  recommend,  as  a  tax  measure  to  support 
SMEs,  tax  credits  that  are  granted  as  a  certain  percentage  of  specified  investment 
costs (e.g. acquisition costs of certain assets). The size of the tax credit should be lim-
ited  to  maximum  absolute  thresholds.  In  addition  to  limiting  revenue  losses,  this  se-
cures  relatively  higher  relief  for  SMEs  compared  to  LSEs.  By  setting  the  percentage 
and the threshold, each Member State could individually determine how generous the 
incentive  shall  be  and  which  size  enterprises  should  benefit  considerably  from  the 
measure. Distortions arising from special SME tax rates and other forms of tax incen-

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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

tives would be avoided as the tax credit is not dependent on staying below certain size 
criteria. 

18 

 
 
 
 
 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

2.2.  Zusammenfassung (German/Deutsch) 

2.2.1.  Hauptziele 

Die  Steuervermeidungsstrategien  zahlreicher  multinationaler  Unternehmen  waren  zu-
letzt  regelmäßig Gegenstand öffentlicher Diskussionen. Es stellt sich dabei die Frage, 
ob  kleine  und  mittlere  Unternehmen  (KMU)  einem  Wettbewerbsnachteil  ausgesetzt 
sind,  da  ihnen  vergleichbare  Steuervermeidungsstrategien  wegen  ihrer  national  kon-
zentrierten Geschäftstätigkeit regelmäßig nicht zur Verfügung stehen. Auf der anderen 
Seite bieten viele Länder  kleinen  und mittleren  Unternehmen  verschiedene Arten von 
Steuervergünstigungen, um diesen Nachteil auszugleichen.  

Daher wurden VVA und das ZEW von der Generaldirektion Unternehmen und Industrie 
der Europäischen Kommission beauftragt, die Studie „Besteuerung von KMU in Europa 
– eine empirische Untersuchung zur angewandten Körperschaftsbesteuerung von KMU 
im Vergleich zu großen Unternehmen“ („SME taxation in Europe  – an empirical study 
of applied corporate income taxation for SMEs compared to large enterprises”) durch-
zuführen.  Die  Untersuchung  umfasst  eine  detaillierte  Analyse  der  Steueranreize  für 
KMU und Forschungs- und Entwicklungsaktivitäten (F&E) in 20 Mitgliedstaaten der EU 
(Österreich,  Belgien,  Bulgarien,  Kroatien,  Estland,  Finnland,  Frankreich,  Deutschland, 
Griechenland,  Irland,  Italien,  Luxemburg,  Litauen,  die  Niederlande,  Polen,  Rumänien, 
Slowenien, Schweden, Spanien und das Vereinigte Königreich) und – an einigen Stel-
len  in  der  Analyse  –  von  fünf  Nicht-Mitgliedstaaten  (Kanada,  China,  Japan,  Schweiz 
und USA) für den Zeitraum 2009 bis 2013.  

Die Hauptziele der Studie sind die Folgenden2: 

 

Identifikation der wesentlichen Wettbewerbsvorteile und -nachteile, die sich aus 
der Körperschaftsteuer für KMU und Großunternehmen ergeben; 
Identifikation von bewährten Praxis für die Körperschaftsteuer bei KMU; 

 
  Aufzeigen  von  Lösungsvorschlägen,  um  potenzielle  Verzerrungen  und  Nachteile 

für KMU in Hinblick auf die Körperschaftsteuer zu beseitigen. 

2.2.2.  Untersuchungsdesign und Methodik 

Die Analyse erfolgt in fünf Schritten. 

1)  Mittels  der  Analyse  von  Finanzkennzahlen  wird  zunächst  ein  Überblick  über 
strukturelle Merkmale von KMU gegeben. Zudem erfolgt ein Vergleich mit gro-
ßen Unternehmen hinsichtlich Fremdkapital, Liquidität und Steuerbelastung.  

2)  Die  qualitative  Analyse  der  Steueranreize  für  KMU  sowie  für  Forschungs-  und 
Entwicklungsaktivitäten  bietet  einen  Überblick,  welche  Regelungen  derzeit  in 
Europa zur Anwendung kommen. Es wird aufgezeigt, welche Länder Steuerver-
günstigungen  für  KMU  bieten,  welche  Formen  der  Vergünstigungen  für  welche 
Arten  von  Unternehmen  verfügbar  sind  und  ob  es  generelle  Entwicklungsten-
denzen  bezüglich  KMU-  und  Forschungs-  und  Entwicklungssteueranreizen  in 
den Jahren 2009 bis 2013 gab. Zudem erörtert der Abschnitt, wie Steueranrei-
ze idealerweise zu gestalten sind, um als bewährten Praxis erachtet zu werden. 

2 Die Erkenntnisse der gesamten Untersuchung sind in Kapitel 9 aufgeführt. 

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enterprises 

3)  Die Ergebnisse der qualitativen Analyse bilden die Grundlage für die quantitati-
ve  Untersuchung  mit  dem  European  Tax  Analyzer.  Dieser  ermöglicht  es,  die 
tatsächlichen  Auswirkungen  von  Steueranreizen  für  die  effektive  Steuerbelas-
tung  auf  nationaler  Ebene  zu  bewerten.  Dabei  werden  auf  empirischer  Basis 
Modellunternehmen  für  jede  Größenklasse  entwickelt  (Mikro-,  kleine,  mittlere 
und  große  Unternehmen)  und  die  effektive  Steuerbelastung  der  Modellunter-
nehmen quantifiziert sowie analysiert.  

4)  In Kapitel 7 wird die  quantitative Analyse um die Berücksichtigung grenzüber-
schreitender  Tätigkeiten  erweitert.  Durch  die  Anwendung  des  Devereux-
Griffith-Ansatzes  können  die  Steuervergünstigungen  aus  KMU-Steueranreizen 
mit  den  Steuerersparnissen  von  großen  Unternehmen  verglichen  werden,  die 
im Rahmen der Körperschaftsbesteuerung durch optimale Standort- und Finan-
zierungsstrategien erzielt werden. 

5)  Das  letzte  Kapitel  ergänzt  die  vorhergehenden  Ergebnisse  um  eine  weiterge-
hende  Untersuchung  der  Auswirkungen  von  KMU-  und  Forschungs-  und  Ent-
wicklungssteueranreizen  auf  Unternehmensentscheidungen.  Die  Informationen 
werden anhand ausführlicher Fallstudien, Umfragen und einer umfassenden Li-
teraturrecherche gewonnen. Den Erkenntnissen liegen dabei drei unterschiedli-
che  Informationsquellen  zugrunde:  betroffene  Unternehmen  aus  den  Mitglied-
staaten, aktive Steuerberater aus den Mitgliedstaaten sowie vorliegende empi-
rische Untersuchungen zur Wirkung von Steuern und Steueranreizen auf Finan-
zierung, Investitionsverhalten und Rechtsformwahl. 

Insgesamt  vereint  die  Untersuchung  die  Ergebnisse  verschiedener  methodischer  An-
sätze.  Die  Literaturrecherche  und  die  Analyse  der  Finanzkennzahlen  bieten  einen 
Überblick  über  die  Wettbewerbssituation  von  KMU  im  Vergleich  zu  großen  Unterneh-
men  sowie  über  die  für  KMU  verfügbaren  Steueranreize.  Die  Auswirkungen  auf  die 
effektive  Steuerbelastung  werden  mithilfe  von  zwei  unterschiedlichen  quantitativen 
Ansätzen bewertet. Schließlich wird die Wirkung der Körperschaftsteuer und der zuge-
hörigen  Steueranreize  auf  Unternehmensentscheidungen  empirisch  untersucht.  Eine 
Literaturrecherche  zu  früheren  empirischen  Erkenntnissen  ergänzt  in  diesem  Teil  er-
neut die Untersuchung. 

Die  empirischen  Ergebnisse  sind  im  Hinblick  auf  die  Repräsentativität  der  Stichprobe 
naturgemäß mit Vorsicht zu behandeln. In den politischen Diskussionen müssen auch 
die  Schlussfolgerungen  und  Empfehlungen  der  empirischen  Untersuchung  stets  vor 
dem  Hintergrund  der  Ziele  dieser  Studie  betrachtet  werden.  Trotzdem  vermittelt  die-
ser  Bericht  evidenzbasierte  Erkenntnisse,  die  für  die  anhaltenden  Diskussionen  zur 
Körperschaftsteuer in Europa von Bedeutung sind. 

2.2.3.  Ergebnisse 

Die wichtigsten Ergebnisse der Analyse der Finanzkennzahlen sind:  

  Die  Steuerregime  in  Europa  unterscheiden  sich  stark  voneinander.  Während  in 
einigen Ländern sehr niedrige effektive Steuerbelastungen vorzufinden sind (z.B. 
Irland,  Estland,  Bulgarien),  kommt  es  in  anderen  zu  sehr  hohen  Belastungen 
(z.B. Italien, Deutschland, Finnland). 

  Lediglich in fünf Ländern (Frankreich, Griechenland, Bulgarien,  dem  Vereinigten 
Königreich  und  den  Niederlanden)  scheinen  Mikro-,  kleine  und  mittlere  Unter-
nehmen  in  Bezug  auf  die  Steuerbelastung  einen  Vorteil  gegenüber  großen  Un-
ternehmen zu genießen. 

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enterprises 

  Die  Branchenanalyse  zeigt,  dass  hinsichtlich  der  Besteuerung  im  Handelssektor 
kein wesentlicher Unterschied zwischen KMU und großen Unternehmen besteht. 
Im  Bauwesen,  in  der  Hotel-  und  Restaurantbranche  sowie  im  verarbeitenden 
Gewerbe  führt  die  Unternehmensgröße  hingegen  zu  einem  größeren  Besteue-
rungsunterschied. 

Die  Haupterkenntnisse  der  qualitativen  Analyse  der  Steueranreize  für  KMU  und  F&E-
Aktivitäten sind: 

  Steuervergünstigungen  für  KMU  sind  seltener  als  für  Forschungs-  und  Entwick-
lungsaktivitäten.  In  Belgien,  Spanien,  Frankreich  und  Japan  gibt  es  diverse  An-
reize.  Sieben  andere  Länder  bieten  dagegen  überhaupt  keine  steuerlichen  Son-
derregelungen für KMU.  

  Reduzierte  Steuersätze  sind  das  vorherrschende  Instrument,  um  KMU  zu  be-
günstigen,  obwohl  diese  im  Vergleich  zu  anderen  Anreizformen  nachteilige  Ei-
genschaften aufweisen und daher nicht als bewährte Praxis erachtet werden soll-
ten.  Alle  weiteren  Instrumente  finden  nur  in  sehr  begrenztem  Rahmen  Anwen-
dung. 

  Die EU-Mitgliedstaaten beziehen sich bei den Größenkriterien für den Zugang zu 
Steueranreizen  für  KMU  nicht  einheitlich  auf  die  Richtwerte  der  KMU-Definition 
der Europäischen Kommission. 

  Mikro-,  kleine  und  mittlere  Unternehmen  profitieren  in  unterschiedlichem  Maß 
von  KMU-Steueranreizen.  Während  mittelgroße  Unternehmen  die  Anreize  kaum 
nutzen können, profitieren Mikrounternehmen sehr stark. 

  Bei Forschungs- und Entwicklungssteueranreizen wird selten ein expliziter Unter-
schied  zwischen  KMU  und  großen  Unternehmen  gemacht  (Ausnahmen:  Frank-
reich, das Vereinigte Königreich, Kanada und Japan). Die Vorteile aus den allge-
mein  anwendbaren  Forschungs-  und  Entwicklungssteueranreizen  können  relativ 
jedoch größer für KMU ausfallen, da es unwahrscheinlicher ist, dass sie von den 
absoluten Höchstgrenzen der gewährten Steuerentlastungen betroffen sind. 

Die  Hauptergebnisse  der  quantitativen  Analyse  zur  effektiven  Steuerbelastung  natio-
naler Investitionen sind: 

  Mittlere  Unternehmen  profitieren  so  gut  wie  gar  nicht  von  KMU-Steueranreizen 
in  den  in  dieser  Studie  untersuchten  Ländern  (abgesehen  vom  Vereinigten  Kö-
nigreich).  Senkungen  der  effektiven  Steuerbelastung  für  mittlere  Unternehmen 
sind hauptsächlich auf Forschungs- und Entwicklungssteueranreize zurückzufüh-
ren. Die Entlastungen reichen von 0,93% (Luxemburg) bis zu 25,24% (Irland). 
  Kleine  Unternehmen  profitieren  in  fünf  Ländern  von  KMU-Steueranreizen.  Die 
Reduktion  der  effektiven  Steuerbelastung  –  die  allein  den  KMU-Steueranreizen 
zuzurechnen ist – bewegt sich zwischen 2,54% (Belgien) und 29,47% (Spanien). 
Von  Forschungs-  und  Entwicklungssteueranreizen  profitieren  kleine  Unterneh-
men oftmals mehr als große Unternehmen aufgrund von absoluten Höchstgren-
zen bei den Steuerentlastungen.  
KMU-Steueranreize  haben  signifikante  Auswirkungen  bei  Mikrounternehmen 
(Vergünstigungen bis zu 53,05%). Insgesamt zeigt sich, dass die Steuervergüns-
tigungen, die sich aus den KMU-Steueranreizen ergeben, viel umfangreicher sind 
als  jene,  die  aus  Forschungs-  und  Entwicklungssteueranreizen  resultieren.  Dies 
ist vor allem den ermäßigten Steuersätzen zuzuschreiben. 

  Die Steuervergünstigungen aus Forschungs- und Entwicklungssteueranreizen für 
große Unternehmen reichen von 0,98% (Luxemburg) bis zu rund 20% (Litauen). 
  In  den  meisten  Ländern  nimmt  die  Bedeutung  von  Forschungs-  und  Entwick-

lungs- und KMU-Steueranreizen im Untersuchungszeitraum 2009-2013 zu. 

 

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enterprises 

  Die Wirkung von KMU- und Forschungs- und Entwicklungssteueranreizen auf die 
effektive Steuerentlastung verringert sich in den meisten Ländern um rund 50%, 
wenn  zusätzlich  die  Besteuerung  auf  Ebene  der  Gesellschafter  berücksichtigt 
wird.  

  Die Wirkung von Forschungs- und Entwicklungs- und KMU-Steueranreizen unter-
scheidet  sich  im  Vergleich  verschiedener  Industrien  deutlich.  Dies  ist  vor  allem 
darauf zurückzuführen,  dass die  Forschungs- und Entwicklungsintensität sektor-
spezifisch ist. 

  Eigenkapitalfinanzierte  Investitionen  sind  einer  höheren  effektiven  Steuerbelas-
tung  ausgesetzt  als  Investitionen,  die  mit  Fremdkapital  finanziert  werden.  Da 
sich  die  Fremdkapitalbeschaffung  für  KMU  normalerweise  als  schwieriger  er-
weist, erleiden sie im Vergleich zu großen Unternehmen eher einen steuerlichen 
Wettbewerbsnachteil. 

Die  quantitative  Analyse  der  effektiven  Steuerbelastung  nationaler  und  grenzüber-
schreitender Investitionen führt zu folgenden Ergebnissen: 

  Große Unternehmen verteilen ihre Aktivitäten regelmäßig auf verschiedene Län-
der. Daher profitieren große Unternehmen mehr vom zwischenstaatlichen, inter-
nationalen Steuergefälle als KMU, die vorwiegend national operieren. 

  Große  Unternehmen  können  ihre  effektive  Steuerbelastung  weiter  durch  Zwi-
schenschaltung  von  Konzerngesellschaften  im  Finanzierungs-  und  IP-Bereich 
senken.  

  Unter Berücksichtigung von Steueroptimierungsstrategien ergibt sich in 75% der 
untersuchten Länder für große Unternehmen eine geringere  effektive Steuerbe-
lastung als für KMU. 
In Frankreich, Spanien, Belgien und Litauen ergibt sich selbst dann eine niedri-
gere  effektive  Steuerbelastung  für  KMU  im  Vergleich  zu  großen  Unternehmen, 
wenn  steuerliche  Optimierungsstrategien  großer  Unternehmen  berücksichtigt 
werden. 

 

Die Haupterkenntnisse der Fallstudien und der Steuerberaterumfrage sind: 

  Aus Sicht von Unternehmern stellt die Körperschaftsteuer einen von vielen Fak-
toren dar, die die unternehmerische Aktivität und die  Geschäftsentwicklung be-
einflussen.  Jedoch  zeigen  sich  Unternehmen  unterschiedlicher  Größenklassen 
tendenziell weniger besorgt über die Körperschaftsteuer als über die Lohnsteuer 
oder die Sozialversicherungsbeiträge. 

  Finanzierungsentscheidungen und die Gestaltung der rechtlichen Unternehmens-
struktur  werden  primär  von  nichtsteuerlichen  Faktoren  wie  der  Unternehmens-
kultur,  der  Kreditverfügbarkeit  oder  der  strategischen  Positionierung  am  Markt  
beeinflusst, wohingegen Steuersätze eine eher untergeordnete Rolle spielen.  
  Die  Wahl  der  Rechtsform  kann  jedoch  von  dem  Unterschied  zwischen  Einkom-

mensteuer- und Körperschaftsteuersatz beeinflusst werden. 

  Unternehmern zufolge sind Forschungs- und Entwicklungssteueranreize, Abzugs-
beträge und Sonderabschreibungen bzw. beschleunigte Abschreibungen wichtige 
Instrumente für steuerliche Anreize. 

  KMU  sind  im  Vergleich  zu  großen  Unternehmen  etwas  stärker  von  den  mit  der 
Körperschaftsteuer  verbundenen  Befolgungskosten  betroffen.  Die  große  Mehr-
heit  der  KMU  nimmt  professionelle  externe  Unterstützung  bei  der  Erfüllung  der 
körperschaftsteuerlichen  Verpflichtungen  in  Anspruch,  da  intern  hierzu  in  der 
Regel keine ausreichenden personellen Ressourcen vorhanden sind.  

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2.2.4.  Fazit und Handlungsempfehlungen 

Bei der Körperschaftsteuerbelastung für KMU und große Unternehmen bestehen inner-
halb  von  Europa  große  Unterschiede,  die  aus  den  länderspezifischen  Steuersystemen 
resultieren.  Während  einige  EU-Mitgliedstaaten  erhebliche  Steuervergünstigungen  für 
KMU,  insbesondere  für  Mikrounternehmen,  gewähren,  gibt  es  in  anderen  Staaten 
überhaupt  keine  KMU-spezifischen  Steueranreize.  KMU,  die  keinen  Gebrauch  von  in-
ternationalen  Steuerplanungsstrategien  machen  können  und  sich  vergleichsweise  ho-
hen  Befolgungskosten  ausgesetzt  sehen,  unterliegen  in  diesen  Ländern  einem  Wett-
bewerbsnachteil.  

Wenn  Politiker  Steueranreize  für  Unternehmen  in  Erwägung  ziehen,  sollten  sie  diese 
nicht  direkt  an  die  Unternehmensgröße  knüpfen,  sondern  eher  so  ausgestalten,  dass 
die  Wirkung  der  Anreize  von  „wünschenswertem“  Verhalten  wie  Innovations-  und  In-
vestitionsaktivitäten  abhängig  ist.  Andernfalls  wird  das  Wachstum  von  Unternehmen 
behindert  und  es  ergeben  sich  neue  Verzerrungen,  welche  die  Effizienz  und  Transpa-
renz des Steuersystems verschlechtern. 

Wir  betonen  daher  insbesondere  die  Wichtigkeit  eines  fairen,  einfachen  und  transpa-
renten  Steuersystems.  Dies  ist  ein  entscheidender  Bestandteil  eines  attraktiven  Ge-
schäftsumfelds  für  alle  Unternehmen  (einschließlich  der  KMU)  und  verhindert  unver-
hältnismäßig hohe Befolgungskosten für KMU.  

Des Weiteren muss jeder Steueranreiz die grundlegenden Anforderungen Transparenz, 
Effektivität und Neutralität erfüllen. Daher empfehlen wir, als steuerliches Instrument 
zur  Unterstützung  von  KMU  Steuergutschriften  einzusetzen,  die  sich  auf  einen  be-
stimmten  Prozentsatz  spezifischer  Investitionskosten  belaufen  (z.B.  Kauf  bestimmter 
Vermögensgegenstände).  Für  die  absolute  Höhe  der  Steuervergünstigungen  sollten 
Höchstgrenzen  festgelegt  werden,  um  Steuerausfälle  zu  begrenzen.  Neben  der  Be-
grenzung von Aufkommensverlusten sichert dies eine verhältnismäßig stärkere Förde-
rung  von  KMU  im  Vergleich  zu  großen  Unternehmen.  Durch  die  Festlegung  von  Pro-
zentsatz  und  Höchstgrenzen  kann  jedes  Land  selbst  bestimmen,  wie  großzügig  der 
Anreiz sein soll und bis zu welcher Größenordnung Unternehmen maßgeblich von die-
ser  Maßnahme  profitieren  sollen.  Verzerrungen,  die  sich  aus  Sondersteuersätzen  und 
anderen Arten von Steueranreizen ausschließlich für KMU ergeben, würden so vermie-
den,  da  der  Zugang  zum  Anreiz  nicht  mehr  von  bestimmten  Größen-  bzw.  Einkom-
menskriterien abhängig wäre. 

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2.3.  Résumé (French/Français) 

2.3.1.  Objectifs principaux 

Les  stratégies  d’évasion  fiscale  adoptées  par  de  nombreuses  entreprises  multinatio-
nales ont récemment fait l’objet de discussions importantes dans les médias. Ainsi, la 
question  s’est  posée  de  savoir  si  les  petites  et moyennes  entreprises  (PME)  étaient 
soumises à un désavantage concurrentiel, dans la mesure où celles-ci ne peuvent sou-
vent pas utiliser ces mêmes stratégies en raison de leur taille restreinte. D’autre part, 
de nombreux pays offrent aux petites entreprises différents types d’aide afin de com-
penser ce désavantage. 

C’est  pourquoi  la  Direction  Générale  du  Marché  intérieur,  de  l’industrie,  de 
l’entrepreneuriat et des PME de la Commission européenne a chargé VVA, en partena-
riat avec ZEW, de réaliser une étude sur « l’imposition des PME en Europe – une étude 
empirique de l’impôt sur le revenu des PME comparé aux grandes entreprises ». Cette 
étude a pour objectif général de fournir une analyse approfondie des incitants fiscaux 
en  faveur  des  PME  et  de  la  R&D  dans  20  pays  membres  de  l’UE  (Autriche,  Belgique, 
Bulgarie, Croatie, Estonie, Finlande, France, Allemagne, Grèce, Irlande, Italie, Luxem-
bourg,  Lituanie,  Pays-Bas,  Pologne,  Roumanie,  Slovénie,  Suède,  Espagne,  et 
Royaume-Uni), ainsi que – pour certaines parties de l’analyse seulement – 5 pays hors 
UE (Canada, Chine, Japon, Suisse, et les États-Unis) sur la période 2009-2013. 

Les principaux objectifs de l’étude sont les suivants3: 

 

identifier  les  avantages  et  désavantages  concurrentiels  majeurs  générés  par 
l'impôt sur le revenu des sociétés (IRS) pour les PME et les grandes entreprises 
identifier les bonnes pratiques en ce qui concerne l’IRS des PME 

 
  proposer des solutions pour remédier aux potentiels distorsions et désavantages 

à l’encontre des PME en ce qui concerne l’IRS. 

2.3.2.   Structure de l’étude et méthodologie 

L’analyse a comporté cinq étapes. 

1)  Une  analyse  des  ratios  financiers  permettant  d’appréhender  comment  les  PME 
organisent leurs activités commerciales et comment elles se situent par rapport 
aux grandes entreprises en termes de dette, liquidité et imposition. 

2)  Une  analyse  qualitative  des  incitants  fiscaux  en  faveur  des  PME  et  de  la  R&D 
rappelant  quels incitants  sont  disponibles  en  Europe  et  quels  critères  ces  inci-
tants  doivent  remplir  pour  être  considérés  comme  « bonne  pratiques ».  Nous 
rappelons  quels  pays  offrent  de  telles  aides,  quels  types  d’aide  ils  offrent  en 
particulier et à quel type de sociétés, et nous nous interrogeons sur les grandes 
tendances en matière d’incitants fiscaux en faveur des PME et de la R&D durant 
la période 2009-2013. 

3 Les résultats complets de l’étude figurent dans le chapitre 9. 

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3)  Les résultats de l’analyse qualitative constituent la base de l’enquête quantita-
tive menée à l’aide du « European Tax Analyzer » qui permet d’évaluer l’impact 
réel  des  incitants  fiscaux  sur  les  charges  fiscales  effectives  dans  un  contexte 
national.  Ce  faisant,  nous  avons  développé  des  modèles  empiriques  pour 
chaque catégorie de société (micro, petite, moyenne et grande) et analysé les 
charges fiscales effectives de ces sociétés-modèles. 

4)  La  section  suivante  élargit  l’analyse  quantitative  en  y  incluant  les  activités 
transfrontalières.  Adopter  l’approche  dite  de  Devereux-Griffith  nous  a  permis 
de  comparer  l’allègement  fiscal  engendré  par  les  incitants  fiscaux  aux  écono-
mies que les larges entreprises peuvent réaliser en optimisant leur localisation 
et  leurs  stratégies  de  financement  par  rapport  à  l'impôt  sur  le  revenu  des  so-
ciétés. 

5)  La dernière section complète les résultats précédents par un aperçu plus géné-
ral de l’effet des incitants fiscaux en faveur des PME et de la R&D sur le proces-
sus  décisionnel  des  entreprises.  Les  informations  utilisées  dans  cette  section 
ont été collectées grâce à des études de cas approfondies, des enquêtes et une 
recherche documentaire portant sur et/ou réalisées auprès de trois sources de 
données  :  les  sociétés  européennes  concernées,  les  conseillers  fiscaux  euro-
péens  et  les  études  empiriques  menées  précédemment  sur  l’impact  des  taxes 
et  des  incitants  fiscaux  sur  le  financement,  le  comportement  d’investissement 
et le choix de la forme juridique. 

L’étude combine les résultats de différentes  approches méthodologiques (chapitre 9). 
La  recherche  documentaire  réalisée  dans  l’analyse  des  ratios  financiers  donne  un 
aperçu  de  la  situation  concurrentielle  des  PME  par  rapport  aux  grandes  entreprises, 
ainsi  qu’un  bilan  des  incitants  fiscaux  qui  sont  disponibles.  L’impact  sur  les  charges 
fiscales  effectives  est  évalué  par  deux  approches  quantitatives  différentes.  Enfin, 
l’impact réel de l’IRS et des incitants fiscaux associés sur le processus de décision en-
trepreneurial est examiné de façon empirique. L’analyse est, une fois encore, complé-
tée  par  une  recherche  documentaire  sur  les  études  empiriques  menées  précédem-
ment. 

Naturellement, les résultats empiriques doivent être utilisés avec précaution en raison 
des  difficultés  rencontrées  pour  obtenir  un  échantillon  pleinement  représentatif.  De 
plus,  et  compte  tenu  des  discussions  politiques  en  cours,  il  convient  de  replacer  les 
conclusions  et  les  recommandations  de  la  recherche  empirique  dans  le  contexte  des 
objectifs  de  l’étude.  Ce  rapport  reste  néanmoins  une  source  d’inspiration  fondée  sur 
des  données  factuelles  pour  les  discussions  en  cours  autour  de  l'impôt  sur  le  revenu 
des sociétés en Europe. 

2.3.3.  Principaux résultats 

Les principaux résultats de l’analyse des ratios financiers sont les suivants: 

  Les  régimes  fiscaux  pratiqués  en  Europe  varient  considérablement  d’un  pays  à 
l’autre,  allant  de  charges  fiscales  très  basses  (Irlande,  Estonie,  et  Bulgarie)  à 
des charges fiscales relativement élevées (Italie, Allemagne, et Finlande). 

  Seuls cinq pays semblent favoriser les microentreprises et les PME (France, 
Grèce,  Bulgarie,  le  Royaume-Uni  et  les  Pays-Bas)  en  matière  de  charges 
fiscales par rapport aux grandes entreprises. 

  L’analyse sectorielle montre que s’il semble ne pas y avoir de différence impor-
tante  dans  le  niveau  d’imposition  entre  les  PME  et  les  grandes  entreprises  du 

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secteur  commercial,  la  taille  de  l’entreprise  joue  beaucoup  dans  le  niveau 
d’imposition appliqué aux secteurs de la construction, de l’hôtellerie-restauration 
et des produits manufacturés. 

Les  principales  conclusions  de  l’analyse  qualitative  sur  les  incitants  fiscaux  accordés 
aux PME et aux activités de R&D sont les suivantes : 

  L’allègement  fiscal  est  plus  rare  pour  les  PME  que  pour  les  activités  de  R&D. 
Les  pays  ayant  mis  en  place  divers  incitants  sont  la  Belgique,  l’Espagne,  la 
France  et  le  Japon.  D’autre  part,  sept  pays  (tels  que  l’Autriche,  la  Bulgarie, 
l’Estonie, l’Italie, la Slovénie, la Suède et la Suisse) n’ont même aucun régime 
fiscal particulier pour les PME. 

  Les taux d’imposition spécifiques forment la principale mesure fiscale en faveur 
des  PME.  Toutefois,  cette  mesure  présente  des  propriétés  défavorables  par 
rapport  à  d’autres  types  d’allègement  fiscal  et  ne  devrait  pas  être  considérée 
comme une « bonne pratique ». 

  Les  États  membres  de  l’UE  ne  limitent  pas  tous  de  la  même  façon  l’éligibilité 
aux  incitants  fiscaux  pour  les  PME  en  se  référant  aux  critères  utilisés  dans  la 
définition  de  la  PME  établie  dans  la  Recommandation  de  la  Commission  du  6 
mai 2003. 

 

  On constate une certaine discrimination en matière d’incitants fiscaux entre les 
microentreprises, les petites entreprises et les moyennes entreprises. En réali-
té, les moyennes entreprises sont rarement éligibles aux incitants fiscaux des-
tinés aux PME, tandis que les microentreprises en bénéficient largement. 
Il y a  rarement de différentiation explicite entre les grandes entreprises  et les 
moyennes  entreprises  en  ce  qui  concerne  les  incitants  fiscaux  en  faveur  de  la 
R&D  (c’est  le  cas  seulement  en  France,  au  Royaume-Uni,  Canada  et  Japon). 
Néanmoins, les avantages générés par les incitants fiscaux applicables de façon 
générale  sont  souvent  plus importants  pour  les  PME  car  elles  sont  moins  sus-
ceptibles  d’être  soumises  aux  restrictions  concernant  les  allègements  maxi-
maux autorisés. 

Les principaux résultats de l’analyse quantitative des charges fiscales effectives appli-
quées aux investissements domestiques sont les suivants : 

  En pratique, les moyennes entreprises ne profitent pas des incitants fiscaux en 
faveur  des  PME  dans  les  pays  considérés  dans  cette  étude  (mis  à  part  au 
Royaume-Uni). Les  réductions de charge  fiscale effective se résument généra-
lement  aux  incitants  fiscaux  en  faveur  de  la  R&D.  Ces  réductions  vont  de 
0,93% (cas du Luxembourg) à 25,24% (cas de l’Irlande). 

  Pour  les  petites  entreprises,  les  incitants  fiscaux  en  faveur  des  PME  sont  pro-
gressivement  effectifs  dans  cinq  pays  (Belgique,  France,  Irlande,  Espagne  et 
Royaume-Uni).  Les  réductions  de  charge  fiscale  effective  (relevant  seulement 
des incitants fiscaux en faveur des PME) vont de 2,54% (cas de la Belgique) à 
29,47%  (cas  de  l’Espagne).  Les  petites  entreprises  retirent  souvent  de  plus 
grands bénéfices des incitants fiscaux en faveur de la R&D que les grandes en-
treprises en raison des dispositions relatives aux seuils. 

  Les  effets  des  incitants  fiscaux  en  faveur  des  PME  sont  non  négligeables  pour 
les microentreprises (les allègements peuvent atteindre 53,05%). Globalement, 
les allègements fiscaux relatifs aux incitants pour les PME se révèlent être bien 
plus  importants  que  les  allègements  relatifs  aux  incitants  pour  la  R&D,  et  ce 
principalement en raison des taux d’imposition. 

  Les réductions de charge fiscale effective provenant des incitants fiscaux en fa-
veur  de  la  R&D  pour  les  grandes  entreprises  vont  de  0,98%  (cas  du  Luxem-
bourg) à environ 20% (cas de la Lituanie). 

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  Pour  la  plupart  des  pays,  on  observe  une  importance  croissante  des  incitants 

fiscaux en faveur des PME et de la R&D dans le temps. 

  L’impact des incitants fiscaux en faveur des PME et de la R&D sur la charge fis-
cale effective diminue d’environ 50% dans la plupart des pays si l’imposition de 
l’actionnariat est également prise en compte. 

  L’effet  des  incitants  fiscaux  en  faveur  des  PME  et  de  la  R&D  varie  considéra-
blement  d’une  industrie  à  l’autre.  Ceci  s’explique  avant  tout  par  l’intensité  en 
R&D de l’industrie considérée. 

  Les  investissements  financés  par  fonds  propres  sont  affectés  par  des  charges 
fiscales plus élevées que les investissements financés par emprunt. Comme les 
PME  éprouvent  généralement  des  difficultés  à  lever  des  emprunts,  elles  sont 
plus  susceptibles  de  souffrir  d’un  désavantage  concurrentiel  vis-à-vis  des 
grandes entreprises. 

Les  résultats  de  l’analyse  quantitative  des  charges  fiscales  effectives  appliquées  aux 
investissements domestiques et transfrontaliers sont les suivants : 

  Les  grandes  entreprises  implantent  leurs  activités  dans  des  pays  différents. 
Ainsi,  elles  bénéficient  des  différentiels  de  taxation  entre  ces  pays,  contraire-
ment aux PME qui opèrent localement. 

  Les grandes entreprises peuvent encore réduire leurs charges fiscales effectives 
en  répartissant  certaines  fonctions  relevant  du  financement  et  de  la  propriété 
intellectuelle dans différents pays. 

  Concernant  les  stratégies  de  minimisation  des  taxes,  on  constate  que  dans 
75%  des  pays  de  l’échantillon,  les  grandes  entreprises  ont  une  charge  fiscale 
effective plus basse que celle des PME. 

  Néanmoins,  et  même  en  supposant  des  stratégies  d’optimisation  fiscale  sans 
contrainte par les grandes entreprises, les PME en France, en Espagne, en Bel-
gique,  en  Lituanie  et  aux  Pays-Bas  ont  des  charges  fiscales  effectives  plus 
basses que les grandes entreprises. 

Enfin, les principales conclusions des études de cas et de l’enquête auprès des conseil-
lers fiscaux sont les suivantes : 

  L’IRS  est  perçu  par  les  entrepreneurs  comme  un  des  nombreux  facteurs  qui 
impactent leur activité entrepreneuriale et leurs résultats économiques. Toute-
fois,  en  comparaison  à  d’autres  types  d’impôts  auxquels  elles  sont  soumises, 
les sociétés de toute taille ont tendance à être moins préoccupées par l’IRS que 
par les impôts et taxes sur les intrants comme les cotisations sociales. 

  En  traitant  des  problèmes  relatifs  à  l’accès  au  financement  la  structure  légale 
ou  financière  de  leur  société,  les  entrepreneurs  ont  tendance  à  ne  pas  fonder 
leurs choix sur l’impact que l’IRS aura, mais sur divers facteurs non-fiscaux tels 
que  la  culture  et  le  contexte  entrepreneuriaux,  la  disponibilité  du  crédit  et  les 
décisions stratégiques en matière de positionnement sur le marché. 

  Le choix de la structure légale pourrait être affecté par la différence qui existe 
entre les taux d’imposition sur le revenu des personnes physiques et le revenu 
des sociétés. 

  De  l’avis  des  entrepreneurs,  les  incitants  fiscaux  en  faveur  de  la  R&D,  les  dé-
ductions et les taux de dépréciation spéciaux ou accélérés sont des instruments 
très importants pour les sociétés. 

  Les PME sont légèrement plus affectées par les coûts administratifs et les coûts 
de mise en conformité relatifs à l’IRS que les grandes entreprises. La vaste ma-
jorité  des  PME  fait  appel  à  une  assistance  professionnelle  extérieure  pour  se 
conformer  à  l’IRS,  car  elles  sont  généralement  trop  petites  en  termes  de  res-

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sources humaines pour disposer en interne des connaissances et de l’expertise 
nécessaires. 

2.3.4.  Conclusions générales et Recommandations 

En ce qui concerne le niveau des charges liées à l’IRS pour les PME et les grandes en-
treprises,  les  régimes  fiscaux  varient  considérablement  d’un  pays  européen  à  l’autre. 
Les  PME,  et  notamment  les  microentreprises,  bénéficient  d’un  traitement  préférentiel 
dans  plusieurs  pays  européens,  mais  ne  bénéficient  d’aucun  incitant  fiscal  particulier 
dans les autres. C’est dans ces pays que les PME – incapables d’utiliser des stratégies 
de planification fiscale internationale et souffrant d’un processus de mise en conformi-
té assez lourd – sont les plus à mêmes de souffrir d’un désavantage concurrentiel. Si 
les responsables politiques décidaient de discuter des modalités de soutien aux entre-
prises  par  des  incitants  fiscaux,  ceux-ci  ne  devraient  pas  être  directement  liés  à  la 
taille des entreprises mais à la volonté de produire des résultats souhaitables tels que 
l’innovation et l’investissement. Sinon, la croissance des entreprises serait ralentie par 
de  nouvelles  distorsions  qui  entraveraient  l’efficacité  et  la  transparence  du  système 
fiscal. 

C’est pourquoi dans un premier temps nous mettons l’accent sur l’importance des sys-
tèmes  de  taxation  équitables,  simples,  prévisibles  et  transparents.  Ceci  représente 
une  étape  intermédiaire  dans  la  construction  d’un  environnement  d’affaires  attractif 
pour toutes les  entreprises (y compris les PME), et possède l’avantage de  réduire les 
charges  administratives  de  mise  en  conformité  disproportionnellement  élevées  pour 
les PME.  

Dans  un  second  temps,  chaque  incitant  fiscal  doit  remplir  un  certain  nombre  de  cri-
tères  de  base  tels  que  la  transparence,  l’efficacité  et  la  neutralité.  Nous  recomman-
dons donc, comme mesure fiscale en  faveur des PME, les  crédits d’impôts d’un mon-
tant  proportionnel  aux couts  d’investissements  spécifiques  (ex.  coûts  d’acquisition  de 
certains  actifs).  Ce  montant  devrait  être  limité  par  des  plafonds  absolus  maxima.  En 
plus  de  limiter  les  pertes  de  revenus,  cela  permettrait  de  garantir  des  allègements 
relativement  plus  élevés  pour  les  PME  que  pour  les  grandes  entreprises.  En  fixant  le 
coefficient de proportionnalité et le plafond correspondant, chaque État membre pour-
rait déterminer individuellement la « générosité » de son incitant fiscal et la taille des 
entreprises  qui  devraient  largement  bénéficier  de  cette  mesure.  Les  distorsions  qui 
apparaissent avec des taux d’imposition spécifiques pour les PME ou d’autres mesures 
d’incitation fiscale seraient alors évitées puisque le crédit d’impôt ne dépendrait pas de 
critères de taille maximale. 

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enterprises 

3.  INTRODUCTION AND STUDY SCOPE 

Across all European countries, both large enterprises (LSEs) and small- and medium-
sized enterprises (SMEs) have to pay some form of CIT if they have a non-transparent 
organizational  form4.  In  each  country,  both  categories  of  enterprises  thus  tend  to  be 
subject to the same tax regime.  

The  major  goal of this study was to find evidence about which kinds of  corporations, 
LSEs or SMEs, have to bear a higher CIT burden. We also investigated how tax rules - 
in combination with different tax structuring options of enterprises - influence compa-
nies’  effective  tax  burdens  and  the  behaviour  of  entrepreneurs.  The  study  was  com-
posed of two main elements (summarised in Figure 3.1): 

1.  Desk  and  field  research  were  conducted  to  provide  a  statistically  robust  over-
view of the impact of different aspects of CIT on SME performance. The objec-
tive  was  to  identify  key  competitive  advantages  and  disadvantages  resulting 
from corporate income tax (CIT) for SMEs and LSEs.  

2.  Empirical research with companies was carried out to provide in-depth qualita-

tive information regarding actual experiences with different taxation regimes.  

This report presents the information in points 1 and 2  above to provide an  evidence-
based starting point for the formulation of practical recommendations (section 9). 

Figure 3.1: Overview of the approach 

4 In this study we use the terms “company” and “corporation” interchangeably to designate enterprises with 
a non-transparent organisational form. The term "enterprises" denotes all legal entities irrespective of their 
organisational form. 

29 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

In agreement with the European Commission, the study scope was limited as follows:  

1.  By definition, the study was limited to incorporated entities (companies/ corpo-
rations), i.e. entities that are liable to pay CIT. A large number of SMEs, espe-
cially at the micro end of the SME definition are not incorporated. This includes 
for  instance,  sole  traders  or  partnerships.  Because  these  entities  do  not  pay 
CIT they fall outside the scope of this study on CIT regimes.  

2.  The available data only captured corporations that are required to file accounts 
with  the  national  administration.  Corporations  that  are  not  required  to  file  ac-
counts are not captured in the AMADEUS database (or in other databases). 

3.  The tax modelling part of the study shows the impact of the tax code on effec-
tive  tax  burden  for  corporations  of  different  size.  It  examines  tax  burdens  as-
suming that corporations comply with applicable legislation and that they take 
advantage  of  size  related  exemptions  and  reductions  where  they  are  eligible. 
Thus, this analysis is not based on the actual behaviour of corporations but on 
model corporations. The value added of this part of the study is that it identi-
fies  those  CIT  regimes  with  the  most/least  advantageous  tax  provisions  for 
SMEs. There are three stages in the  tax modelling analysis (described in more 
detail in the main body of this report): 

a.  Extraction  of  SME-specific  provisions  in  the  tax  code  in  the  countries 
covered  by  the  study  (Section  5  of  this  report).  This  part  of  the  study 
identifies  special  tax  provisions  for  SMEs  and  compares  and  contrasts 
the CIT regimes in each country on the basis of their tax code.  

b.  Calculation of the impact of these provisions on corporations of different 
size  (the  “European  Tax  Analyser”  in  Section 6).  This  part  of  the  study 
computes the impact of the provisions identified in point a) on a typical 
corporation  in  each  size  group:  micro,  medium-sized  and  small  and 
compares them against companies that are not eligible for SME specific 
provisions (i.e. LSEs). The “typical corporation” is defined as an average 
corporation  on  the  basis  of  data  contained  in  the  AMADEUS  database. 
This part of the study shows how SME-specific provisions in the tax code 
affect  the  tax  burden  of  typical  corporations  of  different  size  that  take 
advantage of these provisions. 

c.  Demonstration of the potential impact of internationalisation of a corpo-
ration on its tax burden (the “Devereux-Griffiths analysis” in Section 7). 
This  part  of  the  study  shows  the  potential  difference  in  the  tax  burden 
for  a  purely  domestic  corporation  compared  with  a  corporation  that  is 
part  of  a  multi-national  group.  The  analysis  demonstrates  how  profit 
shifting by multi-national groups can reduce the tax burden of a corpo-
ration  compared  with  a  competitor  that  is  not  part  of  a  multinational 
group. 

4.  The  financial  ratio  analysis  (Section  4)  analyses  the  behaviour  and  actual  tax 
burden  of  individual  companies,  extracted  from  the  AMADEUS  database.  This 
part of the analysis is based on a sample of real-life companies in each country. 
It shows trends in six key financial ratios over time and its value added is that 
it  can  help  identify  patterns  in  the  way  companies  behave  in  different  coun-
tries. At the same time, this part of the analysis cannot correlate financial rati-
os to specific provisions in the tax code of any one country since there are too 
many intervening variables to be able to make that correlate. 

30 

 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

5.  Finally, the survey and company interviews investigated the perceptions of en-

trepreneurs on the CIT regime in their country in greater detail.  

The study does not include aspects in the tax code that do not explicitly make a dis-
tinction on the basis of the size of the company but that may in practice apply mostly 
to  LSEs  (e.g.  holding  regimes,  group  taxation,  etc.).  As  presented  above,  the  study 
analyses  the  tax  code  to  extract  paragraphs  that  make  a  distinction  in  treatment  of 
companies  on  the  basis  of  their  size  (turnover,  employees  or  assets  as  per  the  SME 
definition). While this may sound like a significant limitation it allows the study to fo-
cus on SME  specific provisions in the tax code  over which policymakers can exert di-
rect control. 

In  the  context  of  this  study  we  analysed  20  current  Member  States  of  the  European 
Union. 

Table 3.1 Sample countries 

Austria 

Belgium 

Bulgaria 

Estonia 

Finland 

France 

Greece 

Ireland 

Italy 

Croatia 

Germany 

Lithuania 

Slovenia 

Luxembourg 

Spain 

Poland 

Sweden 

Romania 

The Nether-
lands 

The United 
Kingdom 

The  distinction  between  LSEs  and  the  different  categories  of  SMEs  (i.e.  micro,  small 
and  medium-sized)  is  based  on  the  three  criteria  named  in  EU  recommendation 
2003/361: number of employees, turnover and balance sheet total. 

Table 3.2 Definition of SME 

Enterprise category 

Medium 
Small 
Micro 

Max. number of 
employees 
< 250 
< 50 
< 10 

Max. turnover 

≤ € 50 million 
≤ € 10 million 
≤ € 2 million 

Max. balance 
sheet total 
≤ € 43 million 
≤ € 10 million 
≤ € 2 million 

31 

 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

4.  FINANCIAL RATIO ANALYSIS 

The Financial Ratio analysis is focused on a number of key tax and structural ratios for 
companies across Europe. The report aims at providing an insight on the fiscal burden 
of SMEs compared to LSEs in the 20 selected EU Member States (see previous Section 
for a list of countries covered). 

The ratios evaluated in this report are: 

  TAX over EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortiza-

tion); 

  TAX over EBIT (Earnings Before Interests and Taxes); 
  TAX over EBT (Earnings Before Taxes); 
  Cash ratio; 
  Quick ratio; 
  Debt ratio. 

Furthermore, the study focuses on five economic sectors:  

  Commerce; 
  Construction; 
  Manufacturing; 
  Hotels & restaurants; 
  Energy.  

The  analysis  is  based  on  an  extraction  from  the  Amadeus  database  produced  by  Bu-
reau  Van  Dijk,  which  provides  updated  information  on  the  financial  statements  of  al-
most 19 million enterprises. In total the dataset for this study includes nearly 4 million 
observations5. Each observation corresponds to an enterprise operating between 2009 
and 2013. 

To ensure reliable results and to reduce the impact of outliers, a number of observa-
tions were dropped from the dataset. In particular the dataset does not include: 

  Observations with a negative debt ratio, negative value of total assets or nega-

tive total liabilities. 

  Observations where tax over EBT is negative. 

The  dataset  was  also  adjusted  for  outliers.  Values  above  the  75th  percentile  +  1.5 
times the absolute value of the interquartile range within their group OR values lower 
than the 25th percentile - 1.5 times the absolute value of the interquartile range within 
their  group  are  considered  outliers.  Adjusting  for  outliers  reduces  bias  in  reporting 
average results across different groups of observations. 

The objective of the financial ratio analysis is to determine the CIT burden that SMEs 
and LSEs face in the selected EU countries and in five economic sectors. On the basis 
of this analysis we aim at responding to one of the key questions of the study, to as-
sess whether SMEs pay more taxes than LSEs from a general point of view.  

5 The sample size is sufficiently high to allow for representative conclusions at company size, sector, ratio 
and country level. The full dataset cannot be included in this report and in Annex 1 due to the  confidential 
nature of the information. 

32 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The analysis shows that, solely on the basis of the financial ratios, it is not possible to 
say  that,  in  general,  SMEs  face  a  higher  fiscal  burden  than  LSEs  in  the  EU.  Tax  re-
gimes  across  the  countries  in  the  sample  vary  significantly  from  one  another,  with 
countries that seem to favour SMEs and others where LSEs face a lower CIT burden. 

4.1.  Tax over EBITDA 

The tax over EBIDTA6 ratio shows the impact of CIT on the profitability of the compa-
ny without taking into account the effect of interest payments, financing, depreciation 
or  amortisation.  This  ratio  can  be  used  to  assess  the  impact  of  taxation  on  the  core 
business  of  the  company  without  considering  the  impact  of  the  capital  structure,  or 
the depreciation and amortisation provisions that change from country to country. 

Comparing  tax  over  EBITDA  across  countries  leads  to  quite  a  diverse  picture  across 
the EU7 (see Figure 4.1). The European average TAX over EBITDA (taking into account 
all  28  Member  States)  is  around  12.6%  and  for  most  European  companies,  CIT  falls 
between 8% and 16% of EBITDA. At the extremes, in Bulgaria (5.02%) the weight of 
CIT on operating income is particularly low whereas in Italy (23,6%) TAX over EBITDA 
is  almost  one-fourth  of  operating  income.  Indeed,  Italy  presents  a  much  higher  tax 
over EBITDA ratio compared to the other countries in the sample. This is partially due 
to a high CIT rate in Italy, but also to the presence of  additional regional taxes8, the 
effect of which cannot be separated out due to data limitations.  

Figure 4.1: TAX over EBITDA, ratio per country 

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

IT

UK DE

SE NL

FI

LU AT

EU PL

BE

RO ES

FR

SI

EL HR

IE

EE

BG

tax/EBIDTA 23.6 15.9 15.4 14.9 14.9 14.8 14.5 13.3 12.6 12.2 12.0 10.1 9.63 9.47 8.50 8.42 8.38 7.57 7.55 5.02

Figure 4.2 presents a comparison for each country between TAX over EBITDA for SMEs 
and LSEs. Countries are ranked depending on the spread between the average ratios 
for the two groups.  

6 Earnings Before Interests, Taxes, Depreciation and Amortization 
7 The Amadeus database does not provide data on EBITDA for Lithuania. 
8 IRAP: Imposta Regionale sulle Attivita’ Produttive (Regional Tax on Businesses) 

33 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The  Figure  shows  that,  in  Luxembourg  and  Finland,  SMEs  have  a  TAX  over  EBITDA 
ratio of 15% while for LSEs the weight of taxation on EBITDA is only 7.4% and 9.6% 
respectively. France, on the other hand, presents a more favourable situation for SMEs 
with a TAX over EBITDA ratio that is 3.5% points lower than for LSEs. This is mainly 
due to the fiscal incentives and the special tax rates available to SMEs in France. While 
there are differences across countries in terms of  CIT paid by SMEs versus LSEs, the 
EU  average  shows  that  at  an  aggregate  level,  the  ratio  is  almost  identical  for  SMEs 
and LSEs.  

Figure 4.2: TAX over EBITDA, ratio per country (detail SMEs / LSEs) 

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

LU FI HR

SI

IT

EE DE RO PL

IE UK AT BG SE

EU BE NL

ES

EL

FR

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

lse

7.38 9.66 4.87 5.12 20.5 4.54 12.8 7.62 9.98 5.96 14.7 12.3 4.25 14.2 12.4 12.2 15.1 11.6 10.6 12.9

sme 15.5 14.8 8.43 8.56 23.6 7.56 15.7 10.1 12.4 7.60 16.1 13.5 5.03 14.9 12.6 12.0 14.9 9.61 8.38 9.45

Δ

8.19 5.21 3.56 3.43 3.18 3.02 2.87 2.51 2.48 1.64 1.39 1.20 0.79 0.74 0.20 -0.1 -0.2 -2.0 -2.2 -3.5

lse

sme

Δ

Similarly,  Figure  4.3  shows  that  small  companies  seem  to  have  a  tax  advantage  in 
Spain,  Belgium  and  France  where  TAX  over  EBITDA  is  lower  than  for  medium-sized 
companies. On the other hand Austria, the UK, Croatia and Finland seem to have TAX 
over  EBITDA  ratios  that  are  more  favourable  for  medium-sized  companies  than  for 
smaller ones. 

34 

 
 
 
 
 
)
l
l

a
m
S
/
m
u
d
e
M

i

(
d
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e
r
p
S

SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.3: TAX over EBITDA, ratio per country (SMEs detail)9 

)

%

(
A
D
T
I
B
E
r
e
v
o
X
A
T

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

2.00%

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-4.00%

ES

BE

FR

EL

LU BG SE

EE DE NL

RO SI

IE

IT

PL

FI

HR UK AT

medium 11.6 13.5 14.2 8.10 14.8 4.52 14.4 5.92 15.4 14.8 7.90 6.97 6.62 22.5 11.0 12.3 5.93 14.6 12.6

micro

small

Δ

9.30 11.6 8.56 8.87 19.6 5.31 15.0 8.23 15.8 12.2 11.5 8.84 9.15 23.3 13.7 15.0 8.55 18.2 16.5

10.1 12.8 14.0 8.11 14.9 4.96 15.0 6.58 16.2 15.8 9.00 8.20 7.89 24.5 13.0 14.8 8.49 17.8 15.9

1.52 0.73 0.16 -0.0 -0.0 -0.4 -0.6 -0.6 -0.8 -1.0 -1.1 -1.2 -1.2 -1.9 -2.0 -2.5 -2.5 -3.1 -3.3
Ratio by Country by Medium, Small and Micro enterprise (%)

Figure  4.4  presents  the  TAX  over  EBITDA  ratio  trend  between  2009  and  2013.  The 
analysis  shows  an  overall  slight  increase  of  the  weight  of  taxation  on  EBITDA  in  Eu-
rope.  The  trend  is  similar  for  SMEs  and  LSEs  with  a  difference  of  about  0.3%  points 
between the two groups. 

Figure  4.4:  TAX  over  EBITDA,  time  trend  (2009-2013),  SME/LSE  detail  and 
spread10 

)

%

(
A
D
T
I
B
E
r
e
v
o
X
A
T

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%

Δ

lse

sme

2009

0.28%

12.62%

12.33%

2010

0.82%

13.16%

12.34%

2011

-0.79%

13.07%

13.86%

2012

-1.14%

12.80%

13.93%

2013

0.32%

13.31%

12.99%

Aggregate by year (%)

A detailed analysis of the time trend per industry in Figure 4.5 shows that there seems 
to be no significant difference between SMEs and LSEs in the commerce sector. In the 
five year period under study, the ratio for LSEs decreased slightly to a level below that 
for SMEs.  

9 Delta is defined as the difference between the ratio for small and medium corporations. 
10 Green bars indicate the spread between the TAX over EBITDA ratio for SMEs and LSEs. The blue and red 
lines show the time trend of Tax over EBITDA ratio for SMEs and LSEs. 

35 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

In contrast, the construction sector presents a slight increase for SMEs for four years 
and an evident decrease in 2013 and a steady decreasing trend for large companies. 
In  the  energy  sector,  ratios  for  LSEs  and  SMEs  were  at  the  same  level  in  2009  and 
they remained closely aligned until 2013, when a lower ratio for SMEs was registered.  

In the hotels and restaurants sector, SMEs have a  TAX  over  EBITDA  ratio that is be-
tween 2 and 3.8 percentage points lower than for LSEs during the period of analysis.  

Finally,  in  the  manufacturing  sector,  SMEs  have  a  slightly  higher  TAX  over  EBITDA 
ratio and both size groups present the same increasing trend. 

36 

 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.5:  TAX  over  EBITDA  by  industry  and  LSE/SME,  and  spread  between 
SMEs and LSEs 

Commerce (EBITDA) 

Construction (EBITDA) 

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%

Δ

lse

2009

2010

2011

2012

2013

2.17% 2.29% 1.23% 0.59% -0.24%

15.00% 15.36% 15.14% 14.57% 13.94%

sme 12.83% 13.07% 13.92% 13.97% 14.19%

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

Δ

lse

2009

2010

2011

2012

2013

3.33% 3.51% 1.30% 1.11% 3.21%

16.12% 15.81% 15.67% 15.91% 15.13%

sme 12.79% 12.29% 14.37% 14.81% 11.91%

Energy (EBITDA) 

Hotels and Restaurants (EBITDA) 

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

0.04% 0.98% 0.46% 0.13% 4.52%

11.68% 11.68% 12.04% 11.52% 17.15%

sme 11.64% 10.70% 11.59% 11.39% 12.63%

Manufacturing (EBITDA) 

14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

Δ

lse

2009

2010

2011

2012

2013

3.73% 3.84% 2.18% 2.01% 2.21%

11.81% 12.31% 11.83% 11.87% 9.92%

sme 8.09% 8.48% 9.65% 9.86% 7.71%

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%

Δ

lse

2009

2010

2011

2012

2013

-1.71% -0.83% -3.05% -2.83% -0.94%

10.98% 11.87% 11.88% 11.71% 13.09%

sme 12.68% 12.71% 14.93% 14.54% 14.03%

37 

 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

4.2.  TAX over EBIT 

The TAX over EBIT11 ratio shows the impact of taxation on operating profits. However, EBIT 
includes the effects of depreciation and amortisation.  

Figure 4.6 shows that the EU average for TAX over EBIT is at 18.6%. Across countries, the 
ratios range from 36% in Italy to 7% in Bulgaria.  

Figure 4.6: TAX over EBIT ratio by country 

)

%

(
T
I
B
E
r
e
v
o
X
A
T

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

IT

FI DE UK LU BE NL

SE AT EU PL

ES HR RO EL

SI

FR

LT

IE

EE BG

tax_ebit_mean 36.3 22.4 22.0 21.9 20.9 20.6 20.6 19.8 19.6 18.6 16.7 15.6 14.3 14.1 14.0 13.7 13.3 13.1 11.2 9.42 6.78

Ratio (%, by country)

The detail analysis of the two size groups (LSEs and SMEs) in Figure 4.7 shows great 
differences  from  country  to  country:  while  Finland,  Estonia,  Luxembourg  and  Croatia 
have a lower ratio for LSEs, SMEs in France, Spain, Greece and Italy have a lower TAX 
over EBIT ratio than larger companies.  

11 Earnings Before Interests and Taxes 

38 

 
 
 
 
 
                                                 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.7: TAX over EBIT ratio (SME/LSE detail) 

)

%

(
T
I
B
E
r
e
v
o
X
A
T

45.00%

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

)
E
M
S
/
E
S
L
(
d
a
e
r
p
S

FR ES

EL

IT NL

SE UK BG BE EU AT

LT

PL

IE RO DE

SI HR EE

LU FI

-6.00%

-8.00%

-10.00%

lse

20.5 20.3 17.8 39.7 23.8 21.6 22.8 7.39 20.7 20.4 19.6 12.8 16.1 10.1 12.5 20.2 11.2 11.3 4.32 15.1 14.6

sme 13.3 15.6 13.9 36.3 20.4 19.7 21.8 6.77 20.6 20.4 19.7 13.1 16.8 11.2 14.1 22.2 13.8 14.4 9.44 21.7 22.5

Δ

7.25 4.68 3.94 3.42 3.39 1.96 0.97 0.62 0.12 0.00 -0.0 -0.3 -0.6 -1.1 -1.5 -1.9 -2.6 -3.0 -5.1 -6.5 -7.9

Ratio by Country by LSE and SME (%)

A detailed analysis of the ratio within the SME group  (Figure 4.8) shows that the dif-
ference between SMEs  ranges between  -4% and +3% indicating that within the SME 
group the differences are less marked than between SMEs and LSEs. 

Figure 4.8: TAX over EBIT ratio (SMEs detail)12 

)
l
l

a
m
S
/
m
u
d
e
M

i

(
d
a
e
r
p
S

)

%

(
T
I
B
E
r
e
v
o
X
A
T

45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

ES NL

FR LU BE

EL

SE DE BG IT

PL

EE

LT

SI

IE UK RO AT HR

FI

4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%

medium 19.4 22.8 21.5 21.7 22.2 14.5 20.6 22.5 7.14 39.9 17.0 8.20 12.8 13.4 10.7 21.7 12.3 19.3 12.1 18.4

micro

small

Δ

15.0 14.7 12.0 21.3 20.2 14.0 17.8 20.9 6.47 34.4 16.2 9.88 12.6 13.6 11.3 19.6 14.4 19.8 14.2 23.4

16.6 21.2 20.3 20.8 21.5 13.8 20.1 22.3 7.02 39.8 17.2 8.83 13.5 14.3 11.7 23.0 13.6 21.4 14.8 22.1

2.83 1.57 1.11 0.91 0.74 0.71 0.49 0.20 0.12 0.09 -0.2 -0.6 -0.7 -0.9 -0.9 -1.2 -1.2 -2.1 -2.7 -3.7

Ratio by Country by Medium, Small and Micro enterprise (%)

12 Delta is defined as the difference between the ratio for small and medium corporations. 

39 

 
 
 
 
                                                 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.9  shows  that  the  weight  of  taxation  on  EBIT  is  slightly  increasing  over  the 
time period of the study and the spread between the two groups (SMEs and LSEs) is 
almost  constant  over  time  for  LSEs,  while  for  SMEs  increased  slightly  in  2010  and 
more sensibly in 2011, with a slight decrease during 2013.  

Figure 4.9: TAX over EBIT ratio (time trend)13 

)

%

(
T
I
B
E
r
e
v
o
X
A
T

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

sme

2009

2.64%

20.99%

18.35%

2010

3.02%

21.35%

18.33%

2011

0.81%

21.22%

20.41%

2012

0.65%

21.11%

20.46%

2013

1.82%

21.15%

19.32%

Aggregate by year (%)

Figure 4.10 reports the time trend  for  TAX  over EBIT in the commerce, construction, 
energy,  hotels  and  restaurants,  manufacturing  sectors.  A  detailed  analysis  of  trends 
between  2009  and  2013  in  the  commerce  sector  shows  an  increase  in  the  weight  of 
taxation  on  EBIT  for  SMEs,  while  for  LSEs  this  ratio  decreased  starting  in  2011.  The 
same  situation  for  LSEs  is  shown  in  the  construction  sector,  while  for  SMEs  the  ratio 
decreased markedly starting in 2012. The opposite trend can be observed in the ener-
gy sector, where the spread between SMEs and LSEs increased over time from a slight 
3% point difference to 11% points in 2013 in favour of SMEs. The ratio is also favour-
able to SMEs in the Hotels and Restaurants sector, with a difference of 5.67%  points 
in 2013. In the manufacturing sector there is no present any statistically relevant dif-
ference between the two groups. 

13  Green  bars  indicate  the  spread  between  the  TAX  over  EBIT  ratio  for  SMEs  and  LSEs.  The  blue  and  red 
lines show the time trend of Tax over EBIT ratio for SMEs and LSEs. 

40 

 
 
 
 
 
                                                 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.10:  TAX  over  EBIT  by  industry  and  LSE/SME,  and  spread  between 
SMEs and LSEs 

Commerce (EBIT) 

Construction (EBIT) 

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

5.68% 5.91% 5.33% 4.43% 2.59%

23.86% 24.20% 24.62% 23.65% 22.43%

sme 18.18% 18.29% 19.29% 19.22% 19.83%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

5.49% 5.46% 2.61% 1.69% 2.94%

23.69% 23.41% 22.98% 22.80% 20.88%

sme 18.19% 17.95% 20.36% 21.11% 17.94%

Energy (EBIT) 

Hotels and Restaurants (EBIT) 

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

Δ

lse

2009

2010

2011

2012

2013

2.97% 3.77% 1.96% 1.76% 10.99%

21.27% 20.99% 20.65% 20.06% 30.53%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

6.37% 7.71% 3.34% 3.12% 5.67%

21.00% 22.31% 20.89% 21.16% 19.41%

sme 18.30% 17.22% 18.69% 18.29% 19.54%

sme 14.63% 14.60% 17.55% 18.04% 13.74%

Manufacturing (EBIT) 

25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%

Δ

lse

2009

2010

2011

2012

2013

-1.28% -0.69% -4.00% -3.08% -1.20%

19.10% 19.68% 19.54% 19.78% 20.53%

sme 20.38% 20.37% 23.54% 22.86% 21.73%

4.3.  TAX over EBT 

The TAX over EBT14 ratio expresses the weight of taxation on the value created by the 
company in all its activities. It takes into consideration operations, capital structure (in 
particular the cost of debt) and other activities. This ratio is often used as a quick and 
easy  way  to  assess  the  effective  tax  burden  on  enterprises.  However,  different  fiscal 

14 Earnings Before Taxes 

41 

 
 
 
 
 
 
 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

regimes define taxable income differently from EBT and thus direct comparisons with 
statutory CIT rates need to be interpreted with caution.15 

Figure  4.11  shows  that  as  for  the  previous  TAX  ratios,  Italy  has  the  highest  value 
(52.2%),  followed  by  Germany  (26.3%)  and  Finland  (25.0%).  Bulgaria  (8.77%),  Es-
tonia (9.69%) and Ireland (12.9%) have the lowest tax over EBT ratio. 

Figure 4.11: TAX over EBT ratio by country 

)

%

(
o
i
t
a
r
T
B
E
r
e
v
o
X
A
T

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

IT DE

FI

BE EU ES UK NL

EL

SE

LU AT

PL RO HR

SI

LT

FR

IE

EE BG

tax_profit_mean 52.2 26.3 25.0 24.7 24.4 24.3 23.6 23.3 22.4 21.3 21.1 20.5 20.0 19.1 18.3 17.1 15.1 14.5 12.9 9.69 8.77

Ratio (%, by Country)

For  EBT,  the  measure  of  earnings  that  is  closest  to  profit,  corporate  income  taxation 
tends to weight more,  on average, for SMEs than for LSEs in 14 countries out of 20. 
Figure  4.12  presents  the  TAX  over  EBT  ratio  by  country  and  by  size  class  (LSE  and 
SME).  Cross-country  differences  vary  from  a  maximum  of  -10%  points  in  Finland  to 
5.45% points in France but for most of the countries the difference between SMEs and 
LSEs ranges between -6% and -0.3%. Only 3 countries (France, Greece and Bulgaria) 
appear to have a tax regime that significantly favours SMEs (by >1% point). 

15 Even though CIT is a profit based tax, the calculation of taxable income varies from country to country. 
Thus TAX/EBT does not necessarily give a comprehensive picture of the burden of CIT on enterprises. 

42 

 
 
 
 
 
 
                                                 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.12: TAX over EBT ratio (SME/LSE) 

)

%

(
o
i
t
a
r
T
B
E
r
e
v
o
X
A
T

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

FR EL BG SE UK NL

LT

ES

PL

IE RO EU AT HR SI

BE

EE DE

IT

LU FI

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

-12.00%

)
E
M
S
/
E
S
L
(
d
a
e
r
p
S

lse

20.0 25.5 10.3 21.7 23.9 23.5 14.7 23.8 19.3 12.1 17.8 23.0 19.1 16.2 15.0 20.3 4.67 21.8 46.1 15.6 14.2

sme 14.5 22.3 8.75 21.3 23.6 23.3 15.1 24.3 20.0 12.9 19.1 24.4 20.8 18.3 17.1 24.8 9.71 26.9 52.2 21.8 25.1

Δ

5.45 3.22 1.57 0.38 0.34 0.19 -0.3 -0.4 -0.7 -0.7 -1.2 -1.4 -1.7 -2.0 -2.1 -4.5 -5.0 -5.1 -6.1 -6.2 -10.

Ratio by country by LSE and SME (%)

A  detailed  analysis  of  the  SME  group  in  Figure  4.13  shows  a  similar  trend.  A  partial 
explanation  for  this  result  may  lie  in  the  fact  that  few  countries  seem  to  have  “pro-
gressive regimes” with different tax rates for different levels of EBT (e.g. France, the 
Netherlands).  Instead,  most  countries  show  a  higher  TAX  over  EBT  ratio  for  small 
companies in comparison with medium-sized companies. 

Figure 4.13: TAX over EBT ratio (SME detail)16 

)
l
l

a
m
S
/
m
u
d
e
M

i

(
d
a
e
r
p
S

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

)

%

(
o
i
t
a
r
T
B
E
r
e
v
o
X
A
T

ES

FR PL

EL NL

LT BG SE LU EE UK IE BE DE

SI RO HR AT

IT

FI

3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%

medium 27.3 23.2 20.7 23.6 24.0 15.6 10.3 21.2 22.0 8.86 23.8 12.4 24.5 26.7 17.2 18.6 19.2 20.3 53.8 19.3

micro

small

Δ

23.4 13.2 19.2 21.9 14.8 14.0 7.53 20.9 24.1 10.2 20.7 12.2 24.5 23.9 16.1 20.3 17.0 21.6 49.3 25.4

25.0 21.8 19.8 22.9 23.4 15.4 10.3 21.5 22.4 9.22 24.6 13.4 25.7 28.3 18.9 20.8 22.1 23.4 58.1 25.0

2.36 1.40 0.88 0.77 0.59 0.20 0.00 -0.3 -0.3 -0.3 -0.7 -1.0 -1.2 -1.5 -1.7 -2.2 -2.9 -3.1 -4.3 -5.7

Ratio by country by Medium, Small, Micro enterprise (%)

16 Delta is defined as the difference between the ratio for small and medium corporations. 

43 

 
 
 
 
                                                 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The trend analysis in Figure 4.14 indicates that, on average, SMEs pay about 1% more 
TAX  on  EBT  than  LSEs.  However,  a  comparison  with  the  previous  ratios  presents  an 
interesting  fact:  for  both  the  TAX  over  EBITDA  and  TAX  over  EBT,  SMEs  have  higher 
ratios  than  LSEs  while,  on  average,  the  TAX  over  EBIT  is  higher  for  LSEs  than  for 
SMEs. The causes of this inversion might be related to the different weight of depreci-
ation and amortization in the income statements of SMEs and LSEs.  

Figure 4.14: TAX over EBT ratio (time trend)17 

)

%

(
o
i
t
a
r
T
B
E
r
e
v
o
X
A
T

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

Δ

lse

sme

2009

-0.12%

24.09%

24.21%

2010

-0.90%

23.60%

24.50%

2011

-3.28%

23.83%

27.11%

2012

-4.08%

23.54%

27.62%

2013

-0.76%

22.43%

23.19%

Aggregate by year (%)

Different trends  emerge in the sector analysis in Figure 4.15. While in the commerce 
and  in  the  construction  sectors  differences  between  SMEs  and  LSEs  are  between  1% 
point  and  3.6%  points,  other  sectors  present  some  more  significant  fluctuations:  in 
2013,  the  spread  between  the  two  groups  in  the  energy  sector  reached  19%  points, 
with SMEs having a lower ratio on average than LSEs. 

17  Green  bars  indicate  the  spread  between  the  TAX  over  EBT  for  SMEs  and  LSEs.  The  blue  and  red  lines 
show the time trend of Tax over EBT ratio for SMEs and LSEs. 

44 

 
 
 
 
 
 
                                                 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.15:  TAX  over  EBT  by  industry  and  LSE/SME,  and  spread  between 
SMEs and LSEs 

Commerce (EBT) 

Construction (EBT) 

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

3.59% 2.06% 2.45% 1.07% 1.75%

27.08% 26.74% 27.68% 26.69% 25.20%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

Δ

lse

2009

2010

2011

2012

2013

2.58%

3.17% -1.12% -2.90% 2.23%

26.22% 25.82% 25.37% 24.92% 22.69%

sme 23.49% 24.68% 25.23% 25.62% 23.45%

sme 23.64% 22.65% 26.49% 27.83% 20.46%

Energy (EBT) 

Hotels and Restaurants (EBT) 

50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%

Δ

lse

2009

2010

2011

2012

2013

1.99% 2.35% 1.26% -1.05% 19.67%

24.42% 23.89% 23.93% 21.90% 43.95%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Δ

lse

2009

2010

2011

2012

2013

7.28% 6.27% 2.29% 2.78% 3.84%

26.79% 25.34% 25.16% 26.59% 20.87%

sme 22.43% 21.55% 22.67% 22.95% 24.28%

sme 19.51% 19.07% 22.87% 23.81% 17.03%

Manufacturing (EBT) 

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%

Δ

lse

2009

2010

2011

2012

2013

-6.32% -6.76% -10.87% -10.48% -6.80%

22.00% 21.68% 21.76% 21.73% 20.60%

sme 28.32% 28.44% 32.63% 32.20% 27.40%

4.4.  Cash Ratio 

The  cash  ratio  expresses  the  ability  of  companies  in  the  short  term  to  cover  current 
liabilities with cash or cash equivalents. The cash ratio is calculated by simply compar-
ing the immediate liquidity of the enterprise to the current liabilities. It is a measure of 
the ability of the enterprise to pay back its debts in the very short term. A high cash 

45 

 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

ratio does not necessarily indicate a healthy enterprise as it might indicate an unnec-
essary  accumulation  of  funds  and  inventory18  or  inefficient  financial  management 
(since these funds could be invested more profitably). On the other hand, an extreme-
ly low cash  ratio might suggest that the enterprise could become unable to  repay its 
short term debt. 

Figure  4.16  presents  the  average  cash  ratio  of  companies  across  Member  States.  On 
the left side of the diagram Estonia, Ireland and Finland have a particularly high liquid-
ity  (in  Estonia,  for  example,  on  average  69%  of  company  liabilities  are  covered  with 
cash or cash equivalent assets). On the other side of the graph  Slovenia, Croatia and 
Italy present a particularly low average cash ratio. 

Figure 4.16: cash ratio per country 

)

%

(
o
i
t
a
r
h
s
a
C

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

EE

IE

FI BG DE FR NL BE LU EU UK PL AT

SE

ES RO LT

EL

SI HR IT

cash_ratio_mean 69.5 62.1 58.3 55.2 50.5 45.1 38.7 36.3 34.3 31.7 30.7 27.6 27.0 26.3 25.9 24.5 23.6 21.8 14.2 12.7 11.4

Ratio (%, by country)

Figure 4.17 presents a disaggregated view of the cash ratio between SMEs and LSEs. 
Member States are ranked by the spread of the ratio between the two groups. Finland, 
Estonia, Bulgaria and France have the highest spread (between 36%  points and 49% 
points higher for SMEs in comparison to LSEs). On the opposite side, Italy, Croatia and 
Greece have cash ratios that are between 5% points and 9.8% points higher for SMEs. 
In none of the countries do LSEs have a higher average cash ratio than SMEs. 

18  Carrying  too  much  inventory  means  that  an  enterprise  is  either  not  selling  enough  or  is  ordering  too 
much. Failure to turn over inventory negatively affects revenue and cash flow. 

46 

 
 
 
 
 
                                                 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.17: cash ratio by SME/LSE 

)

%

(
o
i
t
a
r
h
s
a
C

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

IT HR EL

SI

LT PL UK RO LU AT ES EU SE NL BE IE DE FR BG EE

FI

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%

-60.00%

)
E
M
S
/
E
S
L
(
d
a
e
r
p
S

lse

6.4 6.8 12. 4.1 11. 15. 18. 10. 21. 12. 7.5 12. 6.8 18. 13. 33. 21. 9.0 13. 22. 9.8

sme 11. 12. 22. 14. 24. 28. 32. 24. 36. 27. 26. 31. 27. 38. 36. 62. 52. 45. 56. 69. 58.

Δ

-5.

-5.

-9.

-10 -12 -13 -13 -13 -14 -15 -18 -19 -20 -20 -23 -29 -30 -36 -42 -47 -49

Ratio by country by SME and LSE (%)

A  detailed  analysis  of  the  SME  group  in  Figure  4.18  shows  that  micro  companies  ex-
hibit  the  highest  cash  ratios  in  all  countries.  Furthermore,  the  spread  between  medi-
um-sized and small companies is particularly evident in Germany, Bulgaria and France 
(around 16-18% points higher for small companies). 

Figure 4.18: cash ratio by country (SME detail)19 

)

%

(
o
i
t
a
r
h
s
a
C

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

0.00%
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-14.00%
-16.00%
-18.00%
-20.00%

IT RO HR

SI NL

PL

LT AT

IE UK EL BE

ES

LU SE

FR

FI

EE BG DE

)
l
l

a
m
S
/
m
u
d
e
M

i

(
d
a
e
r
p
S

medium 7.55 14.1 6.59 4.92 19.9 21.9 16.8 15.5 37.5 21.7 12.1 17.1 11.4 29.5 16.2 18.0 19.0 25.8 23.2 34.5

micro

small

Δ

13.0 28.6 14.5 17.6 50.0 43.3 32.9 37.9 99.8 69.6 28.3 40.7 28.3 40.2 37.0 48.2 75.3 79.7 88.6 70.6

9.37 16.0 8.79 8.29 25.0 28.4 23.3 22.9 47.0 31.2 21.6 26.7 22.2 41.9 29.2 34.1 35.5 42.6 41.6 53.0

-1.8 -1.8 -2.2 -3.3 -5.1 -6.4 -6.5 -7.3 -9.4 -9.4 -9.5 -9.6 -10. -12. -12. -16. -16. -16. -18. -18.

Ratio by country by Medium, Small and Micro enterprise (%)

The  time  trend  analysis  in  Figure  4.19  shows  a  constant  spread  between  SMEs  and 
LSEs between 2009 and 2012 and an increase in 2013 when it reached 27.8% points.  

19 Delta is defined as the difference between the ratio for small and medium corporations. 

47 

 
 
 
 
 
 
                                                 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.19: cash ratio (time trend)20 

)

%

(
o
i
t
a
r
h
s
a
C

50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%

Δ

lse

sme

2009

2010

2011

2012

2013

-18.17%

-18.96%

-18.29%

-17.72%

-27.81%

13.50%

31.67%

13.43%

32.39%

12.05%

30.34%

13.12%

30.85%

14.51%

42.32%

Aggregate by year (%)

Figure 4.20 provides the detail by industrial sector between 2009 and 2013. In all five 
sectors SMEs present a higher ratio than LSEs, a result consistent with the data shown 
in Figure 4.17.  

20 Green bars indicate the spread between the cash ratio for SMEs and LSEs. The blue and red lines show 
the time trend of cash ratio for SMEs and LSEs 

48 

 
 
 
 
 
                                                 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.20:  cash  ratio  by  industry  and  LSE/SME,  and  spread  between  SMEs 
and LSEs 

Commerce (cash ratio) 

Construction (cash ratio) 

50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%

2009

2010

2011

2012

2013

60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%

2009

2010

2011

2012

2013

Δ

lse

-15.68% -16.57% -16.00% -14.98% -24.99%

12.43% 12.32% 11.29% 12.85% 13.21%

sme 28.11% 28.89% 27.29% 27.82% 38.19%

Δ

lse

-21.99% -22.30% -22.62% -22.87% -34.27%

15.41% 16.00% 14.01% 11.60% 19.92%

sme 37.39% 38.30% 36.63% 34.48% 54.20%

Energy (cash ratio) 

Hotels and Restaurants (cash ratio) 

80.00%

60.00%

40.00%

20.00%

0.00%

-20.00%

-40.00%

-60.00%

2009

2010

2011

2012

2013

50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%

2009

2010

2011

2012

2013

Δ

lse

-38.40% -27.76% -20.76% -24.18% -34.28%

17.49% 15.44% 15.35% 9.87% 4.76%

sme 55.89% 43.20% 36.11% 34.05% 39.03%

Δ

lse

-14.61% -15.64% -15.83% -12.87% -24.82%

21.15% 21.47% 20.67% 22.86% 20.35%

sme 35.76% 37.12% 36.50% 35.73% 45.18%

Manufacturing (cash ratio) 

40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%

2009

2010

2011

2012

2013

Δ

lse

-16.09% -16.40% -15.15% -16.94% -23.47%

11.92% 11.97% 10.28% 11.47% 13.46%

sme 28.01% 28.37% 25.44% 28.41% 36.93%

The highest difference between the cash ratio of LSEs and SMEs in 2013 is registered 
in  the  construction  and  energy  sectors,  with  SMEs  having  a  cash  ratio  higher  than 
LSEs  by  around  34  percentage  points.  In  all  sectors  apart  from  energy,  the  spread 
between the ratios of SMEs and LSEs in 2013 was higher than in 2009. 

49 

 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

4.5.  Quick Ratio 

The quick ratio expresses the ability of a company to cover its current liabilities. It is 
calculated as the sum of its most liquid assets (cash, cash equivalents and short term 
investments) plus the accounts receivables over the current liabilities.  

Obviously,  it  is  vital  that  companies  have  sufficient  cash  on  hand  to  meet  accounts 
payables,  interest  expenses  and  other  bills  when  they  become  due.  The  higher  the 
ratio, the more financially secure the company is in the short term. A common rule of 
thumb is that companies with a quick ratio of greater than 1.0 are sufficiently able to 
meet their short-term liabilities. 

In general, low or decreasing quick ratios suggest that  a company is over-leveraged, 
struggling to maintain or grow sales, paying bills too quickly or  collecting receivables 
too slowly. On the other hand, a high or increasing quick ratio generally indicates that 
a  company  is  experiencing  solid  top-line  growth,  quickly  converting  receivables  into 
cash,  and  easily  able  to  cover  its  financial  obligations.  Such  companies  often  have 
faster inventory turnover and cash conversion cycles. 

Like most  other  measures,  the quick ratio does have drawbacks. To begin with, ana-
lysts commonly point out that it provides no information about the level and timing of 
cash  flows,  which  are  what  really  determines  an  enterprise's  ability  to  pay  liabilities 
when due. The quick ratio also assumes that accounts receivables are readily available 
for  collection,  which  may  not  be  the  case  for  many  companies.  Finally,  the  formula 
assumes  that  a  company  would  liquidate  its  current  assets  to  pay  current  liabilities, 
which  is  not  always  realistic,  considering  some  level  of  working  capital  is  needed  to 
maintain operations. 

It  is  also  important  to  understand  that  the  timing  of  asset  purchases,  payment  and 
collection policies, allowances for bad debt and even capital-raising efforts can all im-
pact  the  calculation  and  result  in  different  quick  ratios  for  similar  companies.  Capital 
needs that vary from industry to industry can also have an effect on quick ratios. For 
these reasons, liquidity comparisons are generally most meaningful among companies 
within the same industry. 

The  average  quick  ratio  of  all  EU  companies  operating in  the  sectors  in  scope  of  this 
analysis is around 110%, as shown in Figure 4.21. This means that,  on average, the 
health  condition  of  European  companies  can  be  considered  as  positive.  In  Germany, 
Ireland and Luxembourg, the quick ratio reaches 1.65 times current liabilities, where-
as  the  average  quick  ratio  of  Italian  and  Croatian  companies  is  lower  than  100% 
(which indicates a tendency to finance operations with debt capital). 

50 

 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.21: quick ratio by country 

)

%

(
o
i
t
a
r
k
c
i
u
Q

200.00%

180.00%

160.00%

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

DE

EE

IE

LU BG SE NL

FI UK

PL AT

LT

EU EL

BE

FR

SI

RO ES

IT HR

quick_mean 175. 163. 159. 149. 138. 137. 136. 135. 123. 115. 114. 112. 111. 110. 110. 108. 105. 100. 97.5 90.3 89.4

Ratio by country (%)

Figure  4.22  presents  a  comparison  of  the  average  quick  ratio  for  SMEs  and  LSEs, 
showing that in nearly all countries in scope (with the exception of Ireland) SMEs have 
a higher quick ratio. However, the spread between the two groups is not as significant 
as for the cash ratio. The highest spread between SMEs and LSEs is evident in Estonia, 
Sweden and Bulgaria (over 40%). 

Figure 4.22: quick ratio by country (SME/LSE) 

)

%

(
o
i
t
a
r
k
c
i
u
Q

200.00%
180.00%
160.00%
140.00%
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%

20.00%

10.00%

0.00%

)
E
S
L
/
E
M
S
(
d
a
e
r
p
S

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%

IE

IT

HR

EU

ES

BE

AT

RO

FR

UK

DE

PL

LT

EL

NL

SI

FI

LU

BG

SE

EE

lse

173.4 89.39 86.28 105.2 90.27 102.4 106.1 90.82 96.07 112.4 163.7 97.32 92.63 88.42 108.1 76.43 101.9 118.5 94.51 92.68 117.7

sme 159.3 90.36 89.50 111.4 97.59 110.2 114.6 100.2 108.4 125.1 176.4 117.0 114.1 111.1 136.0 106.0 135.9 153.6 139.1 137.9 163.8

Δ

14.09 -0.97 -3.21 -6.16 -7.32 -7.80 -8.46 -9.45 -12.3 -12.6 -12.7 -19.6 -21.4 -22.7 -27.9 -29.6 -33.9 -35.1 -44.6 -45.2 -46.0

Ratio by country by SMEs and LSEs (%)

The  detail  of  the  SME  groups  in  Figure  4.23  shows  that  small  companies  in  Luxem-
bourg  have  a  quick  ratio  58  percentage  points  higher  than  medium-sized  ones.  Fur-
ther, German micro companies exhibit the highest quick ratio. 

51 

 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.23: quick ratio by country (SME detail)21 

)

%

(
o
i
t
a
r
k
c
i
u
Q

250.00%

200.00%

150.00%

100.00%

50.00%

0.00%

RO

BE

IT

NL

HR

ES

LT

FI

AT

SE

SI

FR

IE

EL

BG

PL

EE

UK

DE

LU

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%

-60.00%

-70.00%

)
l
l

a
m
S
/
m
u
d
e
M

i

(
d
a
e
r
p
S

medium 94.98 107.7 91.74 111.4 89.56 105.4 111.1 107.3 97.59 104.7 85.83 99.79 144.0 97.10 107.9 106.2 108.6 116.4 154.4 142.2

micro

small

Δ

106.8 112.0 90.09 159.4 89.58 94.04 133.1 151.3 131.0 146.0 110.7 108.6 180.3 120.4 175.4 135.7 179.8 152.6 206.3 161.2

89.78 107.2 91.34 112.6 90.87 107.9 115.3 113.7 106.1 115.6 97.04 111.1 157.6 111.1 122.3 120.6 124.2 133.3 172.0 200.4

5.20%0.52%0.40% -1.22 -1.31 -2.53 -4.19 -6.41 -8.59 -10.9 -11.2 -11.3 -13.5 -14.0 -14.3 -14.4 -15.5 -16.9 -17.6 -58.1

Ratio by country by Medium, Small and Micro enterprise (%)

The  analysis  of  the  time  trend  presented  in  Figure  4.24  shows  that  starting  in  2011 
the  ratio  for  SMEs  is  higher  than  for  LSEs,  even  though  for  that  year  the  difference 
was still low, at 3.2 percentage points. The spread became significantly higher during 
2012  and  2013,  with  a  final  quick  ratio  for  SMEs  that  is  23  percentage  points  higher 
than for LSEs.  

Figure 4.24: quick ratio (time trend)22  

)

%

(
o
i
t
a
r
k
c
i
u
Q

160.0%
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%

Δ

lse

2009

1.3%

107.3%

sme

106.0%

2010

-1.7%

106.2%

107.8%

2011

-3.2%

104.5%

107.6%

2012

-6.5%

109.8%

116.3%

2013

-23.0%

109.8%

132.7%

Aggregate by year and SMEs and LSEs (%)

The quick ratio, similarly to the cash ratio, is strongly influenced by the characteristics 
of  the  sector  where  the  enterprise  operates.  Figure  4.25  presents  the  time  trend  for 
the  commerce,  construction,  energy,  hotels  and  restaurants,  manufacturing  sectors. 

21 Delta is defined as the difference between the ratio for small and medium corporations. 
22 Green bars indicate the spread between the quick ratio for SMEs and LSEs. The blue and red lines show 
the time trend of quick ratio for SMEs and LSEs. 

52 

 
 
 
 
 
                                                 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Specifically, in the commerce sector the quick ratio ranges from 87% to 89% for LSEs 
and from 93% to 119% for SMEs. The spread between the two groups is increasing in 
the  period  under  study.  The  construction  sector  shows  a  similar  picture  with  an  in-
creasing spread. The trend is different in the energy sector, where the ratio for LSEs in 
2013 is higher than for SMEs. For hotels and restaurants, in the five years taken into 
account the ratio for SMEs is always lower than for LSEs. There is a relatively constant 
spread between the two groups in the manufacturing sector which increases only dur-
ing 2013.  

Figure 4.25: quick ratio by industry and LSE/SME, and spread between SMEs 
and LSEs 

Commerce (quick ratio) 

Construction (quick ratio) 

140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%

Δ

lse

2009

2010

2011

2012

2013

-5.3% -6.0% -7.3% -13.0% -29.8%

87.7% 88.8% 87.1% 89.0% 89.2%

200.0%

150.0%

100.0%

50.0%

0.0%

-50.0%

Δ

lse

2009

2010

2011

2012

2013

-12.7% -15.7% -15.0% -21.3% -35.8%

115.1% 115.6% 116.3% 117.3% 121.9%

sme 92.9% 94.9% 94.4% 102.1% 119.0%

sme 127.8% 131.3% 131.3% 138.6% 157.7%

Energy (quick ratio) 

Hotels and Restaurants (quick ratio) 

200.0%

150.0%

100.0%

50.0%

0.0%

-50.0%

-100.0%

Δ

lse

2009

2010

2011

2012

2013

-40.6% -22.9% -25.4% -22.0% 12.6%

107.4% 109.1% 113.7% 111.9% 142.7%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

Δ

lse

2009

2010

2011

13.5% 10.3% 7.8%

2012

3.2%

2013

7.4%

94.7% 93.0% 93.1% 97.3% 109.7%

sme 148.1% 132.0% 139.1% 133.9% 130.2%

sme 81.2% 82.6% 85.3% 94.1% 102.3%

Manufacturing (quick ratio) 

160.0%
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%

Δ

lse

2009

2010

2011

2012

2013

-1.5% -5.3% -5.6% -9.9% -22.0%

115.6% 113.5% 111.2% 117.8% 117.8%

sme 117.2% 118.7% 116.8% 127.7% 139.8%

53 

 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

4.6.  Debt Ratio 

The  debt  ratio  indicates  the  capital  structure  of  a  company  and  it  provides  a  broad 
idea as to the leverage used by the company. A low percentage means that the com-
pany is less dependent on leverage, i.e., money borrowed from and/or owed to others. 
The  lower  the  percentage,  the  less  leverage  the  company  is  using.  In  general,  the 
higher the ratio, the more risk the company is considered to have taken on.  

When the debt ratio is high, the company has a lot of debt relative to its assets. It is 
thus  carrying  a  bigger  burden  in  the  sense  that  principal  and interest  payments  may 
take a  significant amount of cash flows. When the debt  ratio is low, principal and in-
terest  payments  don't  command  such  a  large  portion  of  cash  flows.  However,  a  low 
debt ratio may also indicate that the company has an opportunity to use leverage as a 
means of responsibly growing the business that it is not taking advantage of. 

As  shown  in  Figure  4.26,  amongst  the  countries  in  scope,  Italy  (76%)  and  Croatia 
(67%)  exhibit  the  highest  debt  ratios.  On  the  opposite  side,  Estonia  (44%),  Ireland 
(49%) and Bulgaria (51%) present the lowest debt ratios. This means that, on aver-
age, companies operating in these countries finance 50% or more of their assets with 
equity.  This  can  have  a  very  strong  impact  on  taxation:  higher  leverage  generally 
leads to higher interest costs in the income statement and thus to a decrease in taxa-
ble income. 

Figure 4.26: debt ratio by country 

)

%

(
o
i
t
a
r

t
b
e
D

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

IT HR EU BE

ES DE RO FR

SI

SE AT

EL

LU NL

FI UK LT

PL BG IE

EE

tax_debt_mean 76.3 67.5 62.3 62.2 61.7 61.6 61.4 61.2 61.2 60.5 59.7 57.7 57.3 56.8 56.1 55.5 53.1 50.7 50.7 49.1 43.9

Ratio by counrty (%)

The  comparison between SMEs and LSEs carried out in Figure 4.27 does not suggest 
any substantial difference between the two groups in any Member State. In Italy, Cro-
atia  and  Romania  SMEs  tend  to  be  slightly  more  indebted  in  comparison  with  LSEs 
(around  8%  points),  while in  Finland,  Greece  and  UK  SMEs  are  slightly less  indebted 
(6% points). 

54 

 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 4.27: debt ratio by country (SME/LSE) 

)

%

(
o
i
t
a
r

t
b
e
D

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

EL

FI UK EE

FR

IE

SE NL AT BG LU PL DE

LT

ES

EU BE

SI RO HR IT

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

)
E
S
L
/
E
M
S
(
d
a
e
r
p
S

lse

64.2 62.5 60.6 49.0 65.3 52.9 64.1 59.1 61.6 52.5 58.6 51.0 62.0 53.4 61.4 60.1 59.7 57.9 54.5 59.7 68.2

sme 57.6 56.0 54.9 43.9 61.2 49.1 60.3 56.8 59.6 50.6 57.1 50.6 61.6 53.1 61.7 62.4 62.2 61.2 61.4 67.6 76.4

Δ

6.64 6.51 5.72 5.11 4.13 3.81 3.80 2.34 2.03 1.87 1.42 0.36 0.34 0.30 -0.3 -2.2 -2.4 -3.3 -6.9 -7.8 -8.1

Ratio by country and by LSE and SME (%)

The detail of the SME group in Figure 4.28 shows the same relatively small difference 
among medium-sized, small and micro companies. The countries where the difference 
is bigger are Italy, Romania and Croatia where smaller companies exhibit, on average, 
a  higher  debt  ratio.  On  the  other  side  of  the  graph  are  Greece,  France  and  Ireland 
where the ratio is higher for medium-sized companies.  

Figure 4.28: debt ratio by country (SME detail)23 

)
l
l

a
M
S
/
m
u
d
e
M

i

(
d
a
e
r
p
S

)

%

(
o
i
t
a
r

t
b
e
D

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

EL

FR

IE

AT

SE UK

LU PL

EE

FI

BG ES NL

SI

LT DE

BE

RO HR

IT

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

medium 62.3 64.9 50.9 64.2 61.8 57.7 57.4 51.1 48.2 60.0 52.8 58.7 61.4 61.9 51.1 61.5 61.5 58.3 63.0 70.3

micro

small

Δ

55.7 61.1 49.6 57.0 59.8 49.6 59.2 49.5 43.0 54.3 48.3 62.6 54.1 60.6 55.1 62.6 48.3 61.4 68.0 76.8

57.9 61.3 47.5 61.3 59.7 55.8 55.6 50.9 48.0 60.0 53.5 59.4 62.7 63.3 52.8 63.2 63.1 62.2 67.0 76.5

4.32 3.58 3.38 2.83 2.01 1.96 1.78 0.21 0.15 -0.0 -0.6 -0.7 -1.3 -1.3 -1.6 -1.6 -1.6 -3.9 -3.9 -6.1

Ratio by country and by Medium, Small and Micro enterprise (%)

23 Delta is defined as the difference between the ratio for small and medium corporations. 

55 

 
 
 
 
                                                 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

This  strong  similarity  is  also  shown  in  the  overall  EU  time  trend  analysis  in  Figure 
4.29. This small difference is maintained across all sectors taken into account and it is 
just  slightly  higher  in  the  construction  sector  where  LSEs  tend  to  have  a  debt  ratio 
around 12% points higher in 2013 than SMEs. 

Figure 4.29: debt ratio (time trend)24 

)

%

(
o
i
t
a
r

t
b
e
D

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

Δ

lse

sme

2009

-2.65%

61.02%

63.67%

2010

-1.48%

61.08%

62.56%

2011

-2.48%

61.08%

63.56%

2012

-2.22%

60.37%

62.59%

2013

0.76%

60.79%

60.04%

Aggregate by year (%)

The industry detail of the debt ratio in Figure 4.30 presents a similar pattern to that in 
the previous graphs: SMEs and LSEs do not exhibit a significant difference except for 
the construction sector, where LSEs have a higher debt in comparison to SMEs by 9% 
points. 

24 Green bars indicate the spread between  the debt ratio for SMEs and LSEs. The blue and red lines show 
the time trend of debt ratio for SMEs and LSEs. 

56 

 
 
 
 
 
 
 
                                                 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  4.30:  debt  ratio  by  industry  and  LSE/SME,  and  spread  between  SMEs 
and LSEs 

Commerce (debt ratio) 

Construction (debt ratio) 

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

Δ

lse

2009

2010

2011

2012

2013

0.52% 1.78% 1.00% 1.19% 4.74%

65.18% 65.25% 65.27% 64.32% 64.62%

80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

Δ

lse

2009

2010

2011

2012

2013

7.88% 9.21% 8.96% 9.98% 12.74%

71.52% 71.39% 72.00% 70.09% 72.85%

sme 64.66% 63.47% 64.28% 63.13% 59.87%

sme 63.64% 62.18% 63.04% 60.11% 60.11%

Energy (debt ratio) 

Hotels and Restaurants (debt ratio) 

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%

Δ

lse

2009

2010

2011

2012

2013

-3.86% -6.23% -3.19% -2.25% 0.87%

53.48% 55.66% 57.14% 59.59% 61.48%

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%

Δ

lse

2009

2010

2011

2012

2013

-1.25% -0.30% -1.39% -1.01% -1.97%

63.97% 63.72% 63.37% 63.54% 62.57%

sme 57.34% 61.89% 60.33% 61.83% 60.61%

sme 65.23% 64.03% 64.75% 64.55% 64.53%

Manufacturing (debt ratio) 

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%

Δ

lse

2009

2010

2011

2012

2013

-3.79% -2.96% -5.03% -4.28% -2.19%

57.54% 57.60% 57.36% 56.84% 56.49%

sme 61.33% 60.56% 62.38% 61.12% 58.68%

4.7.  Conclusions 

Several conclusions emerge from the above ratio analysis:  

  Tax regimes across Europe are significantly different from one another, ranging 
from  very  low  overall  tax  burdens  (i.e.  Ireland,  Estonia,  Bulgaria)  to  countries 
where the overall tax burden is relatively high (i.e. Italy, Germany, Finland). 

57 

 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

 

Just based on TAX/EBT it appears that Italy, Germany, Finland and Belgium ex-
hibit some of the highest fiscal burdens. 

  Only  five  countries  seem  to  favour  small,  medium-sized  and  micro  companies 
(France,  Greece,  Bulgaria,  the  UK  and  the  Netherlands)  in  terms  of  the  actual 
burden of taxes paid compared with LSEs. 

  The industry analysis shows that while there seems not to be a particularly high 
difference  between  SMEs  and  LSEs  in  the  commercial  sector,  company  size 
makes more of a difference in the construction, hotels & restaurants and manu-
facturing sectors. 

  An analysis of structural ratios shows that on average companies in Estonia, Ire-
land  and  Finland  are  characterised  by  high  liquidity  ratios  and  low  debt  ratios, 
while  companies  in  Italy  and  Croatia  have  low  liquidity  ratios  and  high  debt  in 
their capital structure. 
In  terms  of  the  relation  between  structural  and  tax  ratios,  the  analysis  of  the 
impact  of  depreciation  on  tax  burdens  in  Figure  4.31  shows  that  companies  in 
Italy, Belgium and Finland are able to reduce their tax base the most. 

 

Overall, the financial ratios analysis shows that a uniform treatment for SMEs cannot 
be identified, with different tax burdens across the countries of the sample and differ-
ent tax burdens for SMEs compared to LSEs. 

Figure  4.31:  impact  of  depreciation  on  tax  burden  (difference  between  TAX 
over EBITDA and TAX over EBIT) 

%
s
o
i
t
a
R

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

)
T
I
B
E
r
e
v
o
X
A
T
/
A
D
T
I
B
E
r
e
v
o
X
A
T
(
d
a
e
r
p
S

IT BE FI DE LU AT ES EU HR UK NL EL

SI SE PL RO FR IE EE BG

Country

tax over EBITDA

tax over EBIT

Δ

58 

 
 
 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

5.  ANALYSIS  OF  SME-SPECIFIC  PROVISIONS  AND  R&D  INCEN-

TIVES IN NATIONAL TAX CODES 

5.1.  Outline of the qualitative analysis and definition of SMEs 

The aim of the qualitative analysis is to provide an overview of the multitude of avail-
able  SME-specific  tax  incentives.  In  a  first  step,  the  analysis  identifies  the  five  broad 
categories of available tax incentives and explains their ways of affecting the tax bur-
den. Afterwards, the concrete provisions with respect to SMEs and R&D tax incentives 
are summarized. Synoptic tables containing all countries and all forms of relief provide 
an overview of the provisions in place.25  

SME and R&D incentives are limited to certain enterprises that fulfil different eligibility 
thresholds. This report draws on the EU recommendation 2003/361 to classify the dif-
ferent incentives and their availability for large, medium-sized, small and micro enter-
prises. The exact thresholds are displayed in Table 5.1. According to EU recommenda-
tion  2003/361,  the  classification  is  based  on  three  main  criteria:  number  of  employ-
ees, annual turnover and balance sheet total. While the maximum number of employ-
ees  constitutes  a  binding  limit,  enterprises  only  need  to  meet  one  of  the  other  two 
thresholds in order to qualify as an SME 

Table 5.1 Definition of SME 

Enterprise category 

Medium 
Small 
Micro 

Max. number of 
employees 
< 250 
< 50 
< 10 

Max. turnover 

≤ € 50 million 
≤ € 10 million 
≤ € 2 million 

Max. balance 
sheet total 
≤ € 43 million 
≤ € 10 million 
≤ € 2 million 

Our study focuses on enterprises that take the legal form of a corporation. Therefore, 
transparent enterprises such as partnerships are ignored and the results only refer to 
corporations 

5.2.  Classification of tax incentives 

In general, the study at hand identifies five types of tax incentives:  

1)  accelerated depreciation schemes; 

2)  investment deductions and allowances; 

3)  tax credits; 

4)  special regimes for certain types of income; 

5)  special tax rates. 

25 More detailed descriptions can be found in the country reports in Annex 1 (section 4).  

59 

 
 
 
 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 5.1 Mechanisms of tax incentives to reduce the tax burden 

Determination of the tax 

Tax base 
Related incentives: accelerated depreciation, in-
vestment deductions/allowances, options to capi-
talize expenses 

→ relates to the in-
put used by 
SME/R&D     activ-
ities 

Tax rate 
Related incentives: reduced tax rates, special re-
gimes (e.g. innovation/patent box) 

Tax due 
Related incentives: tax credits (volume-based, 
incremental), temporary exemptions from tax 

→ relates to the out-
put produced by 
SME/R&D activi-
ties 

→ relates to the in-
put used by 
SME/R&D    activi-
ties 

The  various  tax  incentives  differ  with  respect  to  the  mechanisms  through  which  they 
influence tax burdens. They can either reduce the tax base, the tax rate or the amount 
of actual tax payments (see Figure 5.1). Special depreciation rates, options to capital-
ize expenses and additional allowances based on the investment volume aim at modi-
fying  the  taxable  base.  Tax  credits  have  similar  effects  as  allowances,  but  they  are 
directly  deducted  from  the  tax  due  instead  of  the  tax  base.  Moreover,  they  offer  the 
possibility to become effective even in absence of positive taxable income if refundable 
credits are offered. This might be especially important for (small) newly founded cor-
porations  incurring  start-up  losses  and  R&D  activities  that  often  take  some  time  to 
yield profits. 

Special  tax  rates  and  regimes  for  certain  types  of  income  differ  from  the  abovemen-
tioned forms of relief as they are tied to the output of corporations. Both measures are 
usually granted irrespective of investment levels. 

With regard to good practices, implemented measures should be evaluated on the ba-
sis of the following criteria: 

  Effectiveness:  The  tax  incentive  should  provide  enterprises  with  increased  li-

quidity and enable additional investments and growth. 

  Neutrality of the tax system: Enterprises should benefit from the incentive irre-
spective of their legal form. Moreover, the growth of enterprises should not be 
hampered.  Eligibility  thresholds  relating  to  the  size  of  enterprises  provide  an 
incentive to remain small as enterprises want to retain eligibility. Hence, tax in-
centives  with  exclusive  eligibility  for  SMEs  introduce  additional  undesired  dis-
tortions to the tax system.  

60 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

  Transparency for investors: The size of the relief should be foreseeable for in-
vestors. This enables them to appropriately consider the relief when making in-
vestment decisions. 

  Manageability for tax legislators: The losses in tax revenue should be foreseea-

ble. Moreover, administrative costs need to be manageable. 

Considering the above criteria, output-based incentives, in particular special tax rates, 
entail several problems. Usually they are only available up to a certain income thresh-
old. Enterprises do therefore have an incentive to keep profits low, either by account-
ing  measures  or  by  curtailing  their  actual  economic  growth.  Moreover,  special  tax 
rates  can  only  be  introduced  for  corporations.  Transparently  taxed  enterprises  are 
subject to the personal income tax that  applies separate progressive  tax rates. Addi-
tional violations of the neutrality of the tax code are therefore inevitable when imple-
menting  special  tax  rates.  Moreover,  the  benefit  from  special  tax  rates  is  highly  de-
pendent  on  the  profitability  of  an  enterprise.  As  enterprises’  profitability  fluctuates 
over  time,  this  impedes  transparency  for  investors  and  manageability  for  tax  legisla-
tors.  Additionally,  young,  innovative  and  growing  enterprises  –  those  that  are  most 
likely to create positive externalities and that should primarily be targeted by SME tax 
incentives – are likely to incur losses at the beginning of their business activity and do 
therefore often not benefit.  

Input-based  measures,  especially  tax  credits,  provide  the  opportunity  to  circumvent 
these problems.  In the  context of SMEs,  such a tax credit could be defined as a per-
centage of eligible investments and costs respectively. The benefit arising from the tax 
incentive  would  thus  be  independent  from  profitability  and  transparent  for  investors. 
Also non-corporate enterprises could take advantage. Furthermore, it is especially at-
tractive  for  growing,  entrepreneurial  business  activities  that  usually  require  higher 
investment  volumes.  Instead  of  restricting  eligibility  to  enterprises  of  a  certain  size, 
the amount of eligible investments or costs could be capped. Thereby, enterprises do 
not have an incentive to remain small. The cap makes the effect on losses in tax reve-
nues foreseeable and enables tax legislators to determine up to which size enterprises 
shall  incur  significant  benefits  (without  implementing  explicit  size-related  restrictions 
to eligibility). Setting the maximum thresholds also allows active control of the gener-
osity of the tax credit and the related losses in tax revenues. 

5.3.  Favourable  R&D  incentives  for  all  enterprises  in  the  EU  and  other 

selected countries 

In the period from 2009 to 2013 all of the five types of tax incentives described above 
have been in place for R&D activities in the countries selected. Tables 5.2 and 5.3 pro-
vide  an  overview  of  existing  tax  incentives  for  research  and  development  in  the  20 
Member  States  and  the  five  non-EU  countries  examined  here.26  Footnotes  inform 
about the fundamental features of the incentives. Importantly, the tables do not cover 
incentives  that  are  applicable  for  all  kinds  of  investments  (e.g.  general  investment 
deductions) but only those specifically targeted at R&D activities. 

26 The 20 EU Member States comprise Austria, Belgium, Bulgaria, Croatia, Estonia, Finland, France, Germa-
ny, Greece, Ireland, Italy, Lithuania, Luxembourg, the Netherlands, Poland, Romania, Slovenia, Spain, Swe-
den and the United Kingdom. Additionally, Canada, China, Japan, Switzerland and the USA are included as 
non-EU countries. 

61 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Looking at the frequency of application, investment deductions and tax credits are the 
most  common  ways  of  incentivizing  R&D  activities.  19  out  of  25  countries  have  at 
least one deduction or credit in place. Mostly, the incentives are volume-based, which 
means  that  all  qualifying  expenditure  is  considered  in  determining  the  deductible 
amounts. Only six countries use incremental measures. In these cases, only expendi-
ture  beyond  a  certain  base  amount  (usually  an  average  of  expenditure  in  previous 
years) enters the calculation. The majority of credits and allowances refer to revenue 
expenditure  such  as  material  costs  and  personnel  costs  (26  out  of  38  measures  cur-
rently in  place).  Only  12  out  of  38  consider  capital  expenditure  (investments  in  fixed 
assets) whereas 25 incentives from this category include contract research. Frequent-
ly, multiple kinds of expenditure are included. Four provisions exclusively refer to ex-
penses  on  personnel  employed  in  R&D.  Looking  at  deductible  percentages,  most  tax 
credits range between 10% and 40%, whereas deductions exceed percentages of 50% 
in many cases. Deductions are especially high when only revenue expenditure is con-
sidered  (99.5%  on  average  in  contrast  to  67.1%  for  allowances  including  capital  ex-
penditure). Some countries also offer tax credits and allowances as mutually exclusive 
alternatives (e.g. Austria, Belgium, and the UK). 

Accelerated depreciation schemes are another commonly used measure to incentivize 
R&D  activities  (applied  in  12  out  of  25  countries).  As  the  schemes  refer  to  different 
assets, it is difficult to identify a typical range of depreciation rates. The percentages 
range from 10% (Spain; refers to buildings only) to 100% (= immediate depreciation) 
and  two  countries  even  allow  free  depreciation.  Eligible  assets  comprise  equipment 
and  machinery  in  almost  all  countries.  Intangibles  are  mostly  included,  buildings  in 
about half of the cases and land only once. 

Income exemptions and special tax rates constitute the last major group of tax incen-
tives  for  R&D  activities.  In  Europe,  these  forms  of  relief  are  usually  established  for 
income  from  intellectual  property  (IP-Box  regimes).  Currently,  7  of  the  25  countries 
have such regimes in place. The reduction of tax payments usually amounts from 50% 
to  80%  (the  Netherlands,  Spain  and  the  UK  have  extended  their  incentives  recently, 
whereas  Ireland  repealed  its  IP-Box  in  2010).  There  are  no  such  regimes  outside  of 
Europe.  China  and  Japan  exempt  the  income  of  entities  exclusively  engaged  in  R&D 
instead. 

All in all, most countries have established some form of tax incentive for R&D activities 
(only Bulgaria, Estonia, Germany and Sweden have not). Existing incentives, by trend, 
have  become  more  generous  during  the  last  years.  Especially  extensive  reliefs  are 
available in Belgium, France, the Netherlands, Spain and the UK. Compared to the EU, 
non-European countries target more specific fields of R&D with their incentives. Final-
ly, it is noteworthy that only few countries (France, the UK, Canada and Japan) differ-
entiate between SMEs and LSEs with respect to R&D incentives. 

5.4.  SME taxation in Europe and in other selected countries 

An  overview  of  all incentive  schemes  for  SMEs  that have  been  in  place  from  2009  to 
2013  is  displayed  in  Tables  5.4  and  5.5.  The  same  five  kinds  of  tax  incentives  that 
were provided to R&D activities can be distinguished with regard to SMEs. Interesting-
ly, special tax rates are the most common form among the examined countries with a 
total  of  12  countries  having  such  provisions  in  place  for  SMEs.  Accelerated  deprecia-
tion schemes (6 countries), investment deductions (6), exemptions (4) and tax credits 
(4) are less prevalent. 

62 

 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Each  accelerated  depreciation  scheme  increases  the  normal  depreciation  rate  by  at 
least 50%. The scope of application is usually very restricted, though, as only micro or 
very small corporations or only certain regions, activities or assets are affected. Over-
seas,  the  USA  employs  a  widely  applicable  option  for  immediate  depreciation  as  the 
only major incentive for SMEs. 

Investment  allowances  for  SMEs  play  a  minor  role  in  almost  all  of  the  25  countries. 
Only Belgium offers a scheme that most small corporations are eligible for. The Neth-
erlands and the USA provide general investment allowances for all corporations, which 
phase  out  beyond  a  certain  amount  of  investment.  SMEs  therefore  enjoy  a  stronger 
relief. The applicable rates of the allowances vary between 0.5% and 125%, which is 
due to the diversity of calculation bases. Generally, rates tend to be high if the qualify-
ing expenditure is rather limited and vice versa. 

The application of tax credits for SMEs is even less common than applying investment 
deductions. As for the latter, eligibility is usually restricted to very specific regions and 
activities. The  rates reach from 5% to 20% and the credits mostly refer to capital or 
revenue  expenditure.  Occasionally,  tax  credits  are  tied  to  conditions  concerning  em-
ployment levels. 

Special  tax  rates  are  by  far  the  most  popular  tax  relief  for  SMEs.  They  differ  signifi-
cantly  in  their  generosity,  though.  While  Luxembourg  offers  a  very  small  discount  of 
1% up to a comparably low threshold of 15,000 EUR, small and especially micro cor-
porations  in  other  countries  might  face  tax  rates  of  less  than  50%  of  the  standard 
rate.  In most cases, the reduced  rates amount to 50%  - 80% of the  LSE  rate. Com-
pared to other incentives, special tax rates are less frequently limited to certain activi-
ties or regions. They are, however, exclusively targeted at micro corporations in many 
countries (not at small and medium-sized ones). A particular regime can be  found in 
Romania where micro corporations can elect to be taxed on turnover. 

Exempt income regimes are less prevalent than special tax rates. Like the other incen-
tives,  they  are  predominantly  restricted  to  very  limited  circumstances.  Mostly,  they 
occur in the form of investment reserves that need to be reinvested 

5.5.  Summary of results: general trends and patterns 

Comparing tax incentives for SME and R&D activities, SMEs receive considerably fewer 
tax  reliefs.  Countries  with  various incentives  in  place  are  Belgium,  Spain, France  and 
Japan. On the other hand do not have any special regimes for SMEs at all. In addition, 
the following noteworthy trends can be observed: 

  Despite their unfavourable properties, special tax rates are the predominant tax 
measure  to  support  SMEs.  All  other  instruments  are  very  limited in  their  scope 
of  application.  They  can  therefore  be  expected  to  serve  the  promotion  of  very 
specific activities, regions and taxpayers. R&D activities benefit more frequently 
from  tax  credits  and  allowances,  which  exhibit  more  favourable  characteristics 
for tax legislators as well as investors. 

  Member States do not uniformly limit the eligibility to tax incentives for SMEs by 
referring  to  the  criteria  employed  in  the  SME  definition  by  the  European  Com-
mission  (i.e.  the  number  of  employees,  turnover  and  the  balance  sheet  total). 
Special tax rates are usually bound to income thresholds. The non-EU countries 
mostly  relate  their  SME  incentives  to  equity  thresholds.  Irrespective  of  which 
size criteria are applied, they are associated to the danger of incentivizing corpo-

63 

 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

rations to not grow beyond the threshold. If this effect really kicks in in practice, 
has  not  been  empirically  answered  yet.  For  the  personal  income  tax  (PIT), 
bunching  of  self-employed  entrepreneurs  below  thresholds  has  been  observed, 
though, and is likely to also occur for corporations27. 

  Discrimination between medium-sized, small and micro enterprises takes place. 
In  the  Member  States  examined,  12  incentives  currently  target  all  SMEs  (= 
32%), 16 mainly small and micro enterprises (= 42%) and 9 micro enterprises 
only (= 23%; for one regime no clear assignment was possible).28 Exclusive eli-
gibility for micro enterprises primarily occurs for specific tax rates. 

  Seven countries connect at least some of their SME incentives to criteria relating 
to  the  level  of  employment  and  four  countries  limit  at  least  some  of  their  SME 
incentives to newly founded enterprises. 

  Differentiation  of  LSEs  and  SMEs  with  respect  to  R&D  tax  incentives  rarely  oc-
curs (e.g. France, the  UK, Canada,  and Japan). Benefits from the generally ap-
plicable  R&D  incentives,  however,  might  frequently  be  larger  for  them  because 
they are less likely to be subject to restrictions on maximum permissible reliefs. 
If  and  to  which  extent  the  abovementioned  tax  incentives  for  SMEs  really  de-
crease the effective tax burdens of SMEs cannot be assessed solely based on the 
qualitative analysis. It is thus necessary to quantitatively capture the incentives, 
which is done in the upcoming sections of the report. 

 

27 Recent  papers  that  show  taxpayers’  bunching  below  thresholds 
include  Saez  (2010),  Chet-
ty/Friedman/Olsen/Pistaferri  (2011)  and  Kleven/Waseem  (2014).  The  bunching  could  be  due  to  income 
shifting  as  well  as  real  economic  effects,  i.e.  an  actual  slowdown  of  enterprise  growth.  Almunia/Lopez-
Rodriguez (2014) examine bunching for Spanish corporations. They – while covering another time period - 
do not discover bunching at the thresholds that are in place for the SME tax incentives included in this study 
but only at a threshold determining about the tax audit status of a corporation.   
28 See Annex 1 (section 4.1) for the underlying summary statistics on the availability of SME as well as R&D 
tax incentives in the sample countries. 

64 

 
 
 
 
                                                 
– An empirical study of applied corporate income taxation for SMEs compared to large enterprises 

SME taxation in Europe 

Table 5.2 R&D tax incentives in 20 Member States for both LSEs and SMEs 
Option to capi-
talize R&D 
expense 

Accelerated 
depreciation 

Investment 
deductions 

Tax credits 

Country 

Exempt in-
come 

Austria 

- 

Belgium 

Bulgaria 

Croatia 

Estonia 

Finland 

France 

Germany 

Greece 

33.33%1, 4 
[20%/10%] 

- 

- 

- 

20%2  

[7%/4%] 

250/200/150%1, 4, 
5, 7 

[225/175/125%] 

- 

- 

- 

- 

- 

- 

- 

25%8, 10, 11, 32 
35%9, 10, 28, 32 
25%8, 12, 23, 32 

14.5%8, 10, 34 
€15,05014, 33 

- 

150/125/100/ 
75%8, 11, 12, 33 

- 

2-10 years 

100%13, 23, 31 

2-5 years 

- 

- 

- 

2-5 years 

50%9, 11, 12 

Ireland 

100%1, 2, 3, 4 

- 

- 

Italy 

- 

5 years 

Lithuania 

Luxembourg 

≥50%1, 2, 4 

133.3%1, 5 

The Netherlands 

Free depr.1, 4 

- 

- 

- 

100%8, 10, 11, 28, 
33 

200%8, 11, 12 

- 

54%8, 10, 11, 31, 
33 

Poland 

- 

≥1 year 

50%8, 12, 23 

10%8, 10, 11, 12, 31 

- 

100%8, 15 

80%16 

- 

- 

- 

- 

- 

- 

- 

- 

Special 
tax rates 

- 

- 

- 

- 

- 

- 

30/5%8, 11, 24 
60/10%8, 12, 23, 24 
20%8, 11, 23, 26, 28, 31 

100/50%21, 34 

15.5%16 
[34.43%] 

- 

- 

- 

- 

25%8, 10, 11, 12, 23, 31 
25%9, 10, 11 12, 33 
25%8, 10, 30, 33 

35%8, 13, 14, 23, 31 
90%9, 12, 31 
10%8, 10, 11, 23, 32 
40%8, 12, 23, 32 

- 

- 

- 

- 

100%16, 23, 32 

- 

- 

80%16 

- 

20%19 

- 

- 

- 

- 

- 

- 

5%16, 33 

[25%] 

- 

65 

[…] - provision for activities not related to R&D 
Depreciation 
1  - machinery, equipment & furniture 
2  - buildings 
3  - land 
4  - intangibles 
5  - compared to ordinary straight-line rate 
6  - only for one year 
7  - declining-balance method 
Investment deductions/tax credits 
8  - volume-based 
9  - incremental 
10  - on capital expenditure 
11  - on revenue expenditure 
12  - on expenditure for contract research 
13  - on salaries of R&D staff 
14  - per employee hired in R&D 
15  - on WHT on patent income from abroad 
Exemptions/special tax rates: income 

from… 

16  - patents/intellectual property 
17  - technology trans-

fers/development/services 

18  - tax-free R&D reserve 
19  - certified research centers  
20  - institutions with R&D as statutory pur-

pose 

21  - innovative SMEs (activities in R&D zones) 

in first 2 (5) years of operations 
22  - R&D-centered technology corporations 
General Provisions 
23  - limited to certain amount 
24  - altered rate beyond threshold 
25  - higher rate only for corporations up to a 

certain size 

26  - only corporations up to a certain size 
27  - not in combination with certain other 

deductions/credits 

28  - only certain activities/fields of R&D 
29  - only in a certain region 
30  - expenditure on construc-
tion/refurbishment 

Changes during the observation period 
31  - introduced after 2009 
32  - repealed after 2009 
33  - amount/scope of the relief enhanced 
34  - amount/scope of the relief reduced 

 
 
 
– An empirical study of applied corporate income taxation for SMEs compared to large enterprises 

SME taxation in Europe 

Romania 

Slovenia 

50%1, 6 

33.33%1 [20%] 

- 

- 

50%8, 11, 33 

100%8, 10, 11, 12, 
33 

- 

- 

Spain 

Free depr.1, 4 
10%2 

5 years 

Sweden 

- 

The UK 

100%1, 2, 4 

- 

- 

- 

- 

8%8, 10, 34 
12%8, 10, 11, 12, 28, 33 
25/42%8/9, 11, 12 
17%13 

- 

30/125%8, 11, 
12, 23, 25 

10%8, 11, 12, 27, 31 

100%20 

- 

- 

60%16, 33 

- 

- 

Table 5.3 R&D tax incentives in non-5 EU countries for both LSEs and SMEs 
Option to capi-
talize R&D 
expense 

Accelerated 
depreciation 

Investment 
deductions 

Tax credits 

Country 

Exempt in-
come 

Canada  

100%1, 4 

China 

Japan 

Switzerland 

The USA 

- 

- 

- 

- 

- 

- 

- 

- 

5 years 

- 

20/35%8, 10, 11, 12, 
25, 34 

14.5% 8, 10, 11, 12, 26  

- 

50%8, 11, 12 

- 

100/50%17, 24 

- 

- 

- 

8-10/12%8, 11, 12, 
25 
5%9, 11, 12, 27 
0-20%9, 11, 12, 27 
2-4%8, 11, 12, 28 

- 

20%20, 27, 31 

100%18, 23 
80%16, 29 

20%9, 11, 12, 27, 28, 34 
14%9, 11, 12, 27, 28, 34 
20%9, 12, 28 
50%9, 11, 12, 28 

- 

- 

- 

- 

66 

- 

- 

- 

- 

10%16, 31, 33 

[23%] 

Special 
tax rates 

- 

15%22, 33 
[25%] 

[…] - provision for activities not related to R&D 
Depreciation 
1  - machinery, equipment & furniture 
2  - buildings 
3  - land 
4  - intangibles 
5  - compared to ordinary straight-line rate 
6  - only for one year 
7  - declining-balance method 
Investment deductions/tax credits 
8  - volume-based 
9  - incremental 
10  - on capital expenditure 
11  - on revenue expenditure 
12  - on expenditure for contract research 
13  - on salaries of R&D staff 
14  - per employee hired in R&D 
15  - on WHT on patent income from abroad 
Exemptions/special 

rates: 

tax 

income 

from… 

16  - patents/intellectual property 
17  - technology transfers/development/services 
18  - tax-free R&D reserve 
19  - certified research centers  
20  - institutions with R&D as statutory purpose 
21  - innovative SMEs (activities in R&D zones) in 

first 2 (5) years of operations 

22  - R&D-centered technology corporations 
General Provisions 
23  - limited to certain amount 
24  - altered rate beyond threshold 
25  - higher  rate  only  for  corporations  up  to  a 

certain size 

26  - only corporations up to a certain size 
27  - not  in  combination  with  certain  other  de-

ductions/credits 

28  - only certain activities/fields of R&D 
29  - only in a certain region 
30  - expenditure on construction/refurbishment 
Changes during the observation period 
31  - introduced after 2009 
32  - repealed after 2009 
33  - amount/scope of the relief enhanced 
34  - amount/scope of the relief reduced 

 
 
 
 
 
 
 
 
 
– An empirical study of applied corporate income taxation for SMEs compared to large enterprises 

SME taxation in Europe 

Table 5.4 Tax incentives targeted at SMEs in 20 Member States  

Country 

Austria 

Accelerated  

Investment  

Depreciation 

deductions 

- 

- 

Belgium 

200%4, 17, 28, 32/34 

Bulgaria 

Croatia 

Estonia 

Finland 

- 

- 

- 

150%4, 26, 27, 28 

France 

- 

11.5%7, 17, 23 
3,5%6, 17 [3%] 

- 

70/35%2, 26 
[50/25%] 

- 

- 

- 

Tax credits 

Exempt income 

- 

- 

- 

- 

- 

- 

- 

€37,50017, 35 

- 

- 

- 

- 

20%1, 25, 27 
0-15%9, 15, 23 
50%8, 15, 24, 26 
20% 2, 24, 26, 31  

100/50%3, 25, 28, 29, 
34 
100/50%11, 12, 17, 26 

Special tax 
rates 

- 

24.25-
33.33%12 

[33%] 

- 

10%15, 16, 31  

[20%] 

- 

- 

15%14, 17, 19 

 [34,43%] 
13%/23%16, 
21 

[34,43%] 

20%1, 16, 20, 28  

Additionally 

40%1, 35, 36 

Germany 

Greece 

Ireland 

Italy 

Lithuania 

Luxembourg 

The Netherlands 

- 

- 

- 

- 

- 

- 

Poland 

100%1, 16, 19, 25, 34 

Romania 

- 

- 

- 

- 

- 

- 

- 

- 

0-28%1, 13, 24, 25 

70%17/60%1/8, 
27, 31 [50%] 

- 

- 

- 

- 

- 

- 

- 

100%9, 17, 29, 36 
75%1, 22, 24, 25, 26 

- 

- 

25-45%1, 26, 34, 35  

15/20%30, 32  

[15-40%] 

[25%] 

- 

- 

5%16, 33  

[15%] 

20-21%12  

[21%] 

- 

- 

3%5, 16, 21 

€0-40,00021, 28, 29 

- 

- 

- 

- 

- 

- 

67 

[…] - equivalent provision for large corporations 
Quantification of relief 
1  - % refers to relevant capital expenditure 
2  - % refers to relevant revenue expenditure 
3  - % refers to taxable income 
4  - % refers to ordinary depreciation rate 
5  - % refers to turnover 
6  - % refers to company’s equity 
7  - % refers to amount of depreciation incurred 
8  - % refers to related personnel costs 
9  - % refers to income tax payable 
10  - % refers to local income tax payable 
11  - % refers to capital gains from sale of SME 
12  - progressive schedule 
13  - diminishing scale 
14  - reduced rate up to certain income threshold 
15  - relief based on employment level/hiring 
Size restrictions 
16  - only micro corporations  
17  - only small and micro corporations 
18  - extended SME definition  
19  - turnover threshold in place 
20  - equity threshold in place 
21  - income threshold in place 
22  - asset threshold in place 
23  - employment threshold in place 
24  - restricted to a certain amount of investment 
Other restrictions 
25  - only certain assets 
26  - only certain activities/purposes/transactions 
27  - only certain regions 
28  - only for 1 year (DE) / 2 years (FR) /  

  3 years (BE, FI, EI)  
29  - only new corporations  
30  - only newly merged corporations 
Changes during the observation period 
31  - introduced after 2009 
32  - repealed after 2009 
33  - increase of the size/scope of the relief 
34  - decrease of the size/scope of the relief 
Other specifications 
35  - investment reserve 
36  - only deferral of tax payments 

 
 
 
– An empirical study of applied corporate income taxation for SMEs compared to large enterprises 

SME taxation in Europe 

Slovenia 

- 

Spain 

Sweden 

The UK 

100%1, 15, 17, 19, 25, 
32 
300/200%4, 17, 19 

- 

- 

- 

- 

- 

125%2, 18, 26, 33  

[30%] 

- 

€3,00015, 17, 19, 23 
10%1, 17, 26 
6%1, 26, 32 

- 

- 

- 

- 

- 

- 

Table 5.5 Tax incentives targeted at SMEs in 5 non-EU countries 

Accelerated  

Investment  

Depreciation 

deductions 

Tax credits 

Exempt income 

Country 

Canada  

China 

Japan 

Switzerland 

- 

- 

- 

- 

The USA 

100%1, 24, 33 

- 

- 

- 

- 

- 

- 

- 

12%2, 20, 26 [8-
10%] 

7%1, 20, 25 

Y 200,00015, 20, 
23 

- 

- 

- 

- 

- 

- 

- 

68 

- 

20%14, 15, 17, 
19, 23, 31/ 
25%15, 17, 19, 
23/  
25%14, 17, 19, 
33/ 
24%17, 19, 27 
[30%/28%27
] 

- 

20%14, 33 
[23%] 
19%14, 25, 26 
[30%] 

Special tax 
rates 

15.5%14, 20 
[25%] 

20%21, 22, 23 
[25%] 

15%14, 20, 34 
[25,5%] 

81%10, 20 
[148%] 

- 

- 

[…] - equivalent provision for large corporations 
Quantification of relief 
1  - % refers to relevant capital expenditure 
2  - % refers to relevant revenue expenditure 
3  - % refers to taxable income 
4  - % refers to ordinary depreciation rate 
5  - % refers to turnover 
6  - % refers to company’s equity 
7  - % refers to amount of depreciation 
8  - % refers to related personnel costs 
9  - % refers to income tax payable 
10  - % refers to local income tax payable 
11  - % refers to capital gains from sale of SME 
12  - progressive schedule 
13  - diminishing scale 
14  - reduced rate up to certain income threshold 
15  - relief based on employment level/hiring 
Size restrictions 
16  - only micro corporations  
17  - only small and micro corporations 
18  - extended SME definition  
19  - turnover threshold in place 
20  - equity threshold in place 
21  - income threshold in place 
22  - asset threshold in place 
23  - employment threshold in place 
24  - restricted to a certain amount of investment 
Other restrictions 
25  - only certain assets 
26  - only certain activities and purposes 
27  - only certain regions 
28  - only for 1 year (DE) / 2 years (FR) /  

  3 years (BE, FI, EI)  
29  - only new corporations  
30  - only newly merged corporations  
Changes during the observation period 
31  - introduced after 2009 
32  - repealed after 2009 
33  - increase of the size/scope of the relief 
34  - decrease of the size/scope of the relief 
Other specifications 
35  - investment reserve 
36  - only deferral of tax payments 

 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.  EFFECTIVE TAX BURDENS FOR SMES COMPARED TO LSES US-

ING THE EUROPEAN TAX ANALYZER 

The  European  Tax  Analyzer  is  based  on  a  multi-period  model  enterprise  approach  to 
compute  effective  tax  burdens.  The  model  enterprise  can  take  any  legal  form,  i.e.  it 
can  be  either  a  transparent  enterprise  or  an  incorporated  enterprise.  The  following 
analysis  considers  an  incorporated  enterprise,  i.e.  a  corporation.  Therefore,  the  term 
“model  enterprise”  will be  used  for  the  general  description  of  the  European  Tax  Ana-
lyzer whereas the term “model corporation” relates to the actual models used for this 
study in the following. The model enterprise approach allows a highly detailed quanti-
tative analysis of effective tax burdens across the selected countries in general as well 
as of the effect of SME tax incentives. The analysis conducted with the European Tax 
Analyzer  can  be  mainly  divided  into  two  parts.  In  the  first  part,  different  size-
dependent  model  corporations  are  generated  by  using  the  AMADEUS  database.29  For 
the determination of micro, small, medium-sized as well as large model corporations, 
we apply the EU recommendation 2003/361 for micro, small and medium-sized enter-
prises.30  In  the  second  part  of  the  analysis,  the  impact  of  SME  tax  incentives  which 
have been elaborated in the first part of the analysis on the effective tax burden of the 
model corporations are  calculated (Section 6.3). Here, the country-specific conditions 
concerning the eligibility for SME tax incentives are applied. The underlying prerequi-
sites  are  described  in  Section  6.2  and  in  Annex  1  (section  5)  of  this  report.  In  most 
countries, the conditions for SME tax incentives differ from the conditions set out in EU 
recommendation 2003/361. 

6.1.  The European Tax Analyzer 

6.1.1.  Description of the European Tax Analyzer 

The European Tax Analyzer is a computer program for a model enterprise that calcu-
lates  and  compares  effective  average  tax  burdens  for  enterprises  located  in  different 
jurisdictions.31 We consider 20 Member States displayed in Table 6.1. 

Table 6.1 The EU-countries considered in the study 

Austria 
Belgium 
Bulgaria 
Croatia 
Estonia 

Finland 
France 
Germany 
Greece 
Ireland 

Italy 
Luxembourg 
Lithuania 
The Netherlands  Spain 
Poland 

Romania 
Slovenia 
Sweden 

The UK 

As the standard model enterprise with regard to this study is a corporation, the rele-
vant  tax  rules  have  to  be  implemented  for  the  corporate  level  and  the  shareholder 
level. Therefore, the effective tax burden is computed at corporate level (i.e. ignoring 
shareholder  taxes)  and  the  overall  level  (i.e.  combining  corporate  and  shareholder 
taxes). Differences in tax rules, e.g. with regard to depreciation, are highly important 

29 A detailed description of this process can be found in Annex 1 (section 5.1)  
30 The detailed description of EU recommendation 2003/361 can be found in section 5.1. 
31 Among others, the model has been already approved by two earlier studies conducted for the European 
Commission. See Jacobs/Spengel (2000); Spengel/Oestreicher/Reister/Ernst/Finke/Grünewald (2008).  

69 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

for  enterprises  and  become  more  visible  in  a  multi-period  approach.  Therefore,  the 
simulation  takes  into  account  ten  periods.  It  is  important  to  differentiate  the  simula-
tion  (ten  hypothetical  periods)  from  the  tax  codes  for  2009-2013  regarded  in  this 
study.  Each  country-specific tax code for  each year (2009-2013) is separately imple-
mented  in  the  simulation  and  applied  for  the  ten  simulation  periods  in  the  European 
Tax  Analyzer.  This  assures  that  effects  of  changes  in  tax  rules  (e.g.  if  depreciation 
rules are changing from 2009 to 2010) can be better displayed and analysed.  

It should be noted here that the European Tax Analyzer allows implementing tax ba-
ses  in  a  very  detailed  manner.32  Hence,  we  are  able  to  take  into  account  differences 
with regard to the following elements of the tax base:  

-  Depreciation (e.g. pool and individual depreciation schemes, depreciation peri-

ods for all relevant assets); 

-  Stock  valuation  (valuation  method,  i.e.  last-in,  first-out  (LIFO),  first-in,  first-

out (FIFO), weighted average cost method; production costs); 

-  Research and development costs (i.e. immediately expensed or capitalized);  

-  Employee pension schemes (i.e. deductibility of pension costs, contributions to 

pension funds); 

-  Provisions for bad debt and guarantee accruals; 

-  Elimination or mitigation of double taxation on foreign-source income  (i.e. ex-

emption method, tax credit, deduction of foreign taxes); 

-  Thin capitalization rules, earnings stripping rules; 

-  Non-deductible items (e.g. non-deductible taxes); 

-  Notional interest deductions; and 

-  Loss relief (carry-back and carry-forward) 

Additionally  and  considering  the  focus  of  this  study,  it  is  also  possible  to  implement 
SME  and  R&D-related  tax  incentives  with  their  respective  country-specific  thresholds 
(balance sheet total, sales or number of employees) in great detail. 

In considering differences in tax bases across the countries in our sample, we draw on 
a study conducted by the Centre for European Economic Research (ZEW), the Univer-
sity of Mannheim and Ernst & Young.33 This study comprises an extensive international 
comparison  of  tax  accounting  regulations  in  the  EU  Member  States,  Switzerland  and 
the U.S. which enables us to comprehensively consider such differences in tax codes in 
our computations with the European Tax Analyzer.     

We use  financial data from  corporations across all EU-28 Member States provided by 
the  AMADEUS  database  to  arrive  at  an  EU-28  average  corporation.  In  essence,  we 
generate  24  different  EU-28  average  corporations  with  regard  to  a  broad  base  case 

32 For a more detailed description, see Spengel/Zinn (2011), p. 500. 
33 See Spengel/Zöllkau (2012). 

70 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

(average  over different industries) and five different industries (manufacturing, ener-
gy,  construction,  commerce  and  hotels  &  restaurants)  for  four  different  sizes  (large, 
medium-sized,  small  and  micro).  Each  of  these  EU-28  average  corporations  will  be 
applied for the computation of effective tax burdens in the 20 Member States consid-
ered in this study.  

At  the  beginning  of  the  simulation,  an initial  capital  stock  has  to  be  defined.  The  de-
velopment of the balance sheet, sales and other figures for further periods is based on 
corporate planning parameters which are also defined at the beginning of the simula-
tion and implemented into the European Tax Analyzer model. 

1)  Initial capital: The initial capital is described by a balance sheet; total assets 
are divided in fixed assets and current assets. The fixed assets contain real es-
tate, machinery, office equipment, intangibles and financial assets. Inventories, 
trade receivables and cash are sub-items of current assets. Liabilities consist of 
equity, long-term and short-term debt and trade creditors. 

2)  Development of the corporation: The corporate planning estimators are im-
portant  for  the  development  of  the  corporation  over  the  ten-year  simulation 
period.  Besides  macroeconomic  data  such  as  interest  rates  (short-  and  long-
term rates for debtor and creditor) and price increases (primary products, gen-
eral inflation, wages, real estate and investment goods), several data concern-
ing the structure and costs for employees as well as R&D costs have to be de-
fined. For depreciable assets, it is generally assumed that they are disposed at 
the end of their useful life and replaced by an identical asset. The replacement 
costs are thereby adjusted for inflation. 

3)  Corporate Finance: The initial financial resources consist of a mixture of debt 
and equity. After each period, a dividend is distributed to the shareholders. Un-
distributed after-tax profits are retained earnings and can also serve as a fur-
ther source for acquiring new assets or financing the corporation in general 

As  the  initial  capital  stock  and  the  predefined  parameters  are  the  same  for  all  coun-
tries,  the  corporations  will  have  identical  figures  (balance  sheet,  profit-  &  loss-
statement and liquidity) before applying any national tax code. Stated differently, the 
chosen  approach  assures  that  differences  at  the  end  of  the  ten  periods  are  solely 
caused  by  different  country-specific  tax  rules  and  are  not  affected  by  different  coun-
try-specific non-tax data. This is a necessary and well-known assumption for all model 
comparisons of effective tax burdens. The implementation of a whole model  corpora-
tion  allows  the  consideration  of  progressive  tax  rates,  other  complex  tax  rules  as  in-
terest deduction limitations and taxes that are  based  on a special tax base (e.g.  real 
estate tax, payroll tax). 

6.1.2.  Effective average tax burden (corporate level) 

The European Tax Analyzer can be used to calculate the pre-tax and post-tax value of 
the corporation at the end of each period. The value of the corporation is represented 
by the estimated cash flows and the value of the net assets at the end of the simula-
tion period. Cash flow (liquidity) is defined as the net total of cash receipts (sales, in-
terest, dividends and other) and cash expenses (material costs, salaries) in each peri-
od. The value of the assets has to be adjusted at the end of the simulation as during 
the  ten  periods,  hidden  reserves  are  accrued.  The  historical  acquisition  costs  do  not 
reflect  the  fair  value  of  the  assets  and  hidden  reserves  are  added  to  the  taxable  in-

71 

 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

come in period ten and taxed accordingly. Remaining loss carry forwards at the end of 
period ten also have a certain value for the corporation as they would lower the taxa-
ble income of future periods. As our simulation stops in period 10, we add 50% of the 
unused loss carry forwards to the equity value in countries without constraints to the 
utilization  of  losses.  If  there  is,  however,  a  constraint  for  loss  carry  forwards  (e.g.  if 
the loss carry forward is limited in time), we use a rate of 25%. 

   Pre-tax cash flow at the end of the simulation period 
+ Value of the net assets at the end of the simulation period 

= Pre-tax value of the enterprise at the end of the simulation period 

The post-tax value is calculated in a similar way, but taking into account the different 
tax rules in each country. Tax liabilities are paid in the same period as they accrue and 
result in an immediate cash expense. The adjustment of the assets to their fair market 
value  at  the  end  of  the  simulation  period  can  result  in  additional  tax  liabilities.  The 
procedure can be summarised as follows: 

      Pre-tax cash flow at the end of the simulation period 
-     Tax liabilities in each period 

=    Post-tax cash flow at the end of the simulation period 
+    Value of the net assets at the end of the simulation period 
-/+ Tax liabilities/ tax refunds on hidden reserves 

=    Post-tax value of the enterprise at the end of the  simulation period 

The effective tax burden is determined by the difference of pre-tax and post-tax value 
of the corporation at the end of the ten years simulation period. This multi-period ap-
proach  assures  that  the  tax  liability  also  includes  effects  which  only  arise  in  the  long 
term  (e.g.  the  consequences  of  different  depreciation  rules  as  well  as  liquidity  and 
interest effects). 

  Pre-tax value of the enterprise at the end of the simulation period 
- Post-tax value of the enterprise at the end of the simulation period 

=   Effective average tax burden on corporate level 

6.1.3.  Overall  effective  average  tax  burden  (corporate  and  share-

holder level) 

The shareholder level is represented by different shareholders (single natural persons) 
with  different  participation  quotas.  Shareholders  receive  annual  dividend  payments 
from  their  participation  in  the  corporation  and  interest  payments  from  shareholder 
loans. The cash flow received in each period is assumed to be put into a bank account 
and earns an additional interest  from savings. This accrued cash flow, the sharehold-
ing  in  the  model  corporation  and  the  shareholder  loan  represents  the  total  pre-tax 
value of wealth of the shareholders in the simulation. 

72 

 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Similar  to  the  effective  average  tax  burden  on  corporate  level,  the  post-tax  value  is 
calculated in the same manner and the cash flow is adjusted for the different tax rules 
in each country. Apart from  PIT, we  can also implement wealth taxes on shareholder 
level. 

   Pre-tax value of wealth of the shareholders at the end of the simulation period 
- Post-tax value of wealth of the shareholders at the end of the simulation period 

= Effective average tax burden on shareholder level 

The overall effective average tax burden is the sum of the effective average tax bur-
den on corporate and shareholder level. 

   Effective average tax burden on corporate level 
+ Effective average tax burden on shareholder level  

= Overall effective average tax burden  

6.1.4.  Model corporations 

The generation of the model corporations used in this  study is a process with several 
steps and assumptions. Data from the AMADEUS database is the base for the model-
ling of the balance sheet and profit- and loss-statement in period 6 of the simulation. 

The choice of period 6 can be explained by the following: As described in the previous 
subsection  the  European  Tax  Analyzer  assumes  a  newly  founded  corporation  with  an 
initial capital stock at the beginning of the simulation (i.e. period 1). The data gener-
ated  from  AMADEUS,  however,  contains  several  positions  that  typically  are  results  of 
an ongoing business activity (of an established enterprise). Therefore, we use a period 
quite in the middle of our total simulation period. 

24  different  model  corporations  have  been  generated  for  this  study  (see  Section 
6.1.1).  They  consist  of  the  four  size  categories  (large,  medium-sized,  small,  and  mi-
cro) described by EU recommendation 2003/361/EC with each category containing an 
average base case plus five sector-specific models (manufacturing, energy, construc-
tion,  commerce,  hotels  &  restaurants).  Each  corporation  is  based  on  aggregated  en-
terprise data of all EU-28 Member States. 

One should keep in mind that the calculated effective tax burden is only valid for the 
generated  model  corporation.  For  the  validation  of  the  results,  a  sensitivity  analysis 
based on the four average base case model corporations is conducted in addition. Tak-
ing  the  figures  of  the  average  base  case  model  corporation  in  period  6  as  a  starting 
point, the profitability, capital intensity, equity ratio and labour intensity are therefore 
modified  separately.  Each  of  these  model  corporations  can  be  understood  as  distinct 
model  corporations  and  the  same  calculations  for  the  effective  tax  burden  are  analo-
gously carried out compared to the average base case. 

A  detailed  description  of  the  process  (model  corporation  generation  and  sensitivity 
analysis)  as  well  as  the  final  balance  sheet  and  profit  and  loss  account  for  the  24 
model corporations can be found in Annex 1, section 5.1. 

73 

 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.2.  Overview of tax incentives (R&D & SME incentives) 

The different provisions for R&D and SME tax incentives which have been implemented 
in  the  European  Tax  Analyzer  and  are  considered  for  the  calculation  of  the  effective 
tax  burden  are  based  on  Section  5.  They  can  be  found  with  a  detailed  description  in 
Annex 1 (sections 5.2 and 5.3). Both sections contain the rules for the tax years 2009 
to 2013 and are separated by incentives related to the tax base (depreciation, allow-
ances and deductions), the tax rate (special tax rates) and the tax liability (tax cred-
its, temporary exemptions from tax). R&D related provisions are in most cases availa-
ble for both LSEs and SMEs independent from size categories. 

6.3.  Comparison of effective tax burdens 

The calculation of the effective tax burdens has been conducted for multiple cases (dif-
ferent size categories and sectors). This outline contains an overview of the details of 
our quantitative analysis with the European Tax Analyzer: 

  We  consider  model corporations of 4 different size categories: a LSE  as well as 

SMEs classified as medium-sized, small and micro. 

  We regard the fiscal years 2009 to 2013. 
  The  implemented  R&D  and  SME  incentives  are  those  outlined  in  Section  5.2 
above and in Annex 1 (sections 5.2 and 5.3). We divide their overall effects into 
effects related to the tax base, the tax rate and the tax liability (tax credits). 
  As  regards  the  LSEs,  we  only  calculate  the  effective  tax  burdens  resulting  at 

corporate level. 

  For  the  SMEs,  we  compute  both  the  effective  tax  burden  at  corporate  level  as 

well as the overall tax burden including shareholder taxes. 

  This section focuses on the effective tax burdens for the base cases (large, me-
dium-sized, small, and micro). The effective tax burdens for the sensitivity anal-
yses  and  business  sectors  are  contained  in  Annex  1  (sections  5.5  to  5.8)  and 
show  for  the  corporations  of  all  regarded  size  categories  how  varying  assump-
tions  on  the  profitability,  capital  intensity,  equity  ratio,  labour  intensity  and  in-
dustry  affiliation  impact  the  effective  tax  burden  at  corporate  level.  Moreover, 
for the SMEs, a sensitivity analysis on how varying assumptions about the capi-
tal structure impact the overall tax burden (including shareholder taxation) is in-
cluded. 

It is important to highlight that the application of tax incentives for SMEs is based on 
the country-specific limitations and requirements (see Annex 1, sections 5.2 and 5.3). 
The  EU  recommendation  2003/361  was  taken  into  account  for  the  calculation  of  the 
model corporations described in Section 6.1 and Annex 1 (section 5.1). 

The model corporations generated in Section 6.1 are used to compute the effective tax 
burden  for  each  of  the  five  different  years  and  four  enterprise  sizes.  As  outlined 
above,  this  part  of  the  report  concentrates  on  the  base  cases.34In  most  sections 
(large, small, micro), two kinds of tables will display the results of our calculations for 

34 The results of the sensitivity analyses (different industries, change of single corporate parameters such as 
capital structure) can be found in Annex 1 (sections 5.5 to 5.8). 

74 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

the corporate level: The first one provides an overview of the results applying the ap-
plicable tax rules of the fiscal year 2013 for all countries considered in this study. The 
second table will only contain some  selected countries exhibiting interesting develop-
ments over the entire time period of 2009-2013 (i.e. applying the applicable tax rules 
for  each  of  these  five  years  in  a  row).  The  overall  tax  burden  including  shareholder 
taxes  for  the  medium-sized,  small  and  micro  corporations  is  presented  in  a  separate 
table for the fiscal year 2013.35  

In the following subsections, the results for the different size categories are presented. 
For  a  complete  comparison  and  judgement,  the  following  differences  of  implemented 
regulations have to be kept in mind: 

1.  The  LSEs  (only  corporate  level)  is  considered  in  a  base  case  situation  and  is 
combined  with  specific  R&D-incentives  for  each  fiscal  year.  Those  R&D  incen-
tives and their  effects on the total tax burden are calculated in aggregate and 
are partitioned into tax base, tax rate and tax liability effects. 

2.  For SMEs (corporate level), four different cases have to be considered for each 
fiscal  year.  The  first  calculation is  based  on  exactly  the  same  tax  code  as  ap-
plied to the LSEs and serves as a benchmark. This procedure assures that SME-
specific tax incentives (e.g. reductions of tax bases, tax rates and tax liabilities) 
and their effects can be properly measured and related to the benchmark with-
out  any  incentive.  In  a  second  step,  the  general  tax  codes  are  adjusted  for 
SME-specific  provisions.  The  application  of  the  general  tax  code  (benchmark 
case) in combination with all possible R&D incentives constitutes the third case. 
It  includes  general  R&D-incentives  available  to  all  enterprises  as  well as  SME-
specific R&D incentives. This combination allows comparing the impact of R&D 
incentives for LSEs  vs.  medium-sized, small and micro  corporations.  In a final 
step, the SME-specific tax code (second case) is combined with R&D incentives 
to  assess  the  total  tax  relief  derived  from  a  simultaneous  application  of  both 
kinds  of  incentives.  The  effects  of  the  final  combination  of  SME  and  R&D-
incentives are again analysed and divided in tax base, tax rate and tax liability 
effects. 

3.  The overall tax burden for SMEs (corporate and shareholder level) is presented 
in  a  slightly  different  manner.  Here,  four  cases  have  to  be  distinguished.  The 
first calculation contains the tax code applicable for LSEs and can be seen as a 
benchmark. In the second case, SME and R&D-incentives are included and the 
total  effect  of  such  provisions  is  calculated  to  analyse  the  impact  of  SME  and 
R&D-incentives. Furthermore, the rank of the single countries in those two cas-
es  can  be  compared  to  the  rank  considering  only  the  corporate  level.  Such  a 
comparison aims at identifying countries having low taxes for corporations and 
higher  individual  taxes.  As  a  third  and  fourth  case,  a  sensitivity  analysis  fo-
cused  on  the  equity  ratio  is  conducted.  The  results  for  the  extreme  cases  (an 
increase and decrease of 30% of the base case equity ratio) are presented and 
can be used to analyse the impact of different capital structures. This is espe-
cially important as SMEs often face more difficult access to external finance and 
have to rely more heavily on internal financing funds (i.e. retained earnings). 

35 Annex 1 (section 5.4: corporate level and section 5.9: overall level, i.e. corporate and shareholder levels) 
contains complete and very detailed tables for each year and size categories for the base cases. 

75 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.3.1.  LSEs 

6.3.1.1.  Effective tax burden 2013 (corporate level) 

Table  6.2  displays  the  effective  tax  burdens  for  a  model  LSE  under  the  general  tax 
code regimes as well as the  combination of the general tax code and R&D incentives 
for  the  fiscal  year  2013.  The  last  columns  contain  a  specific  division  in  tax  base  and 
tax credit effects of the single R&D-provisions36. 

Table 6.2 Effective tax burden (10 periods, corporate level, model LSE, fiscal 
year 2013) 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

Germany 

Greece  

Ireland 

Italy 

Lithuania 

General Tax 
Code (large) 

Tax Burden 
(€) 

Rank 

52,771,208 

54,168,834 

16,996,329 

32,564,895 

34,571,589 

41,368,771 

78,090,960 

53,434,468 

43,896,744 

22,501,512 

56,573,404 

28,234,532 

15 

17 

1 

6 

8 

10 

20 

16 

13 

2 

18 

5 

14 

11 

7 

3 

4 

19 

9 

12 

R&D Incentives 

All incentives 

Tax base incentives 

Tax liability incentives 

Tax Burden 
(€) 

Total 
Effect 

Rank 

Tax Burden 
(€) 

Isolated 
Effect 

Tax Burden 
(€) 

Isolated 
Effect 

50,785,976 

-3.76% 

53,126,038 

-1.93% 

16,996,329 

- 

27,634,341 

-15.14% 

34,571,589 

- 

38,584,338 

-6,73% 

74,135,453 

-5.07% 

53,434,468 

- 

43,035,140 

-1.96% 

20,390,438 

-9.38% 

54,073,193 

-4.42% 

22,745,714 

-19.44% 

50,339,264 

-0.98% 

15 

16 

1 

6 

8 

11 

20 

17 

13 

2 

18 

3 

14 

52,771,208 

- 

50,785,976 

-3.76% 

53,126,038 

-1.93% 

54,168,834 

16,996,329 

- 

16,996,329 

27,634,341 

-15.14% 

32,564,895 

34,571,589 

- 

34,571,589 

38,584,338 

-6,73% 

41,368,771 

- 

- 

- 

- 

- 

77,949,326 

-0.18% 

74,277,089 

-4.88% 

53,434,468 

- 

53,434,468 

43,035,140 

-1.96% 

43,896,744 

- 

- 

21,671,664 

-3.69% 

21,220,289 

-5.69% 

56,162,562 

-0.73% 

54,484,035 

-3.69% 

22,745,714 

-19.44% 

28,234,532 

50,339,264 

-0.98% 

50,838,649 

- 

- 

38,930,286 

-6.23% 

12 

40,186,253 

-3.20% 

40,259,602 

-3.03% 

32,877,089 

- 

25,914,327 

-5.47% 

24,201,738 

-13.42% 

54,944,564 

-5.48% 

36,866,963 

- 

38,389,124 

-7.68% 

7 

5 

4 

19 

9 

10 

32,877,089 

- 

32,877,089 

25,914,327 

-5.47% 

27,413,142 

24,201,738 

-13.42% 

27,954,026 

- 

- 

- 

57,945,188 

-0.32% 

55,128,410 

-5.16% 

36,866,963 

- 

36,866,963 

- 

40,211,801 

-3.30% 

39,760,190 

-4.38% 

Luxembourg  

50,838,649 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

41,515,570 

32,877,089 

27,413,142 

27,954,026 

58,129,031 

36,866,963 

41,582,866 

In the fiscal year 2013, 15 out of the 20 considered Member States provided specific 
R&D tax incentives which have been implemented in the European Tax Analyzer. Esto-
nia, Germany and Sweden did not offer any R&D tax incentive at all; two other coun-
tries (Bulgaria, Poland) employed very limited R&D tax incentives that only applied in 
specific  cases,  i.e.  their  application  is  for  instance  restricted  to  certain  geographical 
areas or the involvement of an external project partner (i.e. contract research). These 
incentives have not been implemented in the simulation. Almost all countries (14 of 15 
countries) had a tax base incentive in place; Austria was the only country which solely 
offered a tax credit in 2013. In six countries (France, Ireland, Italy, the Netherlands, 
Spain, and the UK), combinations of tax base and tax liability incentives were availa-
ble to LSEs. Tax rate incentives related to R&D were not offered in any country for the 
fiscal  year  2013.  Several  countries  (Belgium,  France,  Luxembourg,  the  Netherlands, 

36 There is no R&D tax rate incentive in place in 2013. 

76 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Spain, and the UK) offer a reduced tax rate for income derived from intellectual prop-
erty. It was, however, not possible to implement those rules in the simulation due to a 
lack  of  publicly  available  data  on  how  many  royalties  and  license  fees  an  (average) 
enterprise in the EU derives from its intellectual property. Any estimation would have 
been arbitrary and would have distorted the effective tax burden calculations. The only 
tax  rate  incentive  implemented  in  the  simulation  is  the  one  operated  in  Croatia  be-
tween 2009 and 2012.37 

The  effective  reduction  in  the  tax  burden  by  the  use  of  R&D-incentives  ranges  from 
only 0.98% (Luxembourg) to almost 20% (Lithuania). The high reduction in Lithuania 
is  related  to  the  very  generous  deductibility  of  personnel  and  current  R&D  costs.  In 
addition to the actual expense, 200% of personnel and current R&D costs can be de-
ducted  for  tax  purposes.  Croatia  and  Slovenia  have  R&D-incentives  in  place  that  re-
duce  the  effective  tax  burden  by  more  than  10%.  Both  countries  have  a  provision 
similar to Lithuania and grant a super deduction for personnel and current R&D costs 
as  well  as  for  certain  kinds  of  capital  expenditures  (Croatia:  125%  plus  actual  ex-
pense; Slovenia: 100% plus actual expense). 

The reduction of the effective tax burden by means of tax base incentives in the other 
countries is in many cases related to accelerated depreciation schemes only available 
for assets used in R&D (Belgium, Finland, France, Greece, Ireland, Spain, and the UK). 
The effect of those special schemes varies depending on the general depreciation rules 
in  place.  Irish  enterprises  can  make  use  of  an  immediate  100%  depreciation  for  all 
assets  solely  used  in  R&D,  whereas  enterprises  in  Luxembourg  only  benefit  from  a 
slightly  increased  depreciation  rate  (40%  declining  balance  instead  of  30%  declining 
balance)  which  is  moreover  restricted  to  machinery  and  equipment.  As  a  result  of 
these  differing  regulations,  the  tax  reducing  effect  in  Ireland  is  about  three  times 
higher  than  in  Luxembourg.  Other  tax  base  incentives  are  currently  in  place  in  Bel-
gium,  the  Netherlands  and  Finland.  In  Belgium  and  the  Netherlands,  these  cover  an 
increased deduction for capital expenditures in newly acquired tangible and intangible 
assets (Belgium 14.5%, the Netherlands 54%). In the Netherlands, therefore, the ef-
fective  tax  burden  is  reduced  by  3.20%.  Finland  offers  –  apart  from  accelerated  de-
preciation  for  R&D  buildings  –  a  100%  additional  deduction  with  regard  to  salaries 
paid to R&D  employees, yielding a total tax base-related reduction of  the tax burden 
of 6.73%.  

Available incentives relating to the tax due, i.e. tax credits are mostly related to per-
sonnel and current R&D expenses. As mentioned above, these incentives can be found 
in  countries  which  also  offer  tax  base  incentives  (apart  from  Austria).  However,  the 
results reveal that the combination of tax base and tax credit incentives does not nec-
essarily imply a higher reduction of the effective tax burden compared to an exclusive 
application  of  a  tax  base  incentive.  A  very  generous  tax  base  incentive  (e.g.  as  in 
Lithuania, Croatia and Slovenia) might have a much higher impact on the effective tax 
burden  than  a  combination  of  two  rather  narrow  tax  base  and  tax  credit  incentives. 
The actual effect of a tax credit depends on a number of different factors (credit rate; 
volume-based  or  incremental  character)  and  thus  varies  considerably.  The  Irish  tax 
credit  incorporates  a  combination  of  volume-based  and  incremental  incentive  related 
to capital expenditures (25%). As Table 6.2 shows, this tax credit features the largest 
effect  of  all  regarded  tax  credits  (-5.69%).  The  ranking  of  the  countries  considering 
the general base case compared to the ranking in the case where R&D tax incentives 
are considered remains almost constant. Only three countries (Belgium, Lithuania and 

37 For details see next section. 

77 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

the UK) improve slightly in the ranking with R&D-incentives. Remarkably, those coun-
tries which already have low general tax burdens also seem to offer the most tax at-
tractive  R&D  environment.  The  leading  positions  in  the  ranking  contain  all  countries 
with  a  10%  or  even  higher  reduction  of  the  effective  tax  burden  by  adding  R&D-
incentives to the general tax code. 

6.3.1.2.  Development  of  effective  tax  burdens  in  selected  countries  (corporate 

level) 

The following graphs in Figure 6.1 display the development of the general tax burden 
and the respective tax burden with R&D incentives for the entire period from 2009 to 
2013  for  selected  countries.  We  selected  nine  countries  which  exhibit  interesting 
trends and changes in their tax codes. In particular, the development of the distance 
between the tax burden in the general case and the tax burden in case R&D tax incen-
tives are considered can be used to derive an increasing or diminishing significance of 
R&D-related provisions for tax purposes.38 

Figure  6.1  Development  of  effective  tax  burden  (corporate  level)  from  2009 
to 2013 for selected countries (model LSE) 

Austria

Ireland

Slovenia

R
U
E
n
o

i
l
l
i

M

55

54

53

52

51

50

R
U
E
n
o

i
l
l
i

M

35

30

25

20

15

10

R
U
E
n
o

i
l
l
i

M

24

23

22

21

20

19

Croatia

Italy

R
U
E
n
o

i
l
l
i

M

62

60

58

56

54

52

R
U
E
n
o

i
l
l
i

M

R
U
E

n
o

i
l
l
i

M

40

35

30

25

20

15

43

42

41

40

39

38

The Netherlands

General Tax Code 
General Tax Code including R&D Incentives 

General Tax Code including R&D Incentives 

38 The detailed results for every country and year can be found in Annex 1 (Table 5.20). 

78 

 
 
 
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

France

Lithuania

The UK

R
U
E
n
o

i
l
l
i

M

90

85

80

75

70

65

R
U
E
n
o

i
l
l
i

M

40

35

30

25

20

15

R
U
E
n
o

i
l
l
i

M

55

50

45

40

35

30

General Tax Code 
General Tax Code including R&D Incentives 

General Tax Code including R&D Incentives 

From the nine countries selected here, only Croatia shows a diminishing significance of 
R&D-incentives at a large scale. From 2009 to 2012, Croatia had a rule in place which 
reduced the general CIT rate  from 20% to 10% if an investor fulfilled certain invest-
ment  thresholds  for  R&D  capital  expenditures.  The  reduced  10%  rate  was  granted  if 
the R&D capital expenditures exceeded EUR 100,000. In 2013, this specific R&D incen-
tive was replaced by a general investment incentive scheme. 

In  Lithuania  and  the  UK,  the  distance  between  the  effective  tax  burden  considering 
only  the  general  tax  code  and  the  effective  tax  burden  including  R&D  incentives  re-
mains almost constant over time. The previously mentioned super deduction in Lithu-
ania has been unchanged since 2009 and reduces the effective tax burden by around 
20%  in  every  year.  Likewise,  R&D  incentives  in  the  UK  (immediate  depreciation  for 
certain  R&D  assets,  deduction  of  an  additional  30%  of  R&D  personnel  and  current 
costs)  have  not  been  modified  since  2009.  In  2013,  however,  the  deduction  was  re-
placed by a 10% tax credit giving rise to a slightly higher reduction of the effective tax 
burden  compared  to  the  previous  combination  of  immediate  depreciation  and  deduc-
tion. 

Also,  France  and  Italy  are  both  showing  interesting  developments.  Until  2011  (Italy) 
and  2012  (France),  the  reduction  of  the  effective  tax  burden  by  R&D-incentives  was 
diminishing. In France, the tax credit rate available for certain R&D expenses was re-
duced  from  50%  (first  year)  and  40%  (second  year)  to  40%  and  35%  respectively. 
This reduction is only available in the first two years for a newly founded corporation. 
The strong decline of the effective tax burden in the general case and the effective tax 
burden  considering  R&D-incentives  in  2013  can  be  explained  by  a  newly  introduced 
general  tax  credit  in  relation  to  the  personnel  expenses  of  an  enterprise.  Likewise, 
Italy has undertaken some changes to its R&D tax incentives in the last years. The tax 
credit  (10%  of  R&D-related  capital  expenditure,  personnel  costs  and  current  costs) 
was  abolished  in  2010.  The  possibility  to  deduct  R&D-related  personnel  costs  for  the 
special Italian tax on the net production value (“IRAP”), however, has not been modi-
fied.  The  increasing  distance  in  the  fiscal  year  2012  is  related  to  a  newly  introduced 
tax credit amounting to 35% of R&D-related personnel costs up to a maximum of EUR 
200,000 per year. This tax credit reduces the effective tax burden by 3.69%.  

Austria, Ireland, the Netherlands and Slovenia expanded their tax incentives for R&D 
in  the  period  from  2009  to  2013.  In  Austria,  the  tax  credit  rate  for  R&D  expenses 
(capital expenditures, personnel costs, current costs) has been increased from 8% to 
10% since 2011, leading to a higher reduction of the effective tax burden by 0.75%. 

79 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The Irish tax credit for R&D expenses only applied on an incremental basis from 2009 
to 2011. In 2012, a volume-based component has been introduced which allowed for 
crediting 25% of R&D expenses up to EUR 100,000 against the CIT liability. This vol-
ume  based  amount  was  increased  to  EUR  200,000  in  2013,  implying  a  tax  credit  of 
max. EUR 50,000 (25% x EUR 200,000). The  provision for the incremental relief has 
not been changed since 2009. 

Since 2012, Dutch enterprises benefit from a newly introduced super deduction which 
amounts  to  40%  (2012)  resp.  54%  (2013)  of  capital  expenditures  and  current  R&D 
costs.  The  effective  tax  burden  in  the  Netherlands  is  reduced  by  2.37%  (2012)  and 
3.03% (2013) due to this provision. For Slovenia, the steadily increasing effect of R&D 
provisions  can  be  explained  by  the  increasing  rate  of  the  super  deduction  for  certain 
R&D expenditures. Starting in 2009 at 20%, the rate was increased to 40% for 2010-
2011 and has been further increased to 100% since 2012. 

6.3.1.3.  Sensitivity analysis (corporate level) 

In the following, it will be assessed how varying assumptions on the profitability, capi-
tal intensity, equity  ratio, labour intensity and industry affiliation impact the effective 
tax burden and the effect of R&D incentives at corporate level. To this end, we analyse 
how  the  reduction  of  the  effective  tax  burden  resulting  from  R&D-incentives  in  the 
base  case  relates  to  the  respective  reduction  in  case  we  modify  the  above  described 
parameters.39  

The  influence  of  R&D  incentives  on  the  effective  tax  burden  remains  fairly  stable  if 
assumptions  on  the  profitability  of  the  corporation  considered  in  the  base  case  are 
modified: deviations from the effect found for the base case largely range around 1-2 
percentage  points  only.  These  deviations  tend  to  be  more  pronounced  in  countries 
with high shares of profit-related taxes (e.g. Lithuania, Croatia), as a change of profit-
ability results in a larger change of the effective tax burden in these cases. (We there-
fore conclude that profitability does influence the effectiveness of R&D incentives, yet 
the scale of the reducing effect still is comparable to that found for the base case). 

Likewise, a change in the capital intensity of the model corporation implies very small 
deviations from the base case of mostly less than one percentage point in terms of the 
effect of R&D incentives. Here, the impact on the effective tax burden is related to the 
countries’  depreciation  scheme:  the  more  favourable  the  depreciation  scheme,  the 
larger is the effect on the effective tax burden of a change in capital intensity. Again, 
Lithuania  and  Croatia  are  examples  for  countries  with  very  beneficial  depreciation 
schemes. 

Comparably small deviations of mostly less than one percentage point with regard to 
the  effect  of  R&D  incentives  on  the  effective  tax  burden  can  also  be  found  for  varia-
tions of the equity ratio and labour intensity.  

We thus conclude that our results are robust with regard to changes in the underlying 
assumptions on the model corporation.  

In  the  next  step,  we  examine  whether  our  findings  for  the  base  case  are  valid  with 
regard to different industry sectors. The results reveal that the impact of R&D tax in-

39 The detailed results for the sensitivity analysis of the profitability, capital intensity, equity ratio and labour 
intensity  can  be  found  in  Annex  1  (section  5.6).  In  the  same  section,  the  results  for  the  industry-specific 
model corporations are presented.    

80 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

centives on the effective tax burden strongly depends on the specific industry sector. 
Since industry sectors strongly differ with regard to the extent of their R&D activities 
this result is not surprising. The construction, commerce and hotel sector for instance 
are comparably little engaged in R&D.  Therefore, R&D  spending and, thus, the  effect 
of R&D tax incentives is much smaller than e.g. in the manufacturing sector.  

To conclude, our results are largely robust with regard to the underlying assumptions 
on  profitability,  capital  intensity,  equity  ratio  and  labour  intensity.  However,  R&D  in-
tensity is of course a decisive factor  for the impact of R&D tax incentives.  Therefore, 
their effect differs across industry sectors. 

6.3.1.4.  Conclusions 

The  assessment  of  R&D  tax  incentives  for  corporations  of  large  size  has  yielded  five 
major results: 

  First,  R&D  incentives  are  very  common.  15  out  of  the  20  considered  Member 
States provide such specific R&D incentives. Most prevalent are incentives relat-
ed to the tax base. 

  Second, the effective reduction of the tax burden resulting from R&D tax incen-
tives range from 0.98% (Luxembourg) to roughly 20% (Lithuania). The country 
ranking, however, remains almost constant. 

  Third,  there  is  a  tendency  for  an  expansion  of  R&D  tax  incentives  in  the  years 

2009 to 2013. 

  Fourth,  the  results  are  largely  robust  to  differing  assumptions  on  profitability, 
capital  intensity,  equity  ratio,  and  labour  intensity.  By  contrast,  R&D  intensity 
reveals a considerable impact on the effective tax burden. 

  Fifth,  variations  of  effective  tax  burdens  across  industries  can  be  explained 

foremost by industry specific R&D intensities. 

6.3.2.  Medium-sized corporations 

6.3.2.1.  Effective tax burden 2013 (corporate level) 

The  following  assesses  the  prevalence,  scope  and  effectiveness  of  tax  incentives  de-
signed  to  provide  relief  to  SMEs.  In  a  first  step,  a  model  corporation  exhibiting  the 
characteristics of a corporation of medium size (as defined by the European Commis-
sion40) is regarded.41 

Table  6.3  displays  the  effective  tax  burdens  for  the  four  different  cases  explained 
above (see Section 6.3.1) in four columns: 

  First column: No incentives, i.e. application of the same general tax code as for 

the LSE. 

  Second column: Only specific SME incentives are applied. 
  Third  column:  R&D  incentives  are  combined  with  the  first  case  (general  tax 

codes without SME incentives). 

  Fourth column: Application of both SME and R&D incentives.  

40 See Commission Recommendation 2003/361/EC. 
41 A detailed table on the separated effects of SME and R&D effects and their subcomponents is provided in 
Annex 1 (section 5.4) 

81 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

First of all, it stands out that in none of the countries  – apart from the UK – SME in-
centives have any reducing effect on the effective tax burden for the considered medi-
um-sized corporation.  The reason  for that is that these incentives are  tied to specific 
size thresholds, e.g. with regard to the corporation’s turnover or profit, balance sheet 
total or number of employees, which the medium-sized corporation does not satisfy.42  

The  only  effective  SME  incentive  is  the  progressive  CIT  rate  scheme  in  the  UK:  In 
2013,  instead  of  the  normal  rate  of  23%,  a  21%  rate  is  in  force  up  to  a  taxable  in-
come of GBP 300,000; marginal relief is available if income lies between GBP 300,000 
and GBP 1,500,000. Only beyond that amount (GBP 1,500,000) the 23% normal rate 
applies.  However,  the  relief  obtained  from  this  SME  incentive  (-0.61%)  is  fairly  low 
compared to the effect induced by the R&D incentives in place (-16.93%), yielding an 
overall reduction of 18%. That is because the medium-sized corporation only qualifies 
for the marginal relief bracket as it does not have income below GBP 300,000 in any 
of the 10 simulation periods.43  

Table  6.3  Effective  tax  burden  (10  periods,  corporate  level,  model  medium-
sized corporation, fiscal year 2013) 

SME specific tax code 

General Tax Code and R&D In-
centives 

SME specific Tax Code and R&D 
Incentives 

Tax Burden 
(€) 

Total 
Effect 

Rank 

Tax Burden 
(€) 

Total 
Effect 

Rank 

Tax Burden 
(€) 

Total 
Effect 

Rank 

Country 

General 
Tax Code 
(large) 

Tax Bur-
den (€) 

Rank 

Austria  

5,535,665 

Belgium  

5,453,582 

Bulgaria 

1,699,083 

Croatia  

Estonia 

Finland  

France  

3,261,631 

3,440,541 

4,136,579 

7,462,469 

Germany 

5,279,368 

Greece  

Ireland 

Italy 

4,360,005 

2,234,652 

5,754,110 

Lithuania 

2,851,156 

Luxembourg   5,069,557 

17 

16 

1 

6 

8 

11 

20 

15 

13 

2 

18 

5 

14 

Poland 

3,290,040 

Romania 

2,744,562 

Slovenia 

2,782,195 

Spain 

Sweden 

The UK  

5,784,801 

3,681,747 

4,180,444 

7 

3 

4 

19 

9 

12 

5,535,665 

5,453,582 

1,699,083 

3,261,631 

3,440,541 

4,136,579 

7,462,469 

5,279,368 

4,360,005 

2,234,656 

5,754,110 

2,851,156 

5,069,557 

3,290,040 

2,744,562 

2,782,195 

5,784,801 

3,681,747 

The Nether-
lands  

4,050,031 

10 

4,050,031 

4,155,099 

-0.61% 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

17 

16 

1 

6 

8 

12 

20 

15 

13 

2 

18 

5 

14 

10 

7 

3 

4 

19 

9 

11 

5,349,599 

-3.36% 

5,351,627 

-1.87% 

1,699,083 

- 

2,802,246 

-14.08% 

3,440,541 

- 

3,875,510 

-6.31% 

7,048,155 

-5.55% 

5,279,368 

- 

4,278,726 

-1.86% 

1,670,627 

-25.24% 

5,360,271 

-6.84% 

2,336,714 

-18.04% 

5,022,551 

-0.93% 

16 

17 

2 

6 

8 

12 

20 

15 

13 

1 

18 

3 

14 

5,349,599 

-3.36% 

5,351,627 

-1.87% 

1,699,083 

- 

2,802,246 

-14.08% 

3,440,541 

- 

3,875,510 

-6.31% 

7,048,155 

-5.55% 

5,279,368 

- 

4,278,726 

-1.86% 

1,670,630 

-25.24% 

5,360,271 

-6.84% 

2,336,714 

-18.04% 

5,022,551 

-0.93% 

16 

17 

2 

6 

8 

12 

20 

15 

13 

1 

18 

3 

14 

3,732,677 

-7.84% 

11 

3,732,677 

-7.84% 

11 

3,116,102 

-5.29% 

2,604,070 

-5.12% 

2,430,377 

-12.65% 

5,496,368 

-4.99% 

3,681,747 

- 

3,472,871 

-16.93% 

7 

5 

4 

19 

10 

9 

3,116,102 

-5.29% 

2,604,070 

-5.12% 

2,430,377 

-12.65% 

5,496,368 

-4.99% 

3,681,747 

- 

3,428,102 

-18.00% 

7 

5 

4 

19 

10 

9 

Aside  from  the  UK,  15  out  of  the  20  sample  countries  have  R&D  incentives  in  place 
that  are  also  or  exclusively  available  for  SMEs  (in  total:  16  countries).  Overall,  the 

42 Details about the threshold for single incentives can be found in Annex 1 (Table 5.19). 
43 In  addition,  the  difference  between  the  normal  (23%)  and  reduced  rate  (21%)  is  not  particularly  pro-
nounced.  This,  however,  only  fully  comes  into  effect  in  case  of  the  small  and  micro  enterprise  as  far  as 
these fall into the lowest income bracket. 

82 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

effects  (in  terms  of  the  scale  of  reduction)  are  similar  and  comparable  to  the  effects 
found for the LSE in most countries. For ten countries, the reduction of the tax burden 
is slightly smaller for the medium-sized corporation as compared to the LSE. In seven 
countries the effects are more pronounced for the medium-sized corporation. In some 
of these countries, this can be attributed to the fact that the scope and effectiveness 
of the relevant incentives is size-dependent: In Ireland for instance, where the overall 
reduction amounts to 25.24% compared to 9.38% for the LSE, this result is driven by 
the  nature  of  the  R&D  tax  credit.  This  credit  for  qualifying  R&D  expenses  is  volume-
based up to EUR 200,000 but becomes incremental beyond. The LSE has R&D expens-
es  in  excess  of  EUR  200,000,  whereas  the  medium-sized  corporation  does  not  reach 
this  threshold  and  can  therefore  fully  deduct  all  relevant  expenses.  Similarly,  a  tax 
credit for R&D-related personnel costs is available in Italy, which is, however, restrict-
ed to  a total of  EUR 200,000. Again, the medium-sized corporation does not become 
subject to this restriction, yet the large  one does.44 Likewise, the Netherlands offer  a 
credit for R&D-related personnel costs with a rate of 38% applying up to expenses of 
EUR 200,000 and with a rate of 14% beyond EUR 200,000. Again, the medium-sized 
corporation does not reach this threshold (total relief: 7.84%), whereas the LSE does, 
yielding a relatively smaller tax credit (total relief: 6.23%). 

A  particular  case  is  constituted  by  Poland  which  exhibits  a  tax  burden  reduction  of 
5.29%, whereas the LSE does not benefit from any relief. This can be attributed to an 
R&D incentive which is solely available for SMEs: accordingly, SMEs may credit against 
their CIT liability 75% of the amount invested in qualifying R&D.  

Finally,  the  UK  employs  different  R&D  incentive  regimes  for  LSEs  vs.  SMEs:  As  of 
2013,  LSEs  are  subject  to  a  10%  tax  credit  on  qualifying  R&D  expenditure.  No  such 
credit is  available  for  SMEs,  which,  however,  have  at  their  disposal  a  more  generous 
super deduction of 125% (i.e. a total of 225% of qualifying R&D expenditures may be 
deducted).  Hence,  the  relief  from  R&D  incentives  amounts  to  16.93%  compared  to 
7.68% for the LSE. 

Table 6.3 also provides information on the implied country ranking position for each of 
the computed cases. Overall, the ranking remains quite stable. Compared to the base 
case (i.e. application of the general tax code), the UK can make up one position if the 
SME tax rate incentive is applied. If R&D incentives are additionally taken into consid-
eration, the UK even improves by three positions and moves from the 12th to the 9th 
rank. Ten countries in the sample hold their positions, the remaining countries change 
their  ranking  by  at  most  two  positions.  Interestingly,  Ireland  with  its  very  generous 
R&D  incentives  even  takes  the  first  rank  and  thus  supersedes  Bulgaria,  which  is 
ranked first in the base case without R&D incentives.   

We also explore how changes in the assumptions on the profitability, capital intensity, 
equity  ratio  and  labour  intensity  of  the  model  corporation  influence  the  effective  tax 
burden and the impact of SME and R&D incentives.45 The results are again robust and 
the effects are comparable to those found for the LSE. We therefore refer to the previ-
ous section (LSE) for a more extensive discussion. Likewise, it can be confirmed again 
that the impact of SME and R&D tax incentives is strongly related to the industry affili-
ation. 

44 Hence, the tax burden is reduced by 6.84% (medium) vs. 4.42% (large). 
45 The detailed results for the sensitivity analysis of the profitability, capital intensity, equity ratio and labour 
intensity  can  be  found  in  Annex  1  (section  5.6).  In  the  same  section,  the  results  for  the  industry-specific 
model corporations are presented.    

83 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.3.2.2.  Effective tax burden 2013 (overall level: corporation and shareholder) 

The following extends the analysis conducted for the effective tax burden at the corpo-
rate level to the overall level by including the taxation at the shareholder level.46 

Table  6.4  displays  the  effective  tax  burdens  for  the  four  different  cases  explained 
above (see Section 6.3.1) in four columns:  

  First column: no incentives, i.e. application of the same general tax code as for 

the LSE. 

  Second column: specific SME and R&D incentives are applied. 
  Third column: SME and R&D incentives are combined with a modified medium-
sized model corporation (only equity ratio is decreased; everything else is kept 
constant). 

  Fourth column: combined SME and R&D incentives and a higher equity ratio 

compared to the base case corporation are applied. 

Table  6.4  Effective  tax  burden  (10  periods,  corporate  and  shareholder  level, 
model medium-sized corporation, fiscal year 2013) 

General Tax code 

Base case 

Base case 

Equity Ratio -30% 

Equity Ratio +30% 

SME specific Tax Code and R&D-Incentives 

Tax burden 
(€) 

Rank 

Tax Burden 
(€) 

Total 
Effect 

Rank 

Tax Burden 
(€) 

% 
change 
com-
pared 
to Base 
Case 

Rank 

Tax   Bur-
den    (€) 

% 
change 
com-
pared to 
Base 
Case 

Rank 

14 

15 

1 

4 

2 

12 

20 

17 

10 

18 

16 

5 

9 

8 

6 

3 

7 

19 

11 

13 

8.080.874 

-1,70% 

8.255.502 

-0,92% 

2.512.262 

- 

5.019.124 

-7,34% 

3.588.808 

- 

7.798.127 

-2,15% 

10.851.017 

-2,41% 

8.593.981 

- 

7.591.086 

-0,80% 

8.967.317 

-3,97% 

8.030.526 

-3,70% 

5.117.933 

-7,44% 

7.483.928 

-0,49% 

6.968.254 

-3,28% 

5.769.528 

-2,38% 

4.921.258 

-2,34% 

6.074.797 

-4,16% 

9.207.666 

-2,12% 

7.696.183 

- 

7.588.882 

-6,44% 

15 

16 

1 

4 

2 

13 

20 

17 

11 

18 

14 

5 

9 

8 

6 

3 

7 

19 

12 

10 

7.930.931 

-1,86% 

8.179.042 

-0,93% 

2.436.911 

-3,00% 

4.955.915 

-1,26% 

3.507.301 

-2,27% 

7.773.647 

-0,31% 

10.617.268 

-2,15% 

8.360.050 

-2,72% 

7.415.209 

-2,32% 

8.810.454 

-1,75% 

7.876.021 

-1,92% 

4.865.555 

-4,93% 

7.199.313 

-3,80% 

6.832.028 

-1,95% 

5.574.422 

-3,38% 

4.753.422 

-3,41% 

5.877.358 

-3,25% 

9.293.830 

0,94% 

7.459.529 

-3,07% 

7.391.179 

-2,61% 

15 

16 

1 

5 

2 

13 

20 

17 

11 

18 

14 

4 

9 

8 

6 

3 

7 

19 

12 

10 

8.232.459 

1,81% 

8.418.063 

1,91% 

2.587.559 

2,91% 

5.083.631 

1,18% 

3.670.290 

2,22% 

7.948.368 

1,85% 

11.105.485 

2,24% 

8.836.381 

2,74% 

7.771.593 

2,30% 

9.210.666 

2,54% 

8.185.450 

1,82% 

5.370.311 

4,36% 

7.779.584 

3,78% 

7.116.699 

2,02% 

5.964.592 

3,19% 

5.089.448 

3,23% 

6.272.364 

3,02% 

9.594.504 

3,95% 

7.932.783 

2,98% 

7.787.755 

2,39% 

15 

16 

1 

3 

2 

13 

20 

17 

9 

18 

14 

5 

10 

8 

6 

4 

7 

19 

12 

11 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

Germany 

Greece  

Ireland 

Italy 

Lithuania 

8.220.423 

8.331.972 

2.512.262 

5.416.448 

3.588.808 

7.969.722 

11.118.533 

8.593.981 

7.652.044 

9.338.112 

8.339.155 

5.529.482 

Luxembourg  

7.520.762 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

7.204.366 

5.910.413 

5.039.271 

6.338.658 

9.407.531 

7.696.183 

8.111.342 

46 Table 5.44 in Annex 1 contains detailed calculation results for all years and the impact of a changing equi-
ty ratio in a more detailed manner. 

84 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

As regards the country ranking obtained from assessing effective tax burdens at cor-
porate  level  (Table  6.3)  and  in  total  (corporate  and  shareholder  level,  Table  6.4),  it 
becomes evident that in most countries the ranking changes by at most two positions 
and  thus  remains  fairly  constant.  However,  the  comparison  also  reveals  that  a  coun-
tries’ rank can change in particular if country specific taxation at the shareholder level 
is  either  more  or  less  favourable  compared  to  the  corporate  level.  This  finding  refers 
to both the base case and the case of applying SME and R&D incentives.  

Ireland constitutes the most extreme case in that regard. Compared to the corporate 
level, Ireland loses 16 (base case) resp. 17 (R&D and SME incentives considered) po-
sitions in the country ranking. The reason for this is that Ireland imposes comparably 
high taxes at shareholder level: dividends and interest from shareholder loans are ef-
fectively subject to progressive rates of up to 41%, interest from bank loans is taxed 
at a rate of 33%. Consequently, the relief of 25.24% obtained from tax incentives at 
the  corporate  level  is  reduced  to  3.97%  only  at  the  overall  level.  Similarly,  Slovenia 
loses 3 positions with the effect of tax incentives shrinking from 12.65% to 4.16% as 
a result of a flat 25% tax on all sources of income without any exemptions at share-
holder  level.  On  the  other  side,  countries  such  as  Luxembourg  and  Estonia  operate 
comparably  favourable  shareholder  taxation  regimes47  and  therefore  improve  by  5 
resp. 6 positions in the country ranking.  

Therefore, in total, it can be concluded that the effect of R&D and SME tax incentives 
is  also  influenced  by  the  level  of  shareholder  taxation.  The  beneficial  effect  of  incen-
tives  may  become  much  smaller  if  both  levels  of  taxation  are  considered.  Above  all, 
this  result  can  be  traced  back  to  high  PIT  at  the  shareholder  level  in  different  coun-
tries. Comparing the impact of SME and R&D-tax incentives on  the  effective tax bur-
den at the corporate and the overall level, it is remarkable that in most countries the 
impact is reduced by roughly 50%.  

Finally,  Table  6.4  analyses  the  effect  of  varying  assumptions  about  the  capital  struc-
ture  on  the  overall  tax burden.  It  becomes  evident  that  a  decreasing  share  of  equity 
(i.e. an increase in debt) reduces the effective tax burden, since more interest can be 
deducted from taxable profits. Unlike interest payments, dividends do not reduce tax-
able income, but have to be paid from after-tax profits. Moreover, dividends are  – at 
least to some extent – subject to PIT at the level of the shareholder. As a result, equi-
ty financing results in double taxation of profits and implies that a higher share of eq-
uity compared to debt-financing increases the overall tax burden. However, increased 
debt financing potentially comes along with detrimental effects as well. First of all, thin 
capitalization  rules  may  become  effective  and  limit  the  deductibility  of  interest  pay-
ments  on  shareholder  loans  at  corporate  level.  In  that  case,  the  tax  benefit  of  debt 
financing at corporate level is reduced. Moreover, at shareholder level, interest income 
from  shareholder  loans  in  most  countries  is  subject  to  progressive  income  taxation, 
whereas  dividends  are  predominantly  taxed  at  lower  proportional  rates.  After  all,  the 
observed tax advantage of debt versus equity financing at the corporate might be re-
versed if we take into account PIT at the shareholder level. 

Still, as the results in Table 6.4 display, debt financing turns out to be more tax effi-
cient  than  equity  financing.  Since  SMEs  face  capital  market  constraints,  a  tax  relief 
from an increased debt financing is less likely for SMEs compared to LSEs. This disad-

47 In Luxembourg, interest from bank accounts for instance is subject to a 10% final withholding tax rate. 
Other  sources  of  income  are  effectively  taxed  at  progressive  rates,  however,  the  top  rates  only  apply  at 
fairly high income levels. In Estonia, interest from bank accounts is not taxed at all, dividends are not sub-
ject to taxation at shareholder level as well. 

85 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

vantage  could  be  reduced  by  eliminating  the  discrimination  between  debt  and  equity 
financing in tax codes. In most of the countries considered in the study, this discrimi-
nation  is  given  as  interest  payments  are  fully  tax  deductible  and  no  relief  for  equity 
financing is offered. Exceptions are Belgium and Italy that both have implemented an 
allowance for corporate equity.48 

6.3.2.3.  Conclusions 

The assessment of tax incentives for corporations of medium size has yielded five ma-
jor results: 

  First, medium-sized corporations hardly qualify for specific SME tax relief due to 
size  restrictions  which  the  corporation  does  not  satisfy.  The  UK  constitutes  the 
only exception. 

  Second,  similar  results  like  for  the  assessment  of  the  LSE  have  been  obtained 
with  regard  to  R&D  tax  incentives.  In  a  couple  of  countries,  those  R&D  incen-
tives incorporate certain threshold provisions. For these cases, higher reductions 
for medium-sized corporations than for LSEs can be observed.   

  Third, R&D benefits may apply for SMEs exclusively. Such rules can be found in 

France, Poland and the UK. 

  Fourth,  the  effect  of  R&D  incentives  diminishes  by  roughly  50%  if  the  overall 

level (corporate and shareholder level) is considered. 

  Fifth, SMEs might face a competitive tax disadvantage as tax codes favour debt 

over equity financing and SMEs face difficulties in obtaining debt. 

6.3.3.  Small corporations 

6.3.3.1.  Effective tax burden 2013 (corporate level) 

The calculation of the effective tax burdens for the model small enterprise follows the 
procedure  for  the  model  medium-sized  enterprise.  In  the  previous  section,  the  four 
different  cases  considered  have  been  described  in  detail  (first  column  no  incentives, 
second column only SME incentives, third column only R&D incentives, fourth column 
combination  of  R&D  and  SME  incentives).  The  results  for  these  four  cases  for  the 
model small enterprise are displayed in Table 6.5.49 

48 See Zangari (2014) for a detailed overview of the differences between the Belgian and the Italian allow-
ance for corporate equity.  
49  A  more  detailed  table  on  the  separated  effects  of  SME  and  R&D  effects  and  their  subcomponents  is 
provided in Annex 1 (section 5.4). 

86 

 
 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Table 6.5 Effective tax burden (10 periods, corporate level,  model  small cor-
poration, fiscal year 2013) 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

General 
Tax Code 
Tax 
burden (€) 

1,512,187 

1,533,802 

486,286 

936,131 

981,644 

1,183,714 

1,852,668 

Germany 

1,480,901 

Greece  

Ireland 

Italy 

1,246,258 

636,567 

1,603,376 

Lithuania 

813,281 

Luxembourg  

1,456,114 

Rank 

16 

17 

1 

6 

8 

11 

20 

15 

13 

2 

18 

5 

14 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

941,007 

785,565 

797,236 

1,655,304 

1,054,122 

1,193,995 

7 

3 

4 

19 

9 

12 

SME specific Tax Code 

General Tax Code and R&D 
Incentives 

SME specific Tax Code and R&D 
Incentives 

Total 
Effect 

Rank 

Tax Bur-
den  (€) 

Total 
Effect 

Rank 

Tax Bur-
den  (€) 

Total 
Effect 

Rank 

Tax   Bur-
den    (€) 

1,512,187 

1,494,804 

-2.54% 

486,286 

936,131 

981,644 

1,183,714 

- 

- 

- 

- 

1,782,597 

-3.78% 

1,480,901 

1,246,258 

- 

- 

588,305 

-7.58% 

1,603,376 

813,280 

1,456,114 

941,007 

785,565 

797,236 

1,167,502 

-29.47% 

1,054,122 

- 

1,095,785 

-8.23% 

- 

- 

- 

- 

- 

- 

- 

- 

18 

17 

1 

6 

8 

13 

20 

16 

14 

2 

19 

5 

15 

1,466,642 

-3.01% 

1,509,038 

-1.61% 

486,286 

- 

823,021 

-12.08% 

981,644 

- 

1,119,822 

-5.40% 

1,751,422 

-5.46% 

1,480,901 

0.00% 

1,226,346 

-1.60% 

498,531 

-21.68% 

1,507,156 

-6.00% 

687,372 

-15.48% 

1,444,617 

-0.79% 

10 

1,011,885 

-7.08% 

7 

3 

4 

12 

9 

11 

898,431 

-4.52% 

751,182 

-4.38% 

711,133 

-10.80% 

1,585,975 

-4.19% 

1,054,122 

- 

1,020,840 

-14.50% 

15 

18 

1 

6 

8 

12 

20 

16 

13 

2 

17 

3 

14 

9 

7 

5 

4 

19 

11 

10 

1,466,642 

-3.01% 

1,469,347 

-4.20% 

486,286 

- 

823,021 

-12.08% 

981,644 

- 

1,119,822 

-5.40% 

1,681,351 

-9.25% 

1,480,901 

- 

1,226,346 

-1.60% 

446,061 

-29.93% 

1,507,156 

-6.00% 

687,372 

-15.48% 

1,444,617 

-0.79% 

16 

17 

2 

6 

9 

13 

20 

18 

14 

1 

19 

3 

15 

1,011,885 

-7.08% 

10 

898,431 

-4.52% 

751,182 

-4.38% 

711,133 

-10.80% 

1,105,021 

-33.24% 

1,054,122 

- 

931,307 

-22.00% 

7 

5 

4 

12 

11 

8 

1,088,987 

10 

1,088,987 

Compared  to  the  results  for  the  model  medium-sized  corporation,  there  are  now  five 
countries (Belgium, France, Ireland, Spain, the UK) where specific SME incentives are 
applicable  for  the  implemented  small  corporation.  As  mentioned  in  the  previous  sec-
tion, this can be explained by the fulfilment of rule-specific thresholds (turnover, prof-
it, balance sheet total or number of employees) that are not satisfied by the medium-
sized  corporation  model.  In  three  of  the  countries  with  applicable  SME  incentives 
(France, Ireland and the UK), the effect of R&D tax incentives remains higher than the 
reduction caused by SME incentives. For Belgium and especially Spain, SME incentives 
have a higher impact on the reduction of the effective tax burden.  

In Belgium, the reduction of the effective tax burden by 2.54% is due to two different 
SME  incentives.  First  of  all,  Belgium  offers  a  notional  interest  deduction  at  a  rate  of 
3% available for all corporations. For corporations with less than 50 employees and a 
turnover below EUR 6,250,000 this rate is increased by 0.5%, which leads to an iso-
lated reduction of the effective tax burden by 1.84%. The second effect is the applica-
tion  of  a lower  progressive  tax  rate  schedule  if  the  income  is  below  EUR  322,500 in-
stead of the general proportional tax rate of 33%. For the model corporations consid-
ered here, this schedule implies a reduction of the effective tax burden by 0.65%. 

The reduction of the effective tax burden in France by 3.78% is related to different tax 
rate incentives available for small corporations. For corporations with a turnover below 
EUR  7,630,000  the  first  EUR  38,120  of  income  are  taxed  at  a  reduced  rate  of  15% 
(income  above  this  threshold  is  taxed  at  33.33%).  Additionally,  the  French  govern-
ment  imposes  a  tax  of  0.16%  on  turnover  if  total  turnover  exceeds  EUR  7,630,000. 

87 

 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The  small  enterprise  model  does  not  meet  this  threshold  and  thus  does  not  become 
subject to this tax, whereas the medium-sized enterprise model does.  

Ireland  offers  a  special  tax  relief  scheme  for  the  first  three  periods  of  operation  for 
newly founded enterprises. As this relief is tied to specific thresholds, it constitutes an 
SME  incentive  as  well.  In  detail,  the  CIT  liability  is  in  a  first  step  calculated  with  the 
standard rate of 12.5%. If this liability is below EUR 40,000, no tax has to be paid. For 
an income tax liability between EUR 40,000 and EUR 60,000, a marginal relief applies 
in  the  first  three  years.  For  the  model  corporation  considered  here,  this  provision  is 
fulfilled in two simulation periods and explains the reduction of the  effective tax bur-
den by 7.58%. 

Spain  employs  several  incentives  targeted  at  small  and  micro  enterprises.  Thus,  the 
effective  tax  burden  is  reduced  at  a  large  scale  by  almost  30%.  Spain  is  the  only 
country which offers tax base, tax rate and tax credit incentives at the same time for 
small and micro corporations. The highest impact is attained by the reduced tax  rate 
scheme: Instead of the normal tax rate of 30%, a progressive schedule with reduced 
tax  rates  (first  EUR  300,000:  20%;  above  EUR  300,000:  25%)  applies,  if  the  enter-
prise  has  less  than  25 employees  and  if  turnover  does  not  exceed  EUR  5,000,000.  A 
tax credit for small and micro enterprises amounting to EUR 3,000 per employee un-
der 30 years and per period is granted since 2012 and reduces the effective tax bur-
den  by  10.67%.  The  tax  base  is  reduced  by  an  increased  depreciation  scheme  that 
allows depreciation at 200% of the normal rates, yielding an isolated tax reducing ef-
fect of 3.08%. 

The  significance  of  the  reduced  tax  rate  system  in  the  UK  is  increasing  for  the  small 
model enterprise. Instead of a rather small reduction of 0.61% for the medium-sized 
enterprise, the effective tax burden is now reduced by 8.23%. In contrast to the me-
dium-sized enterprise, the threshold for the turnover of GBP 300,000 is not exceeded 
and  thus,  the  reduced  CIT  rate  of  21%  is  applicable  in  all  simulation  periods  for  the 
model corporation considered here. 

The country ranking remains considerably stable again. However, an exception is con-
stituted  by  Spain:  With  the  very  generous  incentives  available  for  small  and  micro 
corporations, Spain improves from position 19 to position 12. The application of spe-
cific  incentives  in  Belgium,  France  and  Ireland  has  no  effect  on  the  position  in  the 
country ranking. Only the UK can improve its position by one rank. 

Concerning the third case (combination  of general tax code and R&D  incentives), ex-
actly the same rules which are applied to the medium-sized enterprise are implement-
ed. If one compares the effects of the R&D regulations for the medium-sized and the 
small corporation model, it becomes apparent  that those provisions have comparable 
effects without major differences.50  

Finally,  the  combination  of  SME  and  R&D  incentives  yields  further  interesting  results. 
In  seven  countries,  the  effective  tax  burden  is  now  reduced  by  more  than  10%  in 
comparison  to  the  application  of  the  general  tax  code  for  LSEs.  Ireland  is  replacing 
Bulgaria  at  the  top  of  the  ranking  with  a  reduction  of  the  effective  tax  burden  by 
29.93%.  In  comparison  to  the  case  with  SME  incentives  only,  the  position  of  Spain 
remains  stable.  Spain  exhibits  the  largest  reduction  of  the  effective  tax  burden 

50 The slight differences are due to the model setup and the different structure of the model enterprises.  

88 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

(33.24%)  of  all  considered  countries  for  the  combined  case  of  SME  and  R&D  incen-
tives.  

Again, several sensitivity analyses have been conducted to consider differing assump-
tions  on  the  profitability,  capital  intensity,  equity  ratio  and  labour  intensity  of  the 
model corporation.51 . As for  other size categories, the  results remain robust and the 
effects are comparable to those found in the previous section. 

6.3.3.2.  Development  of  effective  tax  burdens  in  selected  countries  (corporate 

level) 

As  for  the  LSE,  the  most  striking  developments  over  the  entire  time  period  (2009-
2013) are displayed for six selected countries to highlight trends. Each graph contains 
three  lines  (general  tax  code,  only  SME  incentives,  combination  of  SME  and  R&D  in-
centives).52 

Figure  6.2  Development  of  effective  tax  burden  (corporate  level)  from  2009 
to 2013 for selected countries (model small corporation) 

R
U
E
d
n
a
s
u
o
h
T

1,560

1,540

1,520

1,500

1,480

1,460

R
U
E
d
n
a
s
u
o
h
T

2,500

2,300

2,100

1,900

1,700

1,500

Belgium

Ireland

R
U
E
d
n
a
s
u
o
h
T

650

600

550

500

450

400

Spain

R
U
E
d
n
a
s
u
o
h
T

2,000

1,800

1,600

1,400

1,200

1,000

France

Italy

The  UK

R
U
E
d
n
a
s
u
o
h
T

1,750

1,700

1,650

1,600

1,550

1,500

R
U
E
d
n
a
s
u
o
h
T

1,600

1,400

1,200

1,000

800

600

General Tax Code 
General Tax Code including SME-Incentives 
General Tax Code including SME & R&D Incentives 

51 The detailed results for the sensitivity analysis of the profitability, capital intensity, equity ratio and labour 
intensity  can  be  found  in  Annex  1  (section  5.7).  In  the  same  section,  the  results  for  the  industry-specific 
model corporations are presented.    
52 The detailed results for every country and year can be found in Annex 1 (Table 5.22). 

89 

 
 
 
 
 
                                                 
 
 
 
 
 
 
 
 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

In Belgium, the distance in case of the general tax code, the tax code with SME incen-
tives and the tax code in case SME and R&D tax incentives are applied in combination 
is  considerably  increasing  from  2009  to  2013.  The  strong  decline  of  the  effective  tax 
burden for the cases with implemented SME incentives can be explained by the intro-
duction of an increased notional interest deduction rate (3.5% instead of 3%). In con-
trast  to  the  medium-sized  model  corporation,  the  small  model  corporation  fulfils  the 
prerequisites.53  In  the  following  years,  the  distances  remain  stable  and  the  develop-
ments  are  mainly  caused  by  changes  in  the  general  tax  code  as  for  R&D  provisions, 
only some minor changes occur.  

The French tax system and the distance between the three different lines remains sta-
ble  over  time.  Since  the  implemented  SME  incentives  do  not  change  from  2009  to 
2013, most of the developments can be explained by changes in the general tax code. 
The slight decrease between the combined SME and R&D line and the other two lines 
is caused by a reduction of a specific R&D incentive.54 

Ireland  shows  no  change  in  the  distance  between  the  two  upper  lines  whereas  the 
distance  to  the  combined  SME  and  R&D  line is  increasing  at  a  large  scale  from  2012 
on.  This  is  related  to  the  introduction  of  a  volume-based  tax  credit  as  mentioned 
above.  

Italy has no special incentive for SMEs in place and should therefore serve as a coun-
terexample to the other countries displayed in the graph that all apply a certain kind 
of SME incentives. The development of the lower line from 2009 to 2013 is completely 
related to changes  of R&D tax provisions and has been already explained before. Es-
pecially  the  tax  credit  for  R&D-related  personnel  costs  up  to  a  maximum  of  EUR 
200,000 per year at an amount of 35% which has been introduced in 2012 results in a 
reduction of the effective tax burden by 5.41%.  

The tax incentives for SMEs in place in Spain are the most generous among the coun-
tries  covered  in  this  study  and  have  the  highest  impact  on  the  effective  tax  burden. 
Starting from 2009 with a reduction of 24.61%, this has been increased to a reduction 
of the effective tax burden by 29.47% (only SME incentives taken into account). The 
reason  for  the  changes  is  a  newly introduced  tax  credit  and  the  extension  of  the  ap-
plicability of the reduced tax rate from EUR 102,202.41 to EUR 300,000.   

The UK likewise shows a very interesting pattern as the distance between the effective 
tax burdens in case of the general tax code and the consideration of SME specific pro-
visions is diminishing. The reason for this development is the standard CIT rate which 
has  been  reduced  since  2009  in  several  steps  from  28%  (2009)  to  23%  (2013) 
whereas  the  reduced  tax  rate  for  SMEs  has  been  only  decreased  from  21%  (until 
2010) to 20% (2011-2013). Starting from March 2015 onwards, the divergence of the 
tax  rates  will  completely  dissolve  and  a  uniform  tax  rate  of  20%  will  apply  for  LSEs 
and SMEs. The increasing distance between SME tax code and combined SME and R&D 
incentives case can be explained by higher rates for the super deduction for personnel 
and  current  costs  in  R&D  (2009-2010:  75%,  2011:  100%,  2012-2013:  125%  on  top 
of the actual expenses). 

53  Two  of  the  following  three  criteria  must  be  met:  employees  ≤  50;  turnover  ≤  EUR  6,250,000;  balance 
sheet total ≤ EUR 3,125,000. 
54 The same effect occurs for the LSE.  

90 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

6.3.3.3.  Conclusions (corporate level) 

The assessment of tax incentives for corporations of small size can be summarized in 
three major results: 

  First,  compared  to  corporations  of  medium  size,  SME  incentives  become  effec-
tive  more  often  for  small  corporations.  The  effective  tax  reduction  due  to  SME 
incentives ranges from 2.54% (Belgium) to 29.47% (Spain). 

  Second,  the  country  ranking  again is  fairly  unaffected  by  tax  incentives.  Spain, 
however,  offering  a  very  generous  SME  incentives  scheme,  constitutes  an  ex-
ception. 

  Third, the effects of R&D incentives are comparable to those found for the medi-

um-sized corporation. 

6.3.3.4.  Effective tax burden 2013 (overall level: corporation and shareholder)  

The  following  extends  the  analysis  to  the  overall  tax  burden  including  shareholders 
taxes. Again, we consider  four different cases  displayed in  Table 6.6 (first column no 
incentives, second column SME and R&D incentives, third and fourth column effect of 
SME and R&D incentives if the equity ratio is changed).55 

Table  6.6  Effective  tax  burden  (10  periods,  corporate  and  shareholder  level, 
model small corporation, fiscal year 2013) 

General Tax Code 

SME specific Tax Code and R&D-Incentives 

Base case 

Base case 

Equity Ratio -30% 

Equity Ratio +30% 

Tax Bur-
den  (€) 

Rank 

Tax  Bur-
den       (€) 

Total 
Effect 

Rank 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

Germany 

Greece  

Ireland 

Italy 

Lithuania 

2.268.519 

2.335.738 

709.212 

1.512.115 

1.008.234 

2.201.452 

2.927.942 

2.407.589 

2.146.030 

2.617.021 

2.343.112 

1.573.605 

Luxembourg  

2.125.732 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

1.996.229 

1.669.355 

1.423.983 

1.786.828 

2.584.018 

2.168.854 

2.263.905 

14 

15 

1 

4 

2 

12 

20 

17 

10 

18 

16 

5 

9 

8 

6 

3 

7 

19 

11 

13 

2.234.360 

-1,51% 

2.287.397 

-2,07% 

709.212 

- 

1.415.021 

-6,42% 

1.008.234 

- 

2.160.174 

-1,88% 

2.804.911 

-4,20% 

2.407.589 

- 

2.131.096 

-0,70% 

2.478.645 

-5,29% 

2.269.224 

-3,15% 

1.472.878 

-6,40% 

2.116.741 

-0,42% 

1.938.865 

-2,87% 

1.634.869 

-2,07% 

1.395.100 

-2,03% 

1.722.251 

-3,61% 

2.224.543 

-13,91% 

2.168.854 

- 

2.081.485 

-8,06% 

15 

17 

1 

4 

2 

12 

20 

18 

11 

19 

16 

5 

10 

8 

6 

3 

7 

14 

13 

9 

Tax  
Burden    

(€) 

% change 
compared 
to Base 
Case 

2.186.741 

-2,13% 

2.251.455 

-1,57% 

684.926 

-3,42% 

1.393.972 

-1,49% 

981.963 

-2,61% 

2.131.114 

-1,35% 

2.729.346 

-2,69% 

2.328.783 

-3,27% 

2.071.081 

-2,82% 

2.397.117 

-3,29% 

2.217.593 

-2,28% 

1.391.525 

-5,52% 

2.025.722 

-4,30% 

1.896.373 

-2,19% 

1.571.998 

-3,85% 

1.340.921 

-3,88% 

1.658.825 

-3,68% 

2.159.350 

-2,93% 

2.092.593 

-3,52% 

2.019.036 

-3,00% 

Rank 

Tax Bur-
den    (€) 

% change 
compared 
to Base 
Case 

Rank 

15 

17 

1 

5 

2 

13 

20 

18 

11 

19 

16 

4 

10 

8 

6 

3 

7 

14 

12 

9 

2.284.589 

2.332.334 

733.486 

1.436.086 

1.034.508 

2.239.830 

2.897.616 

2.496.869 

2.191.118 

2.600.190 

2.321.695 

1.554.217 

2.213.681 

1.983.300 

1.697.749 

1.449.321 

1.785.747 

2.338.390 

2.245.118 

2.144.179 

2,17% 

1,88% 

3,31% 

1,37% 

2,54% 

3,49% 

3,07% 

3,58% 

2,72% 

4,51% 

2,19% 

4,91% 

4,36% 

2,18% 

3,63% 

3,67% 

3,43% 

4,20% 

3,40% 

2,69% 

14 

16 

1 

3 

2 

12 

20 

18 

10 

19 

15 

5 

11 

8 

6 

4 

7 

17 

13 

9 

55 Table 5.45 in Annex 1 contains detailed calculation results for all years and the impact of a changing equi-
ty ratio in a more detailed manner. 

91 

 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Concerning the combined effective tax burden (shareholder and corporate level), simi-
lar  conclusions  for  the  small  corporation  as  for  the  medium-sized  corporation  can  be 
drawn. As pointed out above, Ireland and Slovenia combine a low tax burden on cor-
porate  level  (Table  6.4)  with  comparably  high  PIT  on  dividend income.  The  latter  re-
duces the impact of SME and R&D-tax incentives on the effective tax burden.56 On the 
other  hand,  Estonia  and  Luxembourg  improve  in  the  country  ranking  due  to  their 
comparably low PIT.  

As for the medium-sized corporation, the effect of SME and R&D-incentives is reduced 
by roughly 50% in most countries. The variation in the equity ratio yields comparable 
results as for the medium-sized corporation. 

6.3.4. Micro corporations 

6.3.4.1.  Effective tax burden 2013 (corporate level) 

Finally, financial data for a model micro corporation is considered. Again, we consider 
the  above  described  four  cases  (no  incentives,  only  SME  incentives,  only  R&D  incen-
tives, combination of R&D and SME incentives), as displayed in Table 6.7.57 

Table 6.7 Effective tax burden (10 periods, corporate level, model micro cor-
poration, fiscal year 2013) 

General 
Tax Code 
Tax 
burden (€) 

Rank 

SME specific Tax Code 

General Tax Code and R&D 
Incentives 

SME specific Tax Code and R&D 
Incentives 

Tax   Bur-
den   (€) 

Total 
Effect 

Rank 

Tax Bur-
den  (€) 

Total 
Effect 

Rank 

Tax Bur-
den  (€) 

Total 
Effect 

Rank 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

Germany 

Greece  

Ireland 

Italy 

Lithuania 

272,763 

298,891 

94,666 

179,309 

191,108 

230,005 

322,756 

286,898 

242,676 

125,756 

303,414 

163,287 

Luxembourg  

274,267 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

186,401 

184,766 

154,053 

154,239 

321,052 

204,894 

237,622 

14 

17 

1 

6 

9 

11 

20 

16 

13 

2 

18 

5 

15 

8 

7 

3 

4 

19 

10 

12 

272,763 

- 

262,134 

-12.30% 

94,666 

- 

89,611 

-50.02% 

191,108 

230,005 

- 

- 

246,895 

-23.50% 

286,498 

-0.14% 

242,676 

- 

77,179 

-38.63% 

303,414 

- 

76,669 

-53.05% 

274,267 

186,401 

- 

- 

184,405 

-0.20% 

154,053 

- 

149,788 

-2.89% 

164,769 

-48.68% 

204,894 

- 

211,816 

-10.86% 

17 

16 

4 

3 

10 

13 

15 

19 

14 

2 

20 

1 

18 

9 

8 

6 

5 

7 

11 

12 

266,066 

-2.46% 

295,180 

-1.24% 

94,666 

- 

162,749 

-9.24% 

191,108 

- 

220,605 

-4.09% 

307,834 

-4.62% 

286,898 

- 

239,481 

-1.32% 

105,408 

-16.18% 

289,269 

-4.66% 

144,782 

-11.33% 

272,547 

-0.63% 

175,850 

-5.66% 

178,508 

-3.39% 

148,997 

-3.28% 

141,562 

-8.22% 

311,536 

-2.96% 

204,894 

- 

232,888 

-1.99% 

14 

18 

1 

6 

9 

11 

19 

16 

13 

2 

17 

4 

15 

7 

8 

5 

3 

20 

10 

12 

266,066 

-2.46% 

258,524 

-13.51% 

94,666 

- 

81,250 

-54.69% 

191,108 

- 

220,605 

-4.09% 

231,973 

-28.13% 

286,498 

-0.14% 

239,481 

-1.32% 

56,830 

-54.81% 

289,269 

-4.66% 

70,471 

-56.84% 

272,547 

-0.63% 

175,850 

-5.66% 

178,143 

-3.58% 

148,997 

-3.28% 

137,163 

-11.07% 

155,643 

-51.52% 

204,894 

- 

207,695 

-12.59% 

17 

16 

4 

3 

10 

13 

14 

19 

15 

1 

20 

2 

18 

8 

9 

6 

5 

7 

11 

12 

56 For Ireland, the effect of SME and R&D-incentives shrinks from 29.93% (Table 6.5) to 5.29% (Table 6.6). 
In Slovenia, the effect is reduced from 10.80% to 3.61%. 
57 A more detailed table on the separated effects of SME and R&D effects and their subcomponents is pro-
vided in Annex 1 (section 5.4). 

92 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Ten  countries  have  SME  tax  incentives  in  place  that  become  effective  for  the  micro 
model  corporation  (small  corporation:  5  countries  with  effective  incentives)  whereas 
16  countries  have  implemented  R&D  tax  incentives.  In  other  words,  SME  tax  incen-
tives are less commonly applied. However, SME incentives tend to provide much high-
er relief than do R&D incentives: In all of the countries that have both R&D and SME 
incentives in place – apart from Poland and Slovenia  – SME incentives have substan-
tially larger reducing effects. The highest relief comes along with the SME incentive in 
Lithuania  (-53.05%),  but  also  Croatia  (-50.02%),  Ireland  (-38.63%),  France  (-
23.50%)  and  Spain  (-48.68%)  apply  similarly  effective  incentives.  By  contrast,  the 
highest tax reduction induced by R&D incentives amounts to only 16.18% (Ireland). 

The following provides a more detailed discussion of the SME incentives and highlights 
their  reducing  effect  on  the  effective  tax  burden  for  micro  corporations  compared  to 
small corporations.  

First of all, it becomes evident that micro corporations benefit to a much larger extent 
from  tax  rate  incentives  that  are  constructed  as  progressive  rate  schemes.58  Com-
pared  to  the  medium-sized  and  small  corporation,  a  larger  portion  of  their  taxable 
profits  is  taxed  in  the  lowest  income  bracket,  such  that  relatively  larger  relief  is  ob-
tained.  In  Belgium  for  instance,  the  reduction  from  applying  the  progressive  scheme 
amounts to 10.29% vs. 1.84% for the small case. Similarly, in France, where the first 
EUR  38,120  are  taxed  at  15%  and  the  exceeding  amount  at  33.33%  beyond  that 
amount,  the  reductions  total  23.50%  (micro)  resp.  3.78%  (small).  The  respective 
numbers for the tax rate incentive in Spain are 46.68% (micro) and 29.47% (small), 
and 10.86% (micro) resp. 8.23% (micro) in the UK.  

As described in the previous section on the small corporation, Ireland offers a special 
tax relief scheme  for the first three periods of  operations for newly founded corpora-
tions. Since the micro enterprise has a tax liability below EUR 40,000 in all three peri-
ods,  it  attains  full  exemption  from  CIT.  Thus,  the  relief  implied  by  this  incentive 
amounts to 38.63%. The small corporation, however, only obtains a 7.58% reduction. 

In five further countries, SME incentives are operated that exclusively benefit the mi-
cro corporation. In Lithuania, the 15% CIT rate is reduced to 5% if the SME has a tax-
able  income  below  LTL  1,000,000  (ca.  EUR  290.000)  and  less  than  11  employees. 
These prerequisites are only fulfilled by the micro corporation. As outlined above, the 
associated significant reduction totals 53.05%. 

Germany  offers  increased  straight  line  depreciation  at  a  rate  of  20%,  if  the  enter-
prise’s net assets do not exceed EUR 235,000. Again, only the micro enterprise satis-
fies this condition, yet the implied relief is rather small (0.14%). Likewise, immediate 
depreciation  up  to  EUR  50,000  is  available  in  Poland  if  turnover  is  smaller  than  EUR 
1,200,000. Again, however, the tax burden is only slightly (0.2%) reduced.  

Slovenia  applies  a  lump-sum  deduction  from  the  tax  base  of  70%,  if  the  tax  base  is 
smaller  than  EUR  50,000.  The  micro  corporation  satisfies  this  condition  in  only  one 
simulation period; the inherent relief amounts to 2.89%. 

Finally, Croatia taxes income from investment into micro enterprises at a reduced rate 
of  10%  (instead  of  20%)  since  2012.  Consequently,  the  tax  burden  relief  resulting 
from this generous incentive is substantial (50.02%). 

58 See Annex 1 (Table 5.23) for an overview of the isolated effects of the respective incentives. 

93 

 
 
                                                 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

In addition, it is interesting to see how the respective tax incentives affect the country 
ranking. First of all, the exclusive application of R&D incentives comes along with only 
small changes to the base case ranking (general tax code); changes of at most 2 posi-
tions can be observed (3rd column of Table 6.7).59  

By contrast, Table 6.7 unfolds that SME incentives change the country ranking at large 
scale. Spain attains the largest improvement and makes up 12 positions moving from 
rank 19 to rank 7. As outlined above, Spain operates a broad range of SME incentives 
of  different  types.  The  largest  isolated  effect  of  these  incentives  can  be  attributed  to 
the reduced progressive tax rate scheme. Effective tax rate incentives also explain the 
considerable  improvements  of  France  (five  ranks),  Lithuania  (four  ranks)  and  Croatia 
(three  ranks).  Lithuania  thus  supersedes  Bulgaria  and  becomes  ranked  first.  Ireland, 
however, yields a substantial tax burden reduction (-38.63%), yet remains second in 
the ranking. On the other hand, countries without incentives or just little effective SME 
incentives deteriorate; six countries lose three positions in the ranking.    

Similar  movements  can  be  observed  if  both  SME  and  R&D  incentives  are  considered 
for  the  computations.  In  four  countries  (Croatia,  Ireland,  Lithuania  and  Spain),  the 
total  relief  is  larger  than  50%.  Ireland,  having  both  attractive  R&D  and  SME  incen-
tives, even becomes first in the country ranking. Apart from that, the ranking is virtu-
ally the same like in the case of SME incentives only. 

The sensitivity analyses considering the impact of differing assumptions on the profit-
ability, capital intensity, equity ratio and labour intensity on the effective tax burdens 
for  the  micro  corporation  are  conducted  in  the  same  manner  like  for  the  other  size 
categories (large, medium-sized, small).60 Again, as for other size categories, the  re-
sults remain robust and the effects are comparable to those found in the previous sec-
tion. For a more extensive discussion we refer to the previous sections (LSE). 

6.3.4.2.  Development  of  effective  tax  burdens  in  selected  countries  (corporate 

level) 

Similar to the analysis conducted for large and small corporations, the development of 
the effective tax burdens for micro corporations from 2009 to 2013 will be presented 
for some selected countries.61 

Figure  6.3  Development  of  effective  tax  burden  (corporate  level)  from  2009 
to 2013 for selected countries (model micro corporation) 

59 As regards the effect of R&D incentives on the tax burden, comparable results as for the small and medi-
um case are obtained.  
60 The detailed results for the sensitivity analysis of the profitability, capital intensity, equity ratio and labour 
intensity  can  be  found  in  Annex  1  (section  5.8).  In  the  same  section,  the  results  for  the  industry-specific 
model corporations are presented.    
61 The detailed results for each country and year can be found in Annex 1 (Table 5.23). 

94 

 
 
 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Croatia

Lithuania

Slovenia

R
U
E
d
n
a
s
u
o
h
T

R
U
E
d
n
a
s
u
o
h
T

250

200

150

100

50

0

450

400

350

300

250

200

R
U
E
d
n
a
s
u
o
h
T

200

160

120

80

40

0

France

The Netherlands

R
U
E
d
n
a
s
u
o
h
T

250

230

210

190

170

150

R
U
E
d
n
a
s
u
o
h
T

200

180

160

140

120

100

R
U
E
d
n
a
s
u
o
h
T

300

280

260

240

220

200

The UK

General Tax Code 
General Tax Code including SME-Incentives 
General Tax Code including SME & R&D Incentives 

In  Croatia,  the  considerable  reduction  of  the  effective  tax  burden  of  more  than  50% 
(50.02%)  for  micro  corporations  starting in  2012  has  been  described  in  the  previous 
section and can be traced back to the investment incentive specifically targeting micro 
corporations  in  that  year.  The  implemented  R&D  incentives  remain  constant  from 
2009  to  2013  and  include  a  super  deduction  of  125%  for  personnel  costs,  current 
costs and depreciation related to R&D.  

For France, the results display a reduction between effective tax burdens according to 
the  general  tax  code  and  effective  tax  burdens  taking  into  account  the  SME  specific 
case and the combination of SME and R&D tax incentives. As for the other size catego-
ries  (large,  medium-sized,  small),  the  reduction  of  the  rate  of  the  R&D  tax  credit 
(available  for  personnel  and  current  costs)  reduces  the  impact  of  these  incentives 
(2010:  -7.05%;  2011:  -4.12%)  on  the  effective  tax  burden.  From  2012  onwards, 
there  are  no  further  changes  concerning  the  relative  distances  between  the  different 
scenarios. 

Lithuania  only  provides  a  SME  specific  tax  rate  which  has  been  expanded  between 
2009 and 2012 in different ways. In 2010, the lower tax rate for corporations with less 
than  11  employees  and  taxable  income  below  LTL  500,000  (ca.  EUR  145,000)  was 
reduced from 13% to 5%, whereas the head-line CIT  rate was  reduced from 20% to 
15% only. As a result, the reduction of the effective tax burden caused by the SME tax 
scheme increased from 24.91% to 46.01%. Since 2012, the taxable income threshold 
has  been  increased  from  LTL  500,000  (ca.  EUR  145,000)  to  LTL  1,000,000  (ca.  EUR 
290,000) and has led to a further reduction of the comparative effective tax burdens 
to 60.89%. 

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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The Netherlands have no special tax incentive for SMEs in place and therefore serve as 
a  counterexample  to  the  other  countries  displayed.  The  reduction  in  the  comparative 
effective tax burdens is only caused by the available R&D tax incentives.   

Slovenia  has  introduced  a  new  micro  tax  regime  in  2013.  Accordingly,  if  the  annual 
revenue  is  below  EUR  50,000,  corporations  are  entitled  to  a  lump-sum  deduction  of 
70% of taxable income. For the model corporation considered here, this prerequisite is 
only fulfilled in one of the ten simulation periods and thus, the reduction of the effec-
tive  tax  burden  amounts  to  2.89%  only.  The  impact  of  R&D  tax  incentives  increases 
from  2009  to  2013  since  the  applicable  rate  for  the  deduction  of  R&D-related  capital 
expenditure,  personnel  costs  and  current  costs  has  been  gradually  increased  from 
20% (2009) to 40% (2010-2011) and 100% (2012-2013). 

The  effective  tax  burdens  for  the  UK  show  a  similar  pattern  as  already  described  for 
the  small  corporation.  As  the  difference  between  the  standard  CIT  rate  and  the  re-
duced tax  rate applicable to SMEs is diminishing, the differences for the effective tax 
burdens become smaller as well (2009: -21.34%; 2013: -10.86%). 

6.3.4.3.  Effective tax burden 2013 (overall level: corporation and shareholder) 

The  following  extends  the  analysis  to  the  overall  tax  burden  including  shareholders 
taxes. Again, we consider  four different cases  displayed in  Table 6.8 (first column no 
incentives, second column SME and R&D incentives, third and fourth column effect of 
SME and R&D incentives if the equity ratio is changed).62 

62 Table 5.46 in Annex 1 contains detailed calculation results for all years and the impact of a changing equi-
ty ratio in a more detailed manner. 

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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Table  6.8  Effective  tax  burden  (10  periods,  corporate  and  shareholder  level, 
model micro corporation, fiscal year 2013) 

General Tax Code 

SME specific Tax Code and R&D-Incentives 

Base case 

Base case 

Equity Ratio -30% 

Equity Ratio +30% 

Tax Bur-
den (€) 

Rank 

Tax  Bur-
den       (€) 

Total 
Effect 

Rank 

Rank 

Tax Bur-
den    (€) 

Country 

Austria  

Belgium  

Bulgaria 

Croatia  

Estonia 

Finland  

France  

Germany 

Greece  

Ireland 

Italy 

Lithuania 

395.147 

454.687 

138.189 

290.673 

197.056 

428.105 

525.344 

459.092 

418.210 

509.956 

447.060 

309.369 

14 

15 

1 

4 

2 

12 

20 

17 

10 

18 

16 

5 

9 

8 

6 

3 

7 

19 

11 

13 

390.124 

-1,27% 

424.410 

-6,66% 

138.189 

- 

206.426 

-28,98% 

197.056 

- 

421.841 

-1,46% 

464.061 

-11,67% 

458.804 

-0,06% 

415.815 

-0,57% 

466.498 

-8,52% 

436.083 

-2,46% 

235.117 

-24,00% 

382.451 

-0,35% 

323.468 

-2,37% 

320.699 

-1,64% 

273.747 

-1,53% 

333.391 

-3,70% 

347.743 

-25,72% 

421.702 

- 

420.659 

-4,71% 

11 

16 

1 

3 

2 

15 

19 

18 

12 

20 

17 

4 

10 

7 

6 

5 

8 

9 

14 

13 

Luxembourg  

383.813 

The Nether-
lands  

Poland 

Romania 

Slovenia 

Spain 

Sweden 

The UK  

331.319 

326.062 

277.995 

346.197 

468.168 

421.702 

441.442 

Tax  
Burden    

(€) 

% change 
compared 
to Base 
Case 

378.633 

-2,95% 

417.563 

-1,61% 

132.751 

-3,94% 

206.722 

0,14% 

191.161 

-2,99% 

418.064 

-0,90% 

446.420 

-3,80% 

439.341 

-4,24% 

402.356 

-3,24% 

448.222 

-3,92% 

424.313 

-2,70% 

221.546 

-5,77% 

359.850 

-5,91% 

302.131 

-6,60% 

306.607 

-4,39% 

261.616 

-4,43% 

319.456 

-4,18% 

344.874 

-0,83% 

404.607 

-4,05% 

407.115 

-3,22% 

11 

15 

1 

3 

2 

16 

19 

18 

12 

20 

17 

4 

10 

6 

7 

5 

8 

9 

13 

14 

% change 
compared 
to Base 
Case 

4,42% 

2,11% 

3,79% 

408.388 

434.266 

143.639 

206.174 

-0,09% 

202.959 

430.895 

482.784 

483.627 

429.265 

484.774 

447.897 

248.697 

406.177 

344.807 

334.804 

285.910 

347.358 

365.103 

438.815 

434.214 

2,91% 

2,07% 

3,43% 

5,13% 

3,12% 

3,47% 

2,57% 

4,15% 

5,82% 

6,05% 

4,15% 

4,19% 

3,87% 

3,53% 

3,90% 

2,97% 

Rank 

11 

15 

1 

3 

2 

13 

18 

19 

12 

20 

17 

4 

10 

7 

6 

5 

8 

9 

16 

14 

The effects with regard to the overall tax burden for micro corporations are again very 
similar  to  those  found  in  previous  sections  (medium-sized  and  small  corporations). 
Interestingly, Ireland can now be found at the end of the ranking in  Table 6.8. Apart 
from Ireland and Slovenia, the effect of SME and R&D-incentives on the corporate lev-
el is reduced by roughly 50% if the overall level is considered. 

Differing  financing  structures  have  only  a  minor  impact  on  the  effective  tax  burden 
(columns 3 and 4). For Croatia, an opposite pattern compared to the other countries 
can be observed. With a decreasing equity ratio (resulting in higher interest payments 
on  corporate  level  and  higher  interest  income  on  shareholder  level),  the  overall  tax 
burden is increasing and vice versa. This can be explained by the low tax rate on cor-
porate profits (10%) and a high  PIT rate on interest income (40%). A shift of corpo-
rate profits to the shareholder by using a shareholder loan leads to a higher tax bur-
den in this case. 

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enterprises 

6.4.  Summary  

The effects  of R&D and SME tax incentives on  the effective tax burdens for the fiscal 
year 2013 are summarized in the following. We differentiate between the effective tax 
burdens for the corporate level and the overall level (corporate and shareholder level) 
and the results of the sensitivity analyses. 

6.4.1.  Corporate level 

  Broadly applicable R&D incentives are more common than SME incentives. Most 
countries apply many types of R&D tax incentives, the application of SME incen-
tives, however, is less prevalent. These findings refer to the results of the quali-
tative analyses conducted in the previous Section (6.3) of the report. 

  Smaller  SME  corporations  benefit  to  a  greater  extent  from  SME  tax  incentives. 
Many  SME  tax  incentives  do  not  apply  for  medium-sized  and/or  small  corpora-
tions, but exclusively for micro corporations. The reason for that are certain pre-
requisites and thresholds relating for instance to the size of profits which are on-
ly satisfied by micro corporations. 

  Likewise,  as  far  as  R&D  tax  incentives  are  tied  to  certain  threshold  provisions, 
smaller corporations derive a larger benefit in terms of a reduction of the effec-
tive tax burden. 

  With regard to SME and R&D tax incentives, it can therefore be  concluded that 
especially smaller SMEs tend to benefit from lower taxation levels than LSEs. 
  However,  LSEs  are  able  to  derive  tax  benefits  from  international  tax  planning 
strategies, which SMEs usually cannot draw on. This argument will be elaborated 
in the following Section 7.  

  Moreover, SMEs often face more difficult access to debt financing, which we find 
to  be  more  tax  efficient  than  equity  financing.  Still,  we  cannot  conclude  that 
SMEs pay more taxes than LSEs in general. 

  Some R&D incentives exclusively apply for SMEs.  
  For most countries considered in this study, an increasing significance (in terms 
of  the  tax  burden  reducing  effect)  of  R&D  and  SME  incentives  can  be  observed 
over  time.  Exceptions  to  this  are  France,  Lithuania  and  the  UK  which  have  not 
increased  their  incentives  regimes  between  2009  and  2013.  Therefore,  there  is 
no clear evidence for SME-related tax competition among Member States. 

  The  LSEs  benefits  from  tax  reductions  in  the  different  countries  considered  in 
this study between 0.98% (Luxembourg) and roughly 20% (Lithuania) by apply-
ing  R&D  tax  incentives.  However,  the  country  ranking  remains  largely  un-
changed if these R&D tax incentives are taken into consideration. 

  The medium-sized corporation virtually does not benefit from SME tax incentives 
in the countries considered in this study (apart from the UK). This is due to size 
restrictions  which  the medium-sized  corporation  does  not  satisfy.  Reductions in 
effective  tax  burdens  here  can  be  mainly  traced  back  to  R&D  tax  incentives. 
These  reductions  (only  R&D  incentives)  range  between  0.93%  (Luxembourg) 
and 25.24% (Ireland). 
In case of a small corporation, SME incentives become effective with respect to 
five countries (i.e. Belgium, France, Ireland, Spain and the UK). The reductions 
in  effective  tax  burdens  which  can  be  solely  attributed  to  SME  tax  incentives 
range between 2.54% (Belgium) and 29.47% (Spain). Again, the impact on the 
country ranking is rather limited. 

 

  Substantial effects of SME tax incentives have been found for the micro corpora-
tion.  The  largest  tax  relief  was  computed  for  Lithuania  (-53.05%).  Overall,  tax 
relief provided by SME incentives turns out to be much larger than the relief de-
rived  from  R&D  incentives.  In  particular,  SME  incentives  implying  reduced  tax 
rates  and/or  progressive  rate  schemes  are  very  effective  in  reducing  the  tax 

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enterprises 

burden.  Moreover,  SME  incentives  substantially  change  the  country  ranking  in 
the micro case. 

6.4.2.  Overall  level  (corporate  and  shareholder  level  for  medium-

sized, small and micro corporations) 

If shareholder taxation is taken into account in addition, the following conclusions can 
be drawn: 

  For  the  three  considered  size  categories  (medium-sized,  small,  and  micro),  the 
country  ranking  of  the 20  Member  States  remains  fairly  constant.  The  effect  of 
SME and R&D-incentives diminishes by roughly 50% in most of the countries. 
  Some countries, however, lose positions in the country ranking due to compara-
bly  high  PIT.  High  PIT  may  imply  that  the  effect  of  SME  and  R&D-incentives  is 
shrinking at a large scale. 

  Therefore, the beneficial effect of incentives provided on corporate level may be-

come much smaller if both levels of taxation are considered.  

6.4.3.  Sensitivity analysis 

To  verify  the  robustness  of  our  conclusions,  several  sensitivity  analyses  have  been 
conducted. We calculate the effective tax burdens for the different model corporations 
if assumptions on the profitability, capital intensity, equity ratio or labour intensity are 
modified (corporate level). Additionally, industry-specific model corporations are used 
for  further  robustness  checks  (only  corporate  level).  For  the  overall  level,  sensitivity 
analyses are limited to the variation of the equity ratio. We thus aim  to demonstrate 
the impact of different capital structures.  

  The  results  are  again  largely  robust  with  regard  to  differing  assumptions  on 
profitability, capital intensity, equity ratio, and labour intensity (corporate level).  
  The  effect  of  R&D  and  SME  incentives  highly  differs  across  industries.  This  can 
be explained foremost by industry specific R&D intensities (corporate level). 
  The  sensitivity  analysis  (equity  ratio)  for  the  overall  tax  burden  unfolds  that  a 
lower  equity  ratio  (=  higher  debt  share)  reduces  the  tax  burden  on  corporate 
level.  This  reduction  can,  however,  be  countered  for  instance  by  unfavourable 
taxation  (progressive  taxation)  of  shareholder  interest  income  on  shareholder 
level.  Yet,  overall  one  can  conclude  that  debt  financing is  tax  favoured.  Due  to 
capital market constraints, however, SMEs usually face difficulties with obtaining 
debt and are therefore less likely to benefit from this kind of tax advantage. 

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enterprises 

7.  COMPARISON OF EFFECTIVE TAX RATE OF SMES AND CROSS-

BORDER INVESTMENT OF LSES  

7.1.  Tax planning opportunities of multinational enterprises 

Recent  media  reports  have  drawn  attention  to  the  fact  that  some  highly  profitable 
multinational  corporations  seem  to  pay  almost  no  CIT  on  host  country  income.  The 
effective tax rates on foreign profits of Google Inc. and Apple Inc., for example, have 
been reported to be 3% and 1%, respectively.63  This has triggered an intense public 
and  scientific  debate  about  profit  shifting  and  tax  avoidance  by  multinational  enter-
prises.64 The G20 leaders stressed the need to take action against multinational profit 
shifting and tax avoidance. This has led to the Base Erosion and Profit Shifting (BEPS) 
initiative of the OECD.65 The final reports on these works are expected to be released 
in September 2015.66 At the European level, the European Commission came up with 
an Action Plan in 2012 setting out over 30 measures to combat tax fraud and tax eva-
sion67  that  includes  concrete  steps  to  help  protecting  Member  States’  tax  revenues 
against  tax  havens  and  unfair  competition68  as  well  as  against  aggressive  tax  plan-
ning69.  Finally,  the  European  Commission  has  released  a  package  to  increase  trans-
parency  in  2015.70  Recently,  the  debate  has  once  more  been  intensified  by  the  so-
called  Luxembourg  Leaks  which  disclosed  that  the  tax  regime  in  Luxembourg  is  very 
beneficial for group finance corporations.71 

The following highlights the tax planning opportunities of multinational enterprises.    

The foundation of such tax planning opportunities is based on the allocation of taxing 
rights  between  jurisdictions.  Such  taxing  rights  differ  with  respect  to  the  type  of  in-
come.  Generally,  business  profits  are  taxed  at  source  whereas  factor  remunerations 
like interest and royalty payments are deductible at source and taxed in the residence 
country of the recipient. This gives rise to tax planning opportunities for multinational 
enterprises,  as  it  allows  multinationals  to  choose  between  the  tax  rate  applicable  at 
source  and  at  residence.  For  example,  it  is  tax-efficient  for  multinationals  to  finance 
group corporations in high-tax countries with intra-group debt  from affiliates residing 
in low-tax countries. Another tax planning strategy is to locate intangible property in a 
group  corporation  resident  in  a  low-tax  country  and  license  it  to  group  corporations 
residing  in  high-tax  countries.  As  nominal  tax  rates  differ  significantly  across  im-
portant business locations, the tax advantage arising from profit shifting is often sub-
stantial. Sometimes multinational enterprises may even push their overall tax burden 
to levels close to zero.72 They can achieve this, for instance, by locating financing cor-

63 See Sullivan (2012), p. 655. 
64 See Fuest/Spengel/Finke/Heckemeyer/Nusser (2013) and Fuest et al. (2014) for two policy oriented pa-
pers  on  tax  planning  by  multinational  corporations  and  possible  reform  options.  The  explanations  in  this 
subsection are directly borrowed from these two papers. 
65 See OECD (2013a) and OECD (2013b). 
66 The OECD action plan on base erosion and profit shifting as well as all other documents released by the 
OECD so far can be found here: http://www.oecd.org/tax/aggressive/. 
67 See European Commission (2012a). 
68 See European Commission (2012b). 
69 See European Commission (2012c). 
70 See European Commission (2015). 
71 See the Luxembourg Leaks database: http://www.icij.org/project/luxembourg-leaks. 
72 Google or Amazon can be named as prominent examples. For an overview of effective tax rates of promi-
nent  multinationals,  see  Sullivan  (2012),  p.655;  for  a  detailed  description  of  Google’s  tax  planning  struc-
ture,  see  Kleinbard  (2011)  and  Sandell  (2012).  Amazon  applies  a  tax  structure  comparable  to  the  IP-
Holding structure depicted in Fuest/Spengel/Finke/Heckemeyer/Nusser (2013), p. 312-313. 

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enterprises 

porations  and  IP-Holdings  in  typical  tax  havens  that  do  not  levy  corporate  income 
tax.73 By shifting profits of operating corporations as interest and royalty payments to 
these  financing  and  IP-Holding  corporations,  the  profits  remain  de  facto  untaxed  or 
are subject to very low taxation. Alternatively, financing corporations and IP-Holdings 
can be situated in countries that generally levy (high) profit taxes but offer special tax 
rules  resulting in  far  lower  effective  tax  rates  for  interest  and  royalty  income.  Exam-
ples for the latter are intellectual property (IP) Box regimes74 or the notional interest 
deduction regime in Belgium.75  

Figure 7.1 displays the structure of a financing corporation and an IP-Holding corpora-
tion.76 A financing corporation (IP-Holding corporation) provides loans (licences IP) to 
operating corporations which belong to the same group of corporations. The remuner-
ations for the loan (IP-licence) - i.e. interest (royalty) payments - reduce the profits of 
the operating corporations and are taxed at very low rates or are even untaxed at the 
level  of  the  financing  corporation  (IP-Holding corporation).  The  described  profit  shift-
ing  strategies  can  be  extended  to  other  group  activities  such  as  shared  services  for, 
e.g.,  re-invoicing,  factoring  and  insurance  activities.  Profits  can  also  be  shifted  via 
transfer prices such as management fees to group shared service corporations located 
in low tax jurisdictions.77 The area of transfer prices is the predominant route used to 
shift profits to low tax jurisdictions in multinational groups of corporations.78 

Figure 7.1 Tax planning with IP-Holding and Financing Corporations 

Operating Corporations 

IP-Holding Corporation 

Financing Corporation 

Parent Corporation 

73 For this, also see Fuest/Spengel/Finke/Heckemeyer/Nusser (2013), p. 313. 
74 For an overview of IP Box regimes in Europe, see Evers/Miller/Spengel (2014). 
75 See also Kalloe (2011), p. 506. 
76 For this, also see Fuest/Spengel/Finke/Heckemeyer/Nusser (2013), p. 313. 
77 See Jacobs (2011), p. 1078 ff. 
78 See Heckemeyer/Overesch (2013). 

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enterprises 

Several  attempts  have  been  made  to  clarify  how  relevant  the  problem  of  tax  avoid-
ance really is and to find a proxy for the  scale of base  erosion and profit shifting be-
haviour.79  Given  that  true  profit  margins  (i.e.  before  any  avoidance  strategy  that  af-
fects  actually  reported  profits)  are  not  observable  by  country,  the  clear  identification 
of tax avoidance from available data is challenging and existing approaches differ fun-
damentally. To be very clear at the beginning: there exists evidence that profit shifting 
takes place. There is, however, no accurate estimate of the amount of profits shifted. 

On the one hand, there is a small number of rather rough estimates which try to de-
rive the volume of profit shifting from aggregate statistics or similar sources. Although 
these studies receive great attention in public debate, their results have to be treated 
with caution, as we will explain below. On the  other hand, there is a broad  strand of 
academic research investigating corporate tax avoidance. The main evidence provided 
by this strand of literature will also be summarized below.  

Starting with some stylized numbers from public debates, Richard Murphy (adviser to 
the  Tax  Justice  Network  and  director  of  Trades  Union  Councils)  claimed  in  his  report 
The Missing Billions that GBP 12 billion of corporate income tax is lost each year due 
to tax avoidance by the 700 largest enterprises in the United Kingdom.80 For develop-
ing  countries  Oxfam,  a  non-profit  organization,  attributes  a  revenue  loss  of  USD  50 
billion to tax avoidance of multinationals.81 Although the question of how much reve-
nue  is  lost  due  to  profit  shifting  is  highly  interesting  for  the  public,  methodological 
flaws  underlying  the  estimates  prevent  them  from  being  very  reliable.  For  instance, 
taxable income or tax payments, respectively, in absence of tax avoidance are approx-
imated by using profits from financial accounts multiplied by the statutory tax rate82 or 
foreign capital stocks multiplied by a deemed return and an average tax rate.83 Com-
paring  taxable  profits  with  these  inadequate  benchmarks  reveals  conceptual  differ-
ences between the underlying statistics rather than the scale of profit shifting activity. 

Nevertheless,  a  wealth of  empirical  research  studies  assesses  the  significance  of  cor-
porate  tax  avoidance  and  its  sensitivity  with  respect  to  international  tax  incentives. 
Turning to this broad group of empirical approaches, two different strands of literature 
can  be  distinguished.  The  first  strand  of  studies  provides  rather  general  evidence  of 
profit  shifting  by  asking  how  tax  rate  differentials  affect  reported  pre-tax  profits.  In 
their seminal work,  Grubert and Mutti (1991) as well as Hines and Rice (1994) show 
for the United States that there is indeed an empirical relationship between the profit-
ability reported by US multinationals’ foreign affiliates and respective host country tax 
rates.84 Huizinga and Laeven (2008) provide evidence that reported profits of Europe-
an subsidiaries depend on their specific tax incentives and profit shifting potential giv-
en  the  structure  of  the  whole  multinational  group.85  Also  for  Europe,  Egger  et  al. 

79 See Dharmapala (2014) for a recent review of the empirical literature on BEPS. Even if volumes and the 
dominant channels of profit shifting were known, it would still be difficult to draw the line between “accepta-
ble” profit shifting activity and “aggressive” tax planning. Exploiting international tax differentials cannot be 
considered aggressive per se, as the underlying structures are not necessarily artificial. 
80 See Murphy (2008). 
81 See Oxfam International (2000), available online from 
http://oxfamilibrary.openrepository.com/oxfam/bitstream/10546/114611/1/bp-tax-havens-010600-en.pdf. 
82 This approach of Richard Murphy was discussed by the Oxford University Centre for Business Taxation in 
its  report  “The  Tax  Gap  for  Corporation  Tax”  pointing  out  that  this  approach  rather  captures  differences 
between financial and tax accounting, see Oxford University Centre for Business Taxation  (2012), available 
online from http://www.sbs.ox.ac.uk/centres/tax/Documents/reports/TaxGap_3_12_12.pdf. 
83  The  shortcomings  of  this  approach  are discussed  by  Fuest/Riedel  (2010),  who  argue  that,  among  other 
critical  assumptions,  the  role  of  tax  incentives  and  tax  base  regulations  is  neglected  in  these  estimations. 
See Fuest/Riedel (2010). 
84 See Grubert/Mutti (1991) and Hines/Rice (1994). 
85 See Huizinga/Laeven (2008). 

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(2010) directly compare tax payments of multinational enterprises and a group of do-
mestic enterprises using propensity score matching and find that multinational enter-
prises incur substantially lower tax payments.86 Dharmapala and Riedel (2013) use  a 
novel  identification  strategy  by  asking  how  a  shock  in  earnings  at  the  parent’s  level 
transmits  to  group  entities  located  in  high  or  low  tax  countries.87  Fuest  et  al.  (2011) 
study income shifting through debt. They find that financing structures of multination-
al entities in developing countries react more sensitively to tax differences than in de-
veloped countries, suggesting that developing countries with high taxes may be more 
vulnerable to tax planning.88  

The  findings  of  these  scientific  studies  strongly  support  the  idea  that  multinational 
groups reallocate profits globally as to minimize the overall tax burden. Several other 
studies corroborate this conclusion although the estimated effect size differs according 
to the employed profit variable, the measure of the tax incentive and the econometric 
approaches. A recent quantitative survey of this literature is provided by Heckemeyer 
and Overesch (2013).89 Given the general finding that profits are shifted within multi-
nationals,  the  question  arises  which  strategies  to  reallocate  profits  within  the  group 
can  be  identified  empirically.  This  is  the  focus  of  the  second  strand  of  literature.  In 
principle, profits earned in high tax countries can be channelled to lower taxed group 
entities  via  debt  financing  or  via  non-financial strategies  such  as  transfer  pricing  and 
licensing of IP.90  With respect to debt financing, Desai et al. (2004) provide empirical 
evidence  that  multinationals  use  intra-corporation  loans  to  mitigate  tax  payments  of 
subsidiaries in  high  tax locations.91    We  take  this  into  account in the next  subsection 
and  quantify  how  the  EATR  of  LSEs  (which  are  supposed  to  be  multinationals)  is  af-
fected  by  their  optimizing  financing  strategies.  Although  there  are  good  reasons  to 
believe that transfer pricing and licensing of IP represent the predominant routes used 
to shift profits abroad,92 the empirical evidence is not clear cut. Evaluating the general 
evidence for profit shifting, Heckemeyer and Overesch (2013) indeed corroborate the 
expectation of non-financial profit shifting techniques to play the most important role. 
Results  by  Dharmapala  and  Riedel  (2013)  instead  suggest  a  larger  effect  of  debt-
financing whereas the results of Grubert (2003) point to equal shares.93 Finally, it has 
been  shown  in  more  recent  empirical  literature  based  on  new  and  richer  sources  of 
data that the magnitude of BEPS is smaller than that found in earlier studies.94  

To  conclude,  empirical evidence  on  corporate  tax  avoidance  is  robust  and  significant. 
Moreover,  it  is  clearly  shown  that  licencing  and  transfer-pricing  as  well  as  group  fi-
nancing  strategies  are  used  to  reallocate  profits  within  the  group.  Profit  shifting  may 
distort  the  capital  allocation  because  it  distorts  competition  between  enterprises  with 
different opportunities to avoid taxes. Typically, SMEs have less or even no opportuni-
ties to shift profits compared to LSEs.  

86 See Egger/Eggert/Winner (2010). 
87 See Dharmapala/Riedel (2013). 
88 See Fuest/Hebous/Riedel (2011). 
89 See Heckemeyer/Overesch (2013). 
90  Clausing  (2003)  shows  that  intra-company  transfer  prices  for  intra-group  transactions  are  sensitive  to 
international  tax  rate  differentials.  Furthermore,  there  is  robust  evidence  that  tax  considerations  are  im-
portant for the intra-company allocation of intangible  property.  Desai/Foley/Hines (2006) show that large 
international corporations with extensive intra-company trade and high R&D intensities are the most likely 
to use tax havens. 
91 See Desai/Foley/Hines (2004). 
92 The interest rate on intra-group loans can be directly compared to the market interest rate, profit shifting 
thus  being  limited  to  it,  whereas  there  is,  in  principle,  more  discretion  in  setting  transfer  prices  on  highly 
specific group transactions as pointed out by Overesch/Schreiber (2010). 
93 See Dharmapala/Riedel (2013) and Grubert (2003). 
94 For a literature review, see Dharmapala (2014), pp. 439-441. 

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In the next subsection, we focus on group financing strategies and determine quanti-
tatively  to  which  extent  multinational  corporations  can  lower  their  tax  burden  com-
pared to SMEs which are only assumed to operate domestically. 

7.2.  Setup of the Devereux-Griffith Model 

The intention of the application of the Devereux-Griffith approach is to reflect the ef-
fective  average  tax  rate  (EATR)  for  cross-border  investments  of  multinationals  and 
compare  this  to  the  EATRs  of  corporations  which  operate  only  domestically.  In  our 
simulation  we  take  into  account  that  multinationals  arrange  their  investments  cross-
border, and therefore the corporation which carries out an investment, i.e. the subsid-
iary, and the parent corporation are located in different jurisdictions.  In this scenario 
we  are  able  to  take  into  account  the  possibility  of  splitting  profits  between  different 
jurisdictions and shifting profits (i.e. via intra-group debt financing) of multinationals. 
By doing so, we aim at comparing the competitive situation of SMEs only operating in 
domestic markets and LSEs. R&D tax incentives are not considered in this part of the 
study.   

In  contrast to the tax planning opportunities described in Section 7.1, the Devereux-
Griffith model considers only direct (non-intermediated) holding structures. The model 
therefore disregards the use of triangular structures involving financing or  IP-Holding 
corporations  located  in  no  or  low  tax  jurisdictions.  Nevertheless,  even  under  a  direct 
holding  structure,  home  or  source  country  tax  may  be  avoided  by  inter-corporation 
financing. 

The methodology of Devereux and Griffith95 provides reliable information on our sub-
ject of investigation and is therefore relied on in this section of the report.96  This ap-
proach allows computing the EATR on a hypothetical investment project of a corpora-
tion both for domestic and cross-border investments. They are modelled to be carried 
out  in  the  20  selected  Member  States  (Austria,  Belgium,  Bulgaria,  Croatia,  Estonia, 
Finland, France, Germany, Greece, Ireland, Italy, Lithuania, Luxembourg, the Nether-
lands, Poland, Romania, Slovenia, Spain, Sweden and the UK).  

Compared  to  the  European  Tax  Analyzer,  some  differences  occur  with  respect  to  the 
implemented incentives: 

  The  size  of  a  corporation  cannot  explicitly  be  modelled  in  the  Devereux-Griffith 

framework.  

  The  computations  reflect  a  model  investment  rather  than  a  model  corporation. 
Therefore,  we  generally  implement  the  most  generous  SME  tax  incentive  if  in-
centives differ with respect to the three subgroups of SMEs.97 R&D tax incentives 
are not considered in the model. 

  The main reason for this study to make use of the Devereux-Griffith model is to 

complement the results from a cross-border perspective. 

When computing the EATR in the Devereux-Griffith model, the most important regula-
tions  of  the  tax  regimes  are  accounted  for.  Besides  the  regulations  which  determine 

95 See Devereux/Griffith (1999), Devereux/Griffith (2003) and Schreiber/Spengel/Lammersen (2002). 
96 The model is derived from the neoclassical investment theory and has been successfully used by ZEW for 
other  projects  with 
the  European  Commission  (TAXUD/2005/DE/310,  TAXUD/2008/CC/099  and 
TAX/2013/CC/120)  and  publications.  For  an  example  see  Endres/Fuest/Spengel  (2010).  For  the  general 
explanations of the model and its mechanisms we partly borrow formulations from these studies. 
97 The implemented incentives are explicitly stated in Table 7.2. and in Annex 1 (section 6.1).  

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the  domestic  tax  burden98  borne  in  the  potential  locations  of  the  subsidiary,  country 
specific withholding taxes on profit repatriation and methods for avoiding international 
double taxation in the home country of the parent corporation are accounted for in the 
calculations. In the following, we briefly outline the setup of our analysis, the underly-
ing  assumptions  on  investment  and  financing  strategies  and  the  tax  provisions  cov-
ered by the model. 

Figure 7.2 Devereux-Griffith model 

Figure 7.2 illustrates the set-up of the model investment. In general, we differentiate 
between  two  cases.  In  one  case  we  assume  a  domestic  stand-alone  corporation  (left 
part of Figure 7.2) and in the other case we assume a cross-border investment i.e. an 
LSE (right part of Figure 7.2).99 

In the domestic case we assume the existence of corporations located in a specific 
country  (conducted  for  all  selected  countries)  and  suppose  that  they  are  operating 
only in this country. In our setup this means that we model corporations which are not 
owned  by  a  parent  corporation  located  abroad.  We  call  these  SMEs  and  LSEs  stand-
alone corporations. The enterprises considered are always separate legal entities, i.e. 
they  are  corporations.  It  is  assumed  that  the  respective  corporation  invests  into  five 
different  assets  with  equal  weights  (i.e.  intangibles,  industrial  buildings,  machinery, 
financial assets, and inventories account for 20% each). The investments are financed 
either  by  new  equity,  retained  earnings  and  debt.  The  relative  weights  for  these 
sources of finance amount to 10% for new equity, 55% for retained earnings and 35% 

98 The relevant measure for the tax burden in this section (Section 7) is always the EATR. Sometimes the 
more  general  term  “tax  burden”  is  used  for  more  general  explanations  for  example  with  respect  to  tax 
planning  strategies which  reduce  the  “tax burden” of corporations.  However,  all  computations  refer  to  the 
effective average tax rate. 
99 Please note that in reality there exists a variety of possible tax planning structures. For example, multina-
tionals can make use of  holding corporations as described in section 7.1. The Devereux-Griffith model ab-
stracts from such holdings and simulates a more direct way of profit shifting by financing. 

105 

Domestic Case                             International Case        (Cross-border investment)                                                                              Parent Corporation (residence country) Subsidiary (source country) 5 types  of assets 3 sources  of finance Corporation Individual Shareholder (not included here) Individual Shareholder (not included here) 3 sources  of finance  
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

for  debt.  In  the  following,  we  use  weighted  averages  over  assets  and  sources  of  fi-
nance for the computation of the EATRs. Underlying these domestic results are calcu-
lations for each asset type and each way of financing (3 × 5 = 15 cases). The domes-
tic case is split between two scenarios. 

In the first scenario we determine the  EATR of an investment not considering spe-
cial tax incentives for SMEs in any of the countries.  

The second scenario implements the SME tax incentives which exist in the countries 
of investigation and which are technically possible to be mapped into the model. The 
two  scenarios  allow  us  to  identify  countries  in  which  SMEs  benefit  in  particular  from 
SME tax incentives and the extent to which the tax burden is reduced. The calculations 
presented in this section reflect the tax regulations of the year 2013.100 Since there is 
no  underlying  model  corporation  type  in  the  Devereux-Griffith  Model,  we  do  not  ex-
plicitly assume a certain type of corporation in the sense that we would explicitly mod-
el the size of the  corporation, instead we use  a model investment. This is where this 
model differs from the European Tax Analyzer. However, we will implicitly refer to dif-
ferent corporations by implementing tax rules which only apply to corporations which 
qualify  as  SMEs  on  the  one  hand  and  on  the  other  hand  by  implementing  the  rules 
which  apply  to  corporations  which  cannot  make  use  of  special  SME  tax  provisions. 
With  respect  to  SMEs  we  generally  implement  the  most  generous  incentive  if  tax  in-
centives differ with respect to the three subgroups of SMEs.101 

In  the  international  case  it  is  assumed  that  the  parent  corporation  an  LSE  (i.e.  a 
corporation) of the subsidiary i.e. an SME is resident in one of the selected 20 Member 
States.102 We additionally include the USA, Canada, China, Japan, and Switzerland as 
possible Non-EU locations of the parent. Within the selected Member  States, we con-
sider all possible combinations of subsidiary and parent locations.103 As for the domes-
tic case, the model enterprise has the legal form of a corporation. Again, it is assumed 
that  the  subsidiary  invests  into  five  different  assets  with  equal  share.  The  funds  to 
finance the investment of the subsidiary are provided by the parent corporation.  

In the initial benchmark case i.e. year 1, these funds equally consist of retained earn-
ings, new equity and debt (i.e. sources of finance account for 33.33% each). The re-
financing  of  the  parent  itself  is  assumed  to  consist  of  55%  retained  earnings,  10% 
new  equity  and  35%  debt.  In  total,  for  each  jurisdiction  where  an  investment  is  car-
ried out, we aggregate 45 individual investments (5 different assets at the level of the 
subsidiary,  3  kinds  of  inter-corporation  finance  between  parent  and  subsidiary  and  3 
kinds  of  refinancing  the  parent);  the  following  reports  the  weighted  averages  of  the 
EATR on these investments at the corporate level.104  

It is assumed that profits earned by the subsidiary are entirely repatriated to the par-
ent.  In  case  of  the  investment  being  financed  by  retained  earnings,  this  means  that 
retained  profits  are  distributed  in  subsequent  periods.  In  case  of  debt  financing,  it  is 

100 Additionally, the results for the years 2009 to 2012 are displayed in Annex 1 (section 6.2). 
101 Thus, the analysis reduces to a comparison of SME vs. LSE and there are no further differentiations with 
respect to the SMEs. 
102 The  main  additional  benefit  which  the  Devereux-Griffith  Model  provides  compared  to the  European  Tax 
Analyzer computations arises from the implementation of cross-border investments (international case). 
103 Taxation at the shareholder level of the parent corporation is abstracted from in our analysis within the 
Devereux-Griffith framework. Furthermore, we do not simulate the case of subsidiaries being located in one 
of these non-EU countries. 
104 Please take into account that shareholder taxes on the dividends and the renumerations from contractual 
relations are ignored here.  

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assumed that the subsidiary pays interest to the parent at a fixed rate and distributes 
the remaining profits as dividends. Under these assumptions, profits derived from in-
vestment by the subsidiary may be taxed at two different levels. Firstly, the earnings 
are taxed at the level of the subsidiary. And secondly, the parent might face an addi-
tional tax burden when profits are repatriated.105  

In  combination  with  the  domestic  case  the  model  enables  us  to  answer  the  following 
questions: 

1.  What  is  the  competitive  situation  with  regard  to  SMEs  compared  to  multina-

tionals i.e. LSEs making use of profit shifting strategies?  

2.  Do SMEs or LSEs face a higher effective average tax rate? 

3.  Do tax incentives for SMEs make up the international tax planning advantages 

of multinationals? 

Table 7.1 summarizes the most important model assumptions of the following calcula-
tions. 

Table 7.1 Devereux-Griffith assumptions (manufacturing sector) 

Assumptions about assets, financing, and shareholders 

Types of assets 

Sources of finance 

1. Domestic Case 

2. International Case 
(cross-border invest-
ment) 

Intangibles (20%), industrial buildings (20%), 
machinery (20%), financial assets (20%), in-
ventories (20%) 

Corporation:  retained  earnings  (55%),  new 
equity (10%), debt (35%) 

Subsidiary:  retained  earnings  (33.33%),  new 
equity (33.33%), debt (33.33%) 

Parent:  retained  earnings  (55%),  new  equity 
(10%), debt (35%) 

Assumptions about depreciation, inflation, and pre-tax return 

True economic depre-
ciation (declining bal-
ance) 

Intangibles 
15.35% 

Buildings 
3.1% 

Machinery 
17.5% 

105 More explanations on the international tax law which is reflected in the modelling and the optimal choice 
of the financing structures are provided in Annex 1 (section 6.5). 

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Lifetime (for tax pur-
poses) 

10 years 

25 years 

7 years 

Inflation rate 

Real interest rate 

2% 

5% 

Pre-tax rate of return 

20% 

The  assumptions  correspond  to  the  respective  assumptions  applied  in  the  surveys  of 
the  European  Commission  (see  Devereux  et  al.  (2008)106  and  European  Commission 
(2001)107). Hence, the results derived in this study are directly comparable to  earlier 
studies and are not sensitive to specifics of the recent crisis. 108  

The  approach  applied  in  this  section  covers  the  most  relevant  tax  provisions  of  the 
national  tax  systems.  With  regard  to  the  taxation  of  corporate  profits,  it  considers 
nominal corporation tax rates i.e. CIT, regional taxes on profits, surcharges as well as 
some special rates for particular types of income and expenditure. Moreover, real es-
tate taxes, property and net-wealth taxes are accounted for. For LSEs, the calculations 
assume  that  the  top  bracket  of  profit  tax  rates  applies.  For  SMEs,  it  is  assumed  that 
profits fall within the lowest bracket of the tax rate schedule. Regarding the determi-
nation  of  the  tax  base,  the  calculations incorporate  the  relevant  rules  concerning  de-
preciation  and  amortization  for  three  types  of  assets  (buildings,  intangibles  acquired 
from  third  parties  and  machinery),  the  valuation  method  for  inventories  and  the  ex-
tent  of  interest  deductibility  in  case  of  debt  financing.  If  these  rules  differ  for  SMEs, 
the  differentiations  are  considered.  Table  7.2  lists  all  existing  SME  incentives  in  the 
considered countries which are possible to be mapped into the model of Devereux and 
Griffith. These incentives partly differ to the ones presented in section 5.109 If regula-
tions  are  of  optional  character,  the  most  tax  efficient  possibility  is  chosen.  With  re-
spect to the repatriation of profits in a cross-border setting, country specific withhold-
ing  taxes  and  the  method  to  avoid  international  double  taxation  at  the  level  of  the 
parent  corporation  are  taken  into  account.  Unlike  in  the  European  Tax  Analyzer,  the 
size of a corporation cannot be modelled explicitly in the Devereux-Griffith framework. 
Thus,  we  generally  implement  the  most  generous  incentive  if  incentives  differ  with 
respect  to  corporation  size.  This  is  why  we  conduct  very  detailed  computations  with 
the  European  Tax  Analyzer  and  use  the  Devereux-Griffith  model  to  complement  the 
results  from  a  cross-border  perspective.  Thus,  the  comparability  of  the  results  of  the 
two  models  is limited  since  the  two  models  are  not identical  and  serve  different  pur-
poses. The Devereux-Griffith model is applied to quantify tax minimizing strategies by 
multinationals which the European Tax Analyzer is not able to do.110  

106 See Devereux/Elschner/Endres/Heckemeyer/Overesch/Schreiber/Spengel (2008).  
107 See European Commission (2001).  
108 Nevertheless, we provide a sensitivity analyses in Annex 1 (section 6.3) with respect to the inflation rate, 
the real interest rate and the pre-tax rate of return. 
109 Analogous tables for the years 2009-2012 are provided in Annex 1 (section 6.1). Compared to the pre-
sented SME incentives in Section 5 (Analysis of SME-specific provisions and R&D incentives in national tax 
codes) fewer incentives are implemented in this section. The SME incentives presented in section 5 are very 
comprehensive  (Table  5.4).  Some  of  them  only  apply  in  specific  cases  as  indicated  by  the  corresponding 
legend of Table 5.4. For example, there are incentives which only apply in specific economic areas (e.g. the 
accelerated  depreciation  in  Finland).  Other  incentives  only  apply for  certain  activities  (e.g.  investment  de-
duction on education and training in Croatia) which cannot be reflected in the Devereux-Griffith model.   
110 If incentives only apply to new companies, these are implemented in the European Tax Analyzer but not 
in the Devereux-Griffith Model (e.g. in Ireland). This is due to the assumptions of the models. The European 
Tax  Analyzer  assumes  a  newly  started  company  whereas  the  Devereux-Griffith  model  does  not.  Further-

108 

 
 
 
 
 
 
 
                                                 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Table  7.2  Overview  of  implemented  SME  tax  incentives  for  2013  (Devereux-
Griffith model) 

Country 

Reduction in tax base 

Reduction in tax rate 

(depreciation, allowances 
and deduction) 

(special tax rates) 

Austria 
Belgium 

- 

notional 

interest  deduction 

increased by 0.5% 

- 
Lowest  tax  bracket 
progressive schedule: 

in 

24.25% 

- 
- 
- 
- 
15% instead of 33.33%; 

no  additional  surcharge 
of 5% 

no CET (CFE and CVAE) 

Reduction  in  tax 
liability 

(tax credits, 
temporary ex-
emptions from 
tax) 
- 

- 

- 
- 
- 
- 

- 

- 

- 
- 
- 
- 

- 

20%  additional  depreciation 
on machinery in the first year; 

40% investment reserve for 
machinery 
- 
- 
- 
- 

- 

- 

- 
- 
- 
5% instead of 15% 
20% instead of 21% 

- 

- 

20% instead of 25% 

Investment deduction of 28% 
for machinery 
Immediate deduction of ma-
chinery 
Micro enterprises obliged to be taxed on turnover (3%) under certain conditions. 
We do not model this regime in the standard results.111 
Micro enterprise regime under which taxpayers may apply a lump-sum deduction 
for expenses (70%) under certain conditions. We do not model this regime in the 
standard results.112  
Ordinary  depreciation 
rate 
for 
multiplied  by 
machinery  and  buildings  and 
by factor 1.5 for intangibles 

20% instead of 30%; 

factor  2 

- 

- 

70% depreciation limit is only 
applied to LSEs 
- 
- 

exemption from local 
business tax (IAE) 
- 
20% instead of 23% 

- 
- 

- 
- 
- 
- 

- 

Bulgaria 
Croatia 
Estonia 
Finland 
France 

Germany 

Greece 
Ireland 
Italy 
Lithuania 
Luxembourg 

The Netherlands 

Poland 

Romania 

Slovenia 

Spain 

Sweden 
The UK 

more, in the Devereux-Griffith Model we do not implement incentives which request a build-up of employ-
ment (e.g. in Croatia). This is due to the fact that the Devereux-Griffith Model cannot specify employment 
figures and that a build-up of staff appears as a too strict condition in this context. If an incentive is only 
conditioned  on  the  staff  number  not  being  reduced,  we  model  the  incentive.  There  are  explicit  micro  re-
gimes in Romania and Slovenia. We do not model them in the main results but provide results in Annex 1 
(section 6.4). 
111 However, we provide results for this in Annex 1 (section 6.4). 
112 However, we provide results for this in Annex 1 (section 6.4). 

109 

 
 
 
 
 
 
 
                                                                                                                                                    
 
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enterprises 

7.3.  Effective  average  tax  rate  -  national  investments  of  stand-alone 

corporations 

This  section  presents  estimates  of  EATRs  for  stand-alone  corporations  which  are  not 
part of a parent-subsidiary relationship. It is assumed that the corporation invests into 
five different assets with equal share as described above. This national analysis differ-
entiates between two scenarios: 

 

In  the  first  scenario  we  determine  the  EATR  of  the  investment  not  considering 
special tax incentives for SMEs in any of the countries.  

  The second scenario implements the SME tax incentives which exist in the coun-
tries  of  investigation  and  which  are  technically  possible  to  be  mapped  into  the 
model (see Table 7.2 in Section 7.2).  

  The two scenarios allow us to identify countries in which SMEs benefit in particu-

lar from SME tax incentives and the extent to which EATR are reduced. 

Figure 7.3 Domestic EATR (with and without SME-specific Tax Incentives) for 
Stand-alone Corporations (i.e. SMEs and LSEs) 

40%

35%

30%

25%

20%

15%

10%

5%

0%

SME

Domestic LSE

Table 7.3 exhibits the results for 2013 of the modelling with the Devereux-Griffith ap-
proach.  Throughout  this  section,  we  will  make  use  of  various  graphs  to  further  illus-
trate these results. The remarks in this subsection on domestic investments of stand-
alones are reflected in columns 1 and 2 of Table 7.3. They show the results of the two 
scenarios described above. Figure 7.3 illustrates these results (see Table 7.3 columns 
1 and 2) and ranks the countries according to their tax levels for SMEs from the lowest 
to the highest. The eastern Member States clearly tend to have a low level of CIT both 
for SMEs and LSEs. Lithuania even exhibits an EATR which is below 5% for SMEs. Alt-
hough Lithuania belongs to the countries which in general have a relatively low level of 
taxation, the reduction to below 5%  for SMEs is remarkable.  Within the group  of the 
founding Member States, France, the Netherlands and Belgium show a clear reduction 
of the EATR for SMEs compared to LSEs. The  case of France is especially noteworthy 
since  the  EATR  for  LSEs  amounts  to  35%  but  only  to  14.2%  for  SMEs.  This  makes 
France  to  one  of  the  most  tax  favourable  environments  for  SMEs.  Similarly,  in  Spain 
the EATR for SMEs is reduced to 17.8% compared to 32.6% for LSEs. 

110 

 
 
 
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SME taxation in Europe 

Table 7.3 Effective Average Tax Rates in % for 2013 (Domestic Investments and Cross-border Inbound Investments) 

Country 

Year 

Domestic113 

LSE 
(1) 

SME 
(2) 

(3) 

subsidiary: LSE 
(4) 

Cross-border114 

(5) 

(6) 

subsidiary: SME 
(7) 

(8) 

mix of fi-
nancing 

mix of fi-
nancing 

mix of fi-
nancing 

efficient 
financing115 

Austria 
Belgium 
Bulgaria 
Croatia 
Estonia 
Finland 
France 
Germany 
Greece 
Ireland 
Italy 
Lithuania 
Luxembourg 
The Netherlands 
Poland 
Romania 
Slovenia 
Spain 
Sweden 
The UK 

2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 
2013 

23.0 
26.5 
9.0 
16.5 
16.5 
22.3 
35.0 
28.2 
24.1 
14.4 
25.1 
13.6 
25.5 
22.3 
17.2 
14.8 
15.5 
32.6 
19.4 
24.3 

23.0 
18.7 
9.0 
16.5 
16.5 
22.3 
14.2 
27.6 
24.1 
11.9 
25.1 
4.6 
24.6 
17.0 
16.5 
14.1 
15.5 
17.8 
19.1 
21.4 

24.8 
27.5 
12.1 
21.4 
19.2 
24.4 
36.1 
30.1 
26.6 
16.5 
27.1 
15.8 
26.9 
24.0 
20.1 
17.4 
18.2 
34.8 
21.1 
25.9 

23.2 
26.3 
9.9 
19.5 
13.8 
22.7 
33.9 
28.2 
24.7 
14.8 
25.5 
14.1 
24.8 
22.4 
18.4 
15.7 
16.4 
32.3 
19.6 
24.3 

efficient 
financing 
and loca-
tion116 
19.6 
24.0 
5.0 
15.3 
10.9 
19.1 
30.3 
24.3 
20.4 
10.6 
21.5 
10.7 
21.2 
18.9 
14.0 
11.5 
12.0 
28.1 
16.6 
21.3 

mix of fi-
nancing 

efficient 
financing 

efficient 
financing 
and location 

24.8 
20.1 
12.1 
21.4 
19.2 
24.4 
16.5 
29.5 
26.6 
14.2 
27.1 
7.8 
26.0 
19.0 
19.4 
16.7 
18.2 
20.7 
20.8 
23.2 

23.2 
18.2 
9.9 
19.5 
13.8 
22.7 
14.9 
27.5 
24.7 
12.3 
25.5 
5.1 
24.0 
17.6 
17.7 
15.0 
16.4 
18.8 
19.3 
21.7 

19.6 
15.7 
5.0 
15.3 
10.9 
19.1 
10.8 
23.7 
20.4 
7.9 
21.5 
0.6 
20.5 
14.3 
13.7 
10.7 
12.0 
15.2 
16.3 
18.2 

113 Investment is financed by retained earnings (55%), new equity (10%) and debt (35%). 
114 The investment is conducted by a subsidiary located in one of the European countries on the left hand side. As parent location of this subsidiary, we model all other 19 selected 
Member States and the five Non-European countries (hence, 24 cases). Over all these cases (given a specific way of financing) we take the average which results in  the mean 
EATR for the cross-border investment. In columns (5) and (8) the EATR does not represent an average over all possible parent locations but the EATR for the most tax efficient 
parent location. 
115 The EATR reflects an average of all possible 24 parent locations. For each constellation the most tax efficient way of financing the subsidiary is chosen (according to the reason-
ing in subsection 7.3). Afterwards, the mean over all possible parent locations is computed to receive one cross-border EATR. The same logic applies for column (7). 
116 Parent location with lowest resulting inbound EATR is chosen (out of the 24 parent locations). Thus, this column shows the result for an investment when optimizing both the 
financing structure and the parent location. It reflects a distinct parent location and is not an average over locations. The same logic applies for column (8). 

111 

 
 
 
 
 
 
 
 
                                                 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

All  computations  reflected  in  Table  7.3  were  also  conducted  for  the  years  2009-
2012.117 Overall, the average EATR in the 20 Member States considered in this study 
amounts to 18.2% for SMEs and to 21.5% for LSEs in 2013. For both  size categories 
of  corporations  the  EATR  is  slightly  lower  in  2013  compared  to  2009.  Nevertheless, 
Figure 7.4 shows no clear time trend for the EATRs of LSEs and SMEs and thus neither 
for the difference between the two.  

Figure 7.4 Development of EATR for SMEs and LSEs averaged over the 20 se-
lected Member States 

25%

20%

15%

10%

5%

R
T
A
E
e
g
a
r
e
v
A

0%

2009

2010

2011

2012

2013

LSE

SME

7.4.  Effective average tax rate - cross-border investments 

The  main  additional  benefit  which  the  Devereux-Griffith  model  provides  compared  to 
the  European  Tax  Analyzer  computations  arises  from  the  implementation  of  cross-
border  investments.  So  far,  a  missing  aspect  of  our  analyses  is  that  LSEs  typically 
tend  to  be  part  of  a  multinational  group.  If  this  is  the  case,  corporations  are  able  to 
reduce their tax burdens on investments by making use of intra-group debt financing. 
Therefore,  just  comparing  the  EATR  of  national  investments  conducted  by  SMEs  and 
LSEs  without  considering  the  possibility  of  international  tax  planning  advantages  of 
multinationals tends to overestimate the tax benefit which SMEs receive in some coun-
tries. This section aims at complementing the existing results by adding the described 
cross-border perspective.  

Columns  3  to  5  in  Table  7.3  model  a  cross-border  investment  and  show  the  corre-
sponding EATRs. The investment is conducted by a LSE which is a subsidiary of a par-
ent  corporation  which  is  located  in  a  different  country.  The  investment  is  carried  out 
by  the  LSE  (i.e.  subsidiary)  in  the  respective  country  which  is listed  on  the  left  hand 
side of the table. From the perspective of the respective country where the subsidiary 
is located, we speak of an “inbound investment”. As possible locations for the parent 
corporation of the subsidiary, we model all other 19 selected Member States and the 5 

117 These results are delivered in Annex 1 (section 6.2). 

112 

 
 
 
                                                 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Non-European countries. Over all these  combinations (given a specific way  of  financ-
ing) we compute the mean EATR for the cross-border investment (column 3 and 4 in 
Table  7.3).  Column  3  assumes  that  the  subsidiary  is  financed  by  retained  earnings 
(33.33%),  new  equity  (10%)  and  debt  (35%).  This  does  not  vary  depending  on  the 
locations and thus, no tax minimizing behaviour by the multinational is assumed.118  

The  results  in  Table  7.3  show  that  for  all  investment  locations,  the  stand-alone  LSE 
(column  1  of  Table  7.3)  bears  a  lower  tax  burden  (i.e.  EATR)  than  the  multinational 
(column 3 of Table 7.3). This is due to the following reasons:  

  Firstly, we do not assume any tax minimizing financing behaviour by the multi-

national. 

  Secondly, most of the 25 countries apply the exemption method and therefore, 
given  the  non-tax-minimizing  financing  strategy  of  the  subsidiary,  the  EATR 
cannot be lowered relatively to the national stand-alone investment (even when 
the parent is located in a low tax jurisdiction).  

  Thirdly, many of the countries applying the exemption method only exempt 95% 
of the dividend. 5% of the dividend payments are subject to additional taxation 
which does not occur in the purely domestic case.  

Figure  7.5  Comparisons  of  Effective  Average  Tax  Rates  for  domestic  and 
cross-border investments conducted by LSEs 

40%

35%

30%

25%

20%

15%

10%

5%

0%

Domestic LSE

Inbound LSE with Ø location and Ø financing

Inbound LSE with Ø location and efficient financing

Inbound LSE with efficient location and efficient financing

118 Column 3 therefore reflects quite a number of computed cases: this is 5 × 3 × 3 × 20 × 24 = 21600 
(5 assets, 3 ways of financing the subsidiary, 3 ways of refinancing the parent, 20 subsidiary locations, 24 
parent  locations).  Note  that  this  figure  multiplies  by  factor  5  due  to  the  computations  for  the  other  four 
years (2009-2012). 

113 

 
 
 
                                                 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

The  negative  picture  with  respect  to  EATRs  for  cross-border  investments  changes 
when assuming that for a given cross-border  constellation the most tax efficient way 
of financing the subsidiary is chosen. This is assumed for the investments underlying 
the  results  in  column  4  of  Table  7.3  (or  third  bar  of  Figure  7.5).  Again,  investments 
are conducted in the countries on the left hand side of the table. Investments can be 
financed from parents who are located in all selected 24 countries. For each constella-
tion  the  most  tax  efficient  way  of  financing  the  subsidiary  is  chosen,  i.e.  the  way  of 
financing which leads to the lowest possible EATR. This is either financing by new eq-
uity, retained earnings or debt. Afterwards, the mean over all possible parent locations 
is  computed  in  order  to  receive  one  cross-border  EATR  (inbound).  One  can  see  that 
the  possibility  of  choosing  the  most  tax  efficient  way  of  financing  reduces  the  EATR 
(column  4  of  Table  7.3)  compared  to  the  fixed  mix  of  financing  (column  3  of  Table 
7.3).  This  can  also  be  seen  in  Figure  7.5.  Logically,  this  is  necessary  to  hold  for  all 
countries.  

Furthermore, always choosing the most tax efficient way of financing does result in an 
EATR for cross-border investments (column 4 of Table 7.3) which is lower than for the 
corresponding  domestic  investment  (column  1  of  Table  7.3)  for  some  countries  (i.e. 
Belgium, Estonia, France, Germany119, Luxembourg and Spain). This is also illustrated 
in  Figure  7.5  when  comparing  the  first  and  third  bar.  In  France  the  EATR  for  an  in-
vestment  conducted  by  a  purely  domestic  LSE  amounts  to  35.0%  whereas  the  aver-
age inbound investment which is financed efficiently is taxed at a rate of 33.9%. Also, 
in  Spain  the  average  inbound  EATR  amounts  to  32.3%  in  case  the  most  tax  efficient 
way of financing is chosen whereas the national LSE faces an EATR of 32.6%.  

The figures shown in column 4 of Table  7.3 (or third bar in  Figure 7.5) are averages 
over all 24 inbound investments. This means that for a given subsidiary, we calculate 
24 EATRs as there are 24 possible parent locations. For all 24 inbound investments we 
assume the most tax efficient financing. Finally, the figures in column 4 average over 
all  24 inbound  EATRs.  Unlike  column  4,  column  5  (or  the  fourth  bar  in  Figure  7.5) is 
not an average EATR over all 24 parent locations. Instead, it chooses the parent loca-
tion which results in the lowest inbound EATR (out of the 24 parent locations). Thus, 
column  5  of  Table  7.3  shows  the  result  for  the  inbound  investment  when  optimizing 
both the financing structure and the parent location. It reflects a distinct parent loca-
tion  and  is  not  an  average  over  locations.  Clearly,  the  measured  EATRs  in  column  5 
have to be lower than the ones measured in column 3 and 4. It turns out that the in-
bound EATR which is now efficient with respect to the location choice and the way of 
financing (column 5 of Table  7.3) is lower than the one of the domestic LSE (column 
1) for all countries. This can also be seen when comparing the first and fourth bar in 
Figure 7.5. This last result does not follow deterministically and shows the scope of the 
advantage  which  multinationals  might  gain  from  optimal  intra-group  financing  and 
location decisions.  

In the following, an additional dimension is added, namely the various tax incentives 
which SMEs qualify for in the different Member States of the EU 

119  For  Germany  the  difference  is  very  small  though  (EATR  for  domestic  investment:  28.22%;  for  cross-
border investment: 28.16%)  

114 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure  7.6  Comparisons  of  Effective  Average  Tax  Rates  in  %  for  SMEs  and 
LSEs 

40%
35%
30%
25%
20%
15%
10%
5%
0%

Domestic SME

Domestic LSE

Inbound LSE with efficient financing

Inbound LSE with efficient financing and efficient location

Figure  7.6  gives  an  overview  of  the  relevant  numbers  for  the  comparison  between 
SMEs and LSEs. The first bar reflects the EATR for investments of domestic SMEs, the 
second  bar  the  EATR  for  domestic  LSEs.  The  third  bar  reflects  the  EATR  for  invest-
ments of multinationals which choose the most tax efficient way of financing. Finally, 
the fourth bar displays the EATR for investments when optimally choosing the way of 
financing and the location for the parent.120  

From the analysis in the previous section on LSEs we already know that in most of the 
countries inbound investments are not better off than domestic investments as long as 
no optimizing behaviour with respect to the parent location is considered. This pattern 
is  confirmed  when  zooming  in  Figure  7.6  by  mapping  the  first  and  the  third  bar  in  a 
separate graph in Figure 7.7. 

In Figure 7.7 the first bar reflects the EATR for investments of domestic (stand-alone) 
SMEs  (column  2  of  Table  7.3).  The  second  bar  reflects  the  EATR  for  investments  of 
multinationals which choose the most tax efficient way of financing (column 4 of Table 
7.3).  The  countries  are  ranked  according  to  the  difference  between  the  EATR  for  an 
investment conducted by an SME and an investment conducted by an average multi-
national  LSE  assuming  a  tax  efficient  way  of  financing  (but  no  tax  efficient  choice  of 
the  parent’s  location).  It  becomes  evident  that  the  advantages  which  stand-alone 
SMEs  experience  compared  to  LSEs  “survive”  even  when  assuming  international  tax 
planning  (without  optimizing  location  decisions).  Figure  7.7  shows  for  example,  that 
the  incentives  which  SMEs  receive  in  France  and  Spain  still  outweigh  the  tax  ad-
vantages which LSEs can make use of. Evidence for a clear promotion of SMEs in sev-
eral  Member  States  remains  robust  in  this  international  perspective.  Only  Estonia 
shows a lower EATR for the considered average multinational than for the stand-alone 
SME (domestic). 

120  The  figures  provided  are  taken  from  Table 7.3:  The  first bar reflects column 2,  the  second bar  reflects 
column 1, the third bar reflects column 4 and the third bar reflects column 5. 

115 

 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 7.7 Comparisons of Effective Average Tax Rates for SMEs and multina-
tional LSEs with most tax efficient way of financing 

40%

35%

30%

25%

20%

15%

10%

5%

0%

Domestic SME

Inbound LSE with efficient financing

Multinationals,  however,  are  able  to  further  minimize  the  EATR  on  the  investment 
when  the  parent’s  location  is  an  optimal  fit  to  the  subsidiary’s  location.  This  is  illus-
trated  in  Figure  7.8  which  again  ranks  countries  according  to  the  difference  between 
the  EATR  for  an  investment  conducted  by  SMEs  and  an  investment  conducted  by  a 
LSE  which is  part  of  a  multinational  group  assuming  the  most  tax  efficient  way  of  fi-
nancing and the most tax efficient location of the parent corporation.121 

From  the  results  displayed  in  Figure  7.8  it  is possible  to  identify  countries  where  the 
tax environment is clearly advantageous for SMEs even if multinationals simultaneous-
ly optimize both their location and financing decisions. In this light, the incentives for 
SMEs  in  France,  Spain,  Belgium,  Lithuania  and  the  Netherlands  turn  out  to  indeed 
privilege SMEs. Within these countries the EATR is lower for SMEs than for LSEs even 
when considering tax minimizing possibilities of multinationals.122  

However, for the majority of countries, it turns out that SMEs are not necessarily bet-
ter off than LSEs if tax minimizing strategies are taken into account. Figure 7.8 shows 
that  in  75%  of  the  selected  countries  multinationals  face  a  lower  EATR  than  SMEs 
when considering such tax minimizing strategies (i.e. financing of subsidiary and loca-
tion  of  parent  corporation).123  This  result  is  straight  forward  and  not  surprising  for 

121 The figures provided  are  taken  from  Table  7.3:  The first bar reflects  column 2  and  the  second  bar col-
umn 5 of Table 7.3. 
122 This does not mean that the EATR for SMEs is the lowest in these countries compared to other countries 
(for that see subsection 7.3. and the computations conducted with the European Tax Analyzer). However, it 
means that within these countries there is a favourable environment for SMEs compared to LSE. 
123 Please  note  again,  that  anti-avoidance  provisions  such  as  thin  capitalization  rules  or  earnings-stripping 
rules which limit the deductibility of interest payments at the level of subsidiary were not taken into account 
for the computation of the EATRs. If these rules would be applied, profit shifting activities would be limited 
and the relevant level of taxes would be the one displayed in column 3 of Table 7.3. Please also note that 
multinationals have additional profit shifting channels such as transfer prices and licence fees which are not 
captured in the model. These channels would lower the EATR of multinationals. 

116 

 
 
 
 
                                                 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

countries  without  tax  incentives  for  SMEs.  However,  countries  like  Ireland,  Romania 
and the UK which appeared to be favourable environments for SMEs turn out to rather 
favour LSEs from this perspective. 

Figure 7.8 Comparisons of Effective Average Tax Rates for SMEs and multina-
tional LSEs with tax efficient way of financing and tax efficient location of the 
parent 

35%

30%

25%

20%

15%

10%

5%

0%

Domestic SME

Inbound LSE with efficient financing and efficient parent location

7.5.  Summary of results 

The results of the analysis carried out in this section are: 

  LSEs  locate  their  activities  in  different  countries.  Therefore,  LSEs  benefit  from 
cross-country  tax  differentials  compared  to  SMEs  which  operate  domestically. 
This is a key competitive advantage of the international tax system for LSEs.  
  LSEs  can  further  reduce  their  effective  average  tax  burdens  by  allocating  func-

tions in the areas of financing and intellectual property. 

  The key competitive advantage from CIT for SMEs follows from specific SME tax 

incentives and lower tax rates. 

  Thus, the analysis conducted with the Devereux-Griffith approach examines how 
the competitive situation of SMEs compares to the situation of LSEs when taking 
into account that multinationals can make use of tax minimizing strategies (i.e. 
intra-group financing and location decisions). Consequently, the results suggest 
a more tax friendly environment for LSEs in the selected countries than the re-
sults of the European Tax Analyzer (Section 6).  

  Considering tax-minimizing strategies, LSEs in 75% of the sample countries face 
a lower  EATR than SMEs.  In this  sense, SMEs  have a  competitive disadvantage 
concerning taxation compared to LSEs. However, there might be anti-abuse pro-
visions that limit the possibilities of cross-border profit shifting by multinationals. 
Such provisions were not taken into account in the analysis. 

  Nevertheless,  even  when  assuming  unrestricted  tax  optimizing  strategies  by 
LSEs,  France,  Spain,  Belgium,  Lithuania  and  the  Netherlands  provide  lower  ef-
fective tax rates for SMEs compared to LSEs.  
In order to verify the  robustness of the  results, several sensitivity analyses are 
conducted.  The  EATR  is  computed  for  different  levels  of  the  economic  parame-
117 

 

 
 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

ters  of  the  model  (real  interest  rate,  inflation  rate  and  pre-tax  rate  of  return). 
The results turn out to be robust to the changes of these parameters.124 

124 The detailed results for the sensitivity analysis are delivered in Annex 1 (section 6.3). 

118 

 
 
                                                 
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enterprises 

8.  IMPACT  OF  CIT  ON  SMES  AND  LSES  ACROSS  THE  COMPANY 

LIFE-CYCLE  

This  part  of  the  study  complements  the  results  of  the  financial  ratios,  qualitative  re-
search and tax modelling by providing further insight on the entrepreneurs’ perception 
of the impact of CIT on companies.  

To  do  this,  the  research  team  first  conducted  extensive  desk  research  on  particular 
issues of interest at different points of a company’s lifecycle from entrepreneurship to 
choice of legal form, finance and company growth.  

Case studies 

Desk  based  research  was  complemented  by  a  vast  programme  of  empirical  research 
directly with individual companies located in the 20 countries under in-depth study. A 
total  of  95  interviews  with  companies  were  carried  out  over  the  course  of  the  study. 
The table below shows the breakdown of the interviews by country.  

Table 8.1. Breakdown of interviews by country 

Country 

Austria 

Belgium 

Bulgaria 

Estonia 

Finland 

France 

Germany 

Ireland 

Italy 

Lithuania 

Luxembourg 

Netherlands 

Poland 

Romania 

Slovenia 

Spain 

UK 

Total 

Number of interviews 

9 

13 

1 

3 

3 

5 

12 

8 

5 

1 

7 

5 

3 

6 

3 

6 

5 

95 

Tax adviser survey 

Finally, because smaller companies tend to outsource compliance with CIT to external 
advisers due to a lack of internal capacity, an online survey questionnaire was distrib-
uted among tax advisers across the EU-28 Member States to gather their perceptions 
on  the  impact  of  specific  characteristics  of  the  CIT  regime  on  smaller  companies.  A 
total of 487 responses were received.  

119 

 
 
 
 
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Table 8.2. Breakdown per country of survey responses 

Country 

Austria 

Belgium 

Bulgaria 

Croatia 

Estonia 

Finland 

France 

Germany 

Greece 

Ireland 

Italy 

Lithuania 

Number of valid re-
sponses 

75 

18 

14 

9 

7 

8 

11 

35 

9 

75 

18 

16 

Luxembourg  5 

Netherlands 

Poland 

Romania 

Slovenia 

Spain 

Sweden 

UK 

Total 

25 

12 

75 

33 

10 

7 

25 

487 

This section presents the results of this large empirical research effort. 

8.1.  Overall comparison of tax rates between LSEs and SMEs 

In most countries covered in this study, SMEs and LSEs tend to be subject to the same 
tax  rates,  as  shown  in  Table  5.4,  though  there  are  special  tax  incentives  for  smaller 
companies  in  the  UK,  France,  Belgium,  Lithuania,  Luxembourg,  the  Netherlands  and 
Spain. 

Table 8.3 compares CIT rates (the World Bank uses the term “profit tax” in the table) 
with  other  types  of  taxes  that  companies  are  subject  to.  The  table  shows  that  CIT 
tends to be much less important in terms of its share of corporate income than other 
taxes  such  as  labour  taxes  and  social  security  contributions.  This  was  the  case  in  all 
countries  under  this  study  except  for  Germany,  the  UK  and  the  Netherlands.  Labour 
and social security contributions are generally input taxes, i.e. taxes levied on the use 
of resources by the company to produce outputs.  As such they are payable irrespec-
tive of the profitability of the company and they are therefore, generally of much larg-
er concern to SMEs and LSEs than CIT which is levied on profit only. 

As a result, when queried about taxation as part of this study, the majority of compa-
nies suggested that CIT was not a major concern for them. Instead, most  companies 

120 

 
 
 
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enterprises 

are more interested in other types  of taxes, which they perceive as having a greater 
impact on their business. 

Table 8.3: Tax rates across 20 countries under study 

Country 

Profit tax (%) 

Austria 
Belgium 

15.3 
6.4 

Labour tax and 
contributions (%) 
34.7 
50.3 

Other taxes 
(%) 
2.4 
0.7 

Total tax rate 
(% profit) 
52.4 
57.5 

Bulgaria 
Croatia 
Estonia 
Finland 
France 
Germany 
Greece 
Ireland 
Italy 
Lithuania 
Luxembourg 
The Netherlands 
Poland 
Romania 
Slovenia 
Spain 
Sweden 
The UK 
Source: World Development Indicators 2014, The World Bank, 2014  

4.9 
0 
8.1 
14.1 
8.7 
23 
11.2 
12.3 
20.3 
6 
4.1 
20.8 
14.1 
10.3 
12.9 
21.2 
16 
21.6 

20.2 
17.9 
39.4 
24.5 
51.7 
21.8 
32 
12.1 
43.4 
35.2 
16 
18.2 
26 
31.5 
18.2 
36.8 
35.5 
10.6 

2.6 
1.9 
2 
1.2 
4.3 
4.6 
0.7 
1.3 
2 
1.9 
0.5 
0.3 
1.5 
1.1 
1.4 
0.6 
0.6 
1.7 

27.7 
19.8 
49.4 
39.8 
64.7 
49.4 
44 
25.7 
65.8 
43.1 
20.7 
39.3 
41.6 
42.9 
32.5 
58.6 
52 
34 

In addition to comparing the tax rates themselves, we also conducted a pan-European 
survey of tax advisors to identify their perception of the impact of CIT rates on SMEs 
compared with LSEs.  

As  Figure  8.1  shows,  at  an  aggregate  EU  level  that  tax  advisers  from  across  Europe 
were quite divided with regard to the impact of CIT  rates on different size  of compa-
nies.  While  43%  of  tax  advisers  thought  the  impact  of  CIT  lower  for  SMEs  than  for 
LSEs, 20% did not see a difference based on company size and 37% thought CIT rates 
led to higher tax payments for SMEs than for LSEs. 

121 

 
 
 
 
 
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enterprises 

Figure  8.1:  How  do  CIT  levels  compare  between  SMEs  and  larger  companies 
in your country? (171 respondents) 

43%

37%

20%

Higher for SMEs: 37%

Same: 20%

Lower for SMEs: 43%

Source: Tax Advisers Survey 

Figure 8.2 shows the breakdown of these responses by country and it indicates signifi-
cant  differences  between  countries.  For  instance  in  France,  which  has  a  special  CIT 
rate for smaller companies, all respondents considered that SMEs had a more favoura-
ble regime than LSEs, whereas the opposite was true in Finland, Estonia, Croatia, and 
Greece. At the same time, there was also significant divergence in opinions among tax 
advisers within countries. For instance in Germany, Austria, Belgium, and some others 
respondents  (11  of  20)  suggested  that  SMEs  paid  lower  taxes,  others  (3  of  20) 
thought  there  was  no  difference  and  yet  others  (1  of  20)  thought  SMEs  were  disad-
vantaged in terms of their tax bills compared with LSEs.  

Figure 8.2: How do CIT levels compare between SMEs and larger companies 
in your country? Responses by country (171 respondents) 

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

a
i
r
t
s
u
A

Lower for SMEs

Same

Higher for SMEs

a
i
r
a
g
u
B

l

a
i
t
a
o
r
C

i

a
n
o
t
s
E

d
n
a
n
i
F

l

e
c
n
a
r
F

y
n
a
m
r
e
G

y
l
a
t
I

e
c
e
e
r
G

d
n
a
e
r
I

l

i

a
n
a
u
h
t
i
L

g
r
u
o
b
m
e
x
u
L

s
d
n
a
l
r
e
h
t
e
N

d
n
a
o
P

l

i

a
n
a
m
o
R

i

a
n
e
v
o
l
S

i

n
a
p
S

n
e
d
e
w
S

K
U

i

m
u
g
e
B

l

Source: Tax Advisers Survey 

122 

 
 
 
 
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enterprises 

Finally, Figure 8.3 reports responses from tax advisers on potential differences in be-
haviour depending on the sector of the company. According to the respondents in our 
sample,  the  vast  majority  of  tax  advisers  (79%)  consider  there  to  be  no  differential 
impact on the behaviour of companies across sectors as a result of special CIT rates. 

Figure 8.3: Do you believe that special tax rates influence the overall behav-
iour of SMEs differently depending on which sector they operate in? (194 re-
spondents) 

1%

20%

79%

Yes: 20%

No: 79%

Don't know: 1%

Source: Tax Advisers Survey 

In  general  terms,  no  clear  pattern  seems  to  emerge  from  the  above  analysis.  This 
suggests that perceptions of tax treatment between SMEs and LSEs are influenced by 
a  multitude  of  factors  including  the  prevailing  tax  regime,  the  economic  make-up  of 
the economy and the personal experiences of individual tax advisers. Generally, CIT is 
seen  as  one  of  many  tax  and  non-tax  related  factors  that  impact  on  entrepreneurial 
activity  and  business  performance.  However,  compared  with  other  types  of  taxes, 
companies of different sizes tend to be less worried about CIT than about input taxes 
such as labour or social security contributions. 

8.2. 

Impact of CIT on entrepreneurial activity levels 

The effect of CIT on innovation and entrepreneurship is one of the central questions in 
public finance125. This effect matters not only for the evaluation and design of tax poli-
cy, but also for thinking about economic growth126.  

In theory, lower CIT rates should, everything else being constant, increase the poten-
tial returns from starting a business and therefore have a positive impact on entrepre-
neurship.  A  growing  consensus  in  the  literature  suggests  that  tax  rate  increases  re-
duce  entrepreneurial  entry,  growth,  hiring,  investment,  and  survival.  In  general,  the 

125 See Djankov/Ganser/McLiesh/Ramalho/Shleifer (2010). 
126 See Barro (1991), DeLong/Summers (1991) and Baumol/Litan/Schramm (2007). 

123 

 
 
 
 
                                                 
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enterprises 

literature  shows  a  negative  correlation  between  increasing  CIT  rates  and  economic 
growth and between tax structure (how progressive it is) and entrepreneurship127. 

8.2.1.  Prevalence of special CIT provisions for entrepreneurship 

At EU level, our survey of tax advisers across  Europe shows that a majority of coun-
tries do not provide special CIT provisions for start-ups. At the same time, as shown in 
Figure  8.4,  43%  of  respondents  to  the  survey  suggested  that  such  special  provisions 
existed in their country. Interviews suggest the same result. An entrepreneur for  ex-
ample stated that: “At the time of establishment in 1997 there were no special start-
up provisions and I am not aware of any existing at the moment”. 

Figure 8.4: Does the fiscal system in your country have special CIT provisions 
for start-ups? (139 respondents) 

2%

43%

55%

Yes: 43%

No: 55%

Don't know: 2%

Source: Tax Advisers Survey 

Though  they  may  not  be  very  prominent,  there  are  nevertheless  several  countries 
across  the  EU  which  have  put  in  place  special  tax  provisions  for  start-ups.  Indeed,  a 
2013 European Commission report128 on tax reforms in Member States highlights that 
“several Member Sates introduced tax measures aimed at incentivising entrepreneurial 
activity  and  investment  in  small  unquoted  companies”.  For  instance,  some  Member 
States introduced or expanded their existing tax incentives for start-ups and entrepre-
neurs  (e.g.  Belgium,  Ireland,  Spain,  Italy  and  Hungary).  Italy  introduced  a  set  of 
regulatory  and  tax-related  measures  aimed  at  facilitating  the  emergence  and  growth 
of  innovative  start-ups.  R&D-intensive  start-ups  will  be  subject  to  favourable  tax 
treatment and individual and corporate investors will receive tax incentives to provide 
equity  to  such  start-ups.  In  Spain,  corporate  start-ups  will  be  subject  to  a  15  %  tax 
rate on their annual profits under 300 000 EUR, and 20 % on the excess as of the first 
and  second  year  in  which  profits  arise.  Individual  entrepreneurs  will  also  be  able  to 

127 See Baliamoune-Lutz/Garello (2014). 
128 See European Commission (2013. 

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enterprises 

deduct  20  %  of  their  positive  net  income.  In  2013,  Hungary  introduced  two  optional 
tax schemes for small companies129: a lump sum tax for micro-businesses (KATA) and 
a flat-rate tax for small  companies (KIVA).  In Luxembourg, a new minimum CIT rate 
applies to small companies130.  

8.2.2.  Impact of CIT on entrepreneurship 

In practice, there are many factors that drive or impede people from becoming entre-
preneurs and it is impossible, within the context of this study to identify the impact of 
taxation  on  the  decision  to  start  a  business.  Desk  research  for  this  study  has  found 
mixed  evidence  regarding  the  impact  of  CIT  rates  on  entrepreneurial  activity  levels. 
For instance, Belgium has very low entrepreneurial rates and one of the highest CIT in 
the EU131, while France has a high entrepreneurship and a high CIT132 and the Nether-
lands has a middle range level of entrepreneurship and a middle range level of CIT133. 

In addition, CIT is only one of the tax instruments that new corporations are subject to 
and, arguably, one of the less important ones due to the likely low profitability of  the 
company  in  its  first  years  of  operation.  As  company  interviews  for  this  study  con-
firmed,  other  taxes,  (e.g.  input  based  taxes  such  as  labour,  or  social  security  taxes) 
are  likely  to  be  of  greater  importance  to  entrepreneurs  than  statutory  CIT.  For  in-
stance, rather than CIT on its own, it is the difference between PIT including dividends 
and CIT, which determines the financial incentive to incorporate. Indeed, simple corre-
lation analysis for this study (section 8.4) indicates that there is a (weak) association 
between  the  differential  of  PIT  and  CIT  and  the  entrepreneurship  rate.  An  entrepre-
neur when asked whether the decision of establishing his enterprise had been affected 
by  the  presence  of  favourable  tax  schemes  stated  that:  “While  we  did  benefit  from 
that  favourable  tax  scheme,  the  fact  that  I  knew  of  its  presence  before  starting  the 
business did not influence my decision to start the business at all”. 

The  relatively  weak  correlation  between  CIT  and  entrepreneurship  levels  is  also  con-
firmed  by  the  tax  adviser  survey  conducted  for  this  study.  Indeed,  Figure  8.5  shows 
that tax advisers responding to our survey do not perceive these special provisions as 
having a significant impact on entrepreneurial behaviour. In particular, 40% of advis-
ers in our sample thought that there was no impact on start-up activity and about one 
in three respondents did not discern an impact on access to finance for start-ups. Only 
one in four respondents to the survey suggested that special provisions for start-ups, 
where they exist, had an impact on the success rate of new companies. Among those 
respondents  who  did  identify  a  positive  impact  of  these  special  provisions  for  start-
ups, the magnitude of that impact was generally considered relatively small. This was 
especially the case for the overall success rate where almost half of respondents con-
sidered the impact as small. 

129 See http://eugo.gov.hu/doing-business-hungary/taxation. 
130 See European Commission (2013). 
131 See http://www.investinflanders.be/EN/Sector/ICT/chapter/Setting-up-your-business/page/Business-
incentives. 
132 See http://www.entreprises.cci-paris-idf.fr/web/reglementation/creation-entreprise/fiscalite-entreprise. 
133 See http://www.answersforbusiness.nl/subsidies. 

125 

 
 
 
 
                                                 
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enterprises 

Figure 8.5: What is your perception of the impact of CIT provisions regarding 
investment  in  start-ups  using  different  financing  vehicles  on  the  following? 
(125 respondents) 

100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

6.98%
15.33%
8.59%

35.41%

33.71%

9.85%
12.02%

17.23%

51.93%

8.96%

11.35%

19.03%

8.93%

21.63%

39.07%

13.95%
3.65%
8.49%

47.02%

26.89%

Don't know

Large impact

Medium impact

Small impact

No impact

Access to finance for
start-ups

Financial structure
of start-ups
(debt/equity ratio)

Start-up rates

Success rates

Source: Tax Advisers Survey 

While  the  example  cited  above  suggests  that  some  Member  States  see  CIT  rates  are 
important determinants of entrepreneurship, “the benefits of introducing reduced CIT 
rates  for  specific  enterprises  need  to  be  weighed  against  the  potentially  increased 
costs in terms of tax compliance and possible disincentives to grow.”134 Furthermore, 
special CIT rates can distort behaviour in ways that are not necessarily beneficial. For 
instance, although many Member States have introduced special tax measures to sup-
port self-employment (as a proxy for  “entrepreneurship”) these provisions could lead 
to differential and unequal fiscal treatment of essentially similar activities.135 Preferen-
tial treatment for the self-employed might create a financial incentive for enterprises, 
for tax reasons, to outsource their employees, resulting in the substitution of employ-
ees  by  ‘fake’  self-employed  people,  who  are  physically  and  functionally  part  of  the 
business. Thus, as a 2013 European Commission report136 concludes, it is important to 
point  out  that  supporting  entrepreneurship  first  and  foremost  requires  a  well-
functioning and stable business tax environment. 

The only area where a very large share of survey respondents identified an impact is 
the decision on the financial structure of the new company (i.e. its debt/equity ratio). 
More than half of respondents thought that there was indeed a small impact of special 
CIT provisions on the mix between debt and equity among new companies.  

In sum, it is not possible, in the context of this study, to identify the impact that CIT 
has on the decision to start a new  company, considering that there are many factors 
that  drive  or  impede  people  from  becoming  entrepreneurs.  The  desk  research  con-
ducted for this study has found mixed evidence regarding the impact of CIT  rates on 
entrepreneurial activity levels. In addition, CIT is only one of the tax instruments that 
new company are subject to and one of the less important ones due to the likely low 
profitability of the company in its first years of operation. 

134 See European Commission (2013), p. 24. 
135 See European Commission (2013), p. 61. 
136 See European Commission (2013), p. 24. 

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8.3. 

Impact of CIT rates on the financial structure of companies 

Tax systems might have an influence on the financial structure of start-ups, favouring 
equity  investments  when  CIT  rate  is  low  and  bank  loans  when  taxation  is  higher.  In 
addition,  tax  rates  may  affect  not  just  the  mix  of  financing  instruments  for  start-ups 
but also their access to finance (e.g. ability to access bank loans or private equity in-
vestment). 

8.3.1.  CIT rates and venture capital finance 

Any investment decision made by a venture capital company (VCs) is subject to a due 
diligence process in which the target company is evaluated from several points of view 
including the market that the company operates in, legal and fiscal aspects related to 
its operation and, most importantly the value and the profitability of the enterprise for 
a future disinvestment strategy.  

In this context, a higher tax rate influences the cost of capital (higher tax rates reduce 
the cost of capital because of the deduction of interest) and at the same time it influ-
ences  the  value  of  the  activities  of  a  potential  investee.  In  countries  where  CIT  is 
higher, the effect is double: first, a higher tax rates decreases the value of discounted 
cash  flows;  second,  enterprises  are  incentivised  to  finance  their  activities  using  debt 
instead  of  equity.  Figure  8.6  outlines  schematically  the  impact  of  taxation  on  inves-
tors, funds and the investee. 

Figure 8.6: CIT for investors, venture capital funds and enterprises 

Source: own depiction 

The objective of VCs is to collect funds and target their investments where the poten-
tial  return  is  the  highest  supporting  the  target  company  to  develop  its  potential.  In 
this  process,  not  only  CIT  is  relevant  to  VCs.  Indeed,  rather  than  CIT  rates,  capital 
gains  taxation  and  taxation  of  VC  funds  themselves  have  the  largest  impact  on  VC 
investment.  As  one  interviewee  suggested:  “a  reduction  of  the  burden  of  CIT  would 
certainly be beneficial […] being honest, our priority is to find funds and capital gains 
taxation has a much stronger influence in our job”. For instance, asymmetries in capi-
tal gains taxation across Member States might create multiple points of taxation caus-
ing double or triple taxation of the post-tax returns of an investment and reduce, con-
sequently, the attractiveness of foreign investments.  

127 

 
 
 
 
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enterprises 

While CIT rates do not have a direct and significant impact on the investment choices 
of VC funds in a single jurisdiction, they are more relevant when assessing the relative 
attractiveness  of  multiple  investments  across  tax  jurisdictions.  Indeed,  two  identical 
assets subject to different CIT regimes would have a different value and thus a differ-
ent  attractiveness  to  VCs.  However,  EVCA  (European  Venture  Capitals  Association) 
statistics  show  that  cross-border  investments  are  relatively  low  in  comparison  to  in-
vestments in the home country of the VC fund. 

Thus, from the perspective of this study, the following conclusions emerge:  

  CIT  rates  per  se  do  not  have  a  direct  and  significant  influence  on  investment 
decisions made by  VCs. This is especially the case  when the VC  operates  only 
in one country, which is the case for most VC investments to date.  

  CIT (and other tax) rates have an indirect impact on the value of the company 

and this influences cross-border investments.  

  Capital gains tax, CIT and administrative red tape have a combined impact on 

the development of a dynamic cross-country VC market in Europe. 

8.3.2.  CIT rates and debt/equity mix 

Generally,  CIT  systems  that  allow  the  deduction  of  interest  costs  favour  financing  by 
debt versus equity. Where there is no similar treatment for equity, the result is a bias 
which gives companies an incentive to take on debt.137  

This  debt  bias  introduced  by  the  application  of  CIT  is  also  reflected  in  responses  re-
ceived  from  our  sample  of  tax  advisers  through  the  online  survey.  Figure  8.7  shows 
that more than half of respondents considered that CIT provisions had a large impact 
on the financial structure of SMEs (i.e. their debt/equity mix), compared with e.g. less 
than 20% who thought that this also translated into a large impact on the success rate 
of these companies. On the other hand, 46% thought that CIT provisions did not influ-
ence the success rate of SMEs. 

137 It may also erode the tax base through international profit shifting and the use of hybrid instruments. 

128 

 
 
 
 
 
 
                                                 
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enterprises 

Figure 8.7: Which of the following aspects are influenced by CIT provisions on 
profits, retained earnings and dividends? (90 respondents) 

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Large impact

Medium Impact

Small impact

The financial
structure of
SMEs (i.e.
debt/equity
ratio)
54.83%

23.46%

21.71%

Investment by
SMEs

Investment in
Start-ups

SMEs growth

Start-ups'
success rates

54.03%

33.19%

12.78%

28.82%

35.71%

35.47%

47.56%

26.05%

26.39%

19.34%

34.43%

46.24%

Source: Tax Advisers Survey 

Figure 8.8 shows that, when probed further, respondents also suggested that CIT pro-
visions  had  a larger  effect  on  SMEs  than  on  LSEs  with  66%  suggesting  that  this  was 
the case, compared with only 30% seeing no difference in impact according to compa-
ny size. 

Figure  8.8:  Do  you  believe  that  CIT  provisions  regarding  profits,  retained 
earnings and dividends affect SMEs differently to LSEs? (136 respondents) 

4%

30%

Yes: 66%

No: 30%

Don't know: 4%

66%

Source: Tax Advisers Survey 

129 

 
 
 
 
 
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enterprises 

At  the  same  time,  it  should  be  noted  that  the  case  study  interviews  did  not  produce 
clear evidence that companies (especially the smallest companies) base their decisions 
regarding  financing  structure  on  CITs.  Some  interviewees  suggested  that  they  had 
actively chosen between different  financing options on the basis  of a  rational assess-
ment. For instance, one company stated that “we used an Adjusted Present Value ap-
proach, choosing a debt ratio that could maximize the value of our  company”. At the 
same time, others indicated that they had based their financing decisions on a variety 
of factors including personal relationships and connections with other, similar compa-
nies. For instance, one entrepreneur stated that: “I based my financing-mix choice on 
available evaluations of partnering companies’ standards and positioned my enterprise 
close to them”, and another interviewee replied that he “brought [his] company close 
to the standards of the peers and main competitors in the sector”. 

This decision-making process among smaller companies may be partly due to the fact 
that for these companies in particular, there are generally not many different financing 
options available. Thus, financing choices among smaller companies tend to be driven 
by a variety of factors which include but are not limited to tax considerations. 

The  discrepancy  in  tax  treatment  between  debt  and  equity  described  in  the  previous 
section  can  be  remedied  by  removing  or  restricting  interest  deductibility  (e.g.  CBIT, 
Corporate Business Income Tax) and/or introducing an allowance for corporate equity 
(ACE) which equalises the treatment of debt and equity by offering a tax deduction for 
normal  return  on  equity138.  As  one  interviewee  suggested  in  relation  to  the  Belgian 
notional interest deduction: “they deduct a one-shot amount from the company’s tax-
able income by means of considering your equity funding as if it was a bank loan. This 
[…] is  nicely  keeping  the  amount  of  CIT  I  actually  pay lower  than  what it  would  be”. 
There  is  thus  some  evidence  from  case  study  interviews  that  these  solutions,  where 
they are in place, are having an impact on the debt/equity mix and on the tax liability 
of affected companies.  

Several reforms were undertaken in 2012 and 2013 to address the debt bias in CIT 139. 
These measures mostly tended to restrict the level of deductible interest. France and 
Portugal restricted the deduction of interest payments above a threshold of EUR 3 mil-
lion. In France, the limit is 85% (75% from 2014) of interest paid, while in Portugal it 
is 70 % of EBITDA from 2013, falling to 30% in 2017. Spain and the Netherlands re-
voked their thin capitalisation rules and introduced new rules on the non-deductibility 
of  certain  interest  expenses  (a  so-called  earning-stripping  rule).  Spain,  Sweden  and 
Finland limited the scope of deductibility of interest expenses on intra-group loans.140 

To summarise, in general CIT systems that allow the deduction of interest costs favour 
financing  by  debt  versus  equity.  On  the  other  hand,  there  is  no  clear  evidence  that 
small  corporations  base  their  decisions  regarding  their  financing  structure  on  CIT 
rates. 

138 Other  approaches  currently  discussed  by  the  European  Commission  (2013)  are:  lowering  the  CIT  rate, 
combining the two systems (CBIT and ACE), allowing either the deductibility of (notional risk- free or actual) 
return on capital, irrespective of whether it is in the form of equity or debt (possibly with a cap on the total), 
or a cash-flow tax which thanks to immediate expensing, puts debt and equity financing on an equal level 
when it comes to taxation.  
139 See European Commission (2013), p. 22. 
140 See European Commission (2013). 

130 

 
 
 
                                                 
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enterprises 

8.4.  CIT rates and the choice of legal structure 

CIT rates have a direct effect not only on the financial structure of  a corporation, but 
also on the choice of their legal structure. The type of legal form chosen will determine 
such  factors  as liability  and  taxation.  There  are  many  different  types  of  legal  forms 
that  are  country  specific.  However,  several  types  have  been  identified  as  most  com-
mon  from  our  literature  review:  sole  proprietorship,  partnerships  and  limited  liability 
companies. 

8.4.1.  Definition of limited liability company 

In  a  limited  liability  company  (LLC)  the  company  is  a  separate  legal  entity  from  the 
ownership  and,  therefore,  it  is  separate  and  distinct  from  those  who  run  it141.  If  the 
company gets into debt, the creditors generally only have a claim on the assets of the 
company. The primary characteristic an LLC shares with a corporation is limited liabil-
ity, and the primary characteristic it shares with a partnership is taxation on the own-
ership level. Most Member States have at least two kinds of companies. The first kind, 
the  joint  stock  company  (e.g.  the  AG,  SA,  NV,  plc,  etc.),  is  designed  for  LSEs.  It  is 
often subject to a high minimum capital requirement and detailed internal organisation 
rules. Its shares may be listed on the stock market. This kind of company is often re-
ferred  to  as  "public  companies".  The  second  kind  of  company  is  designed  for  smaller 
companies (e.g. the GmbH, the SARL, the Sprl, etc.). While this form offers its found-
ers and members the much needed limitation of liability, it is often designed some way 
between a joint stock company and a partnership to take account of the fact that the 
personal  involvement  of  shareholders  usually is  very  strong  in  small companies.  This 
makes  of  this  kind  of  company  the  preferred  legal  form  for  small  companies.  These 
company  forms  cannot  offer  their  shares  to  the  public  and  as  a  result  are  often  re-
ferred to as “private companies”. The LLCs pay CIT. 

In  taxing  distributed  profits  of  incorporated  enterprises  a  number  of  solutions  have 
been implemented142:  

a)  Some  countries  (e.g.  Austria)  apply  a  flat  withholding  tax  rate  to  distributed 

profit, at the company level, without further shareholder taxation.  

b)  Other  countries  tax  individual  shareholders  on  the  full  amount  of  dividend  in-
come received at PIT rates without special relief for tax imposed at the corpo-
rate level (classical tax systems). 

c)  Many countries “integrate” CIT and PIT143 in order to avoid or limit double taxa-
tion through a dividend paid deduction at the corporate level, or at the personal 
shareholder level. 

8.4.2.  Impact of taxation on the choice of legal structure 

Lower CIT rates tend to increase the attractiveness of incorporation as a choice of le-
gal structure for profitable SMEs, because they have a higher share of earning to rein-
vest compared to companies located in countries where CIT rates are higher. This re-

141 This is a general definition of sole proprietorship that can be valid for all Member States 
142 See OECD (2009), pp. 1-170. 
143 Possible  integration  approaches  include  a  dividend  paid  deduction  at  the  corporate  level,  providing  an 
offset to CIT at the time of dividend distribution. 

131 

 
 
 
 
                                                 
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enterprises 

sults in more financial resources available to reallocate to growth investments. As one 
interviewee  suggested  “the  possibly  only  big  determinant  of  my  decision  was  that  of 
achieving  the  status  of  corporation  in  order  to  enjoy  an  array  of  finer  tax  benefits.  I 
incurred  debt  in  order  to  register  as  public  limited  company  and  pay  for  the  initial-
capital  requirement”.  Another  interviewee  confirmed  that  “the  prospect  of  saving  on 
CIT was a main determinant to choose the status of public limited company”. 

While PIT is levied on personal income alone, being subject to the CIT regime has  an 
important tax effect which is due to differences in the tax levels levied on profit distri-
butions or capital gains, which are often taxed at a higher rate for corporations. As a 
result, if an enterprise gives priority to capital gains, this might act as a disincentive to 
incorporation. “Double taxation” of corporate income has the same effect, since PIT is 
levied after taxation at the corporate level. Other minor tax effects are, for example, 
due to differences in how pensions and fringe benefits are deducted, and the possibil-
ity  for  partnerships  and  sole  owners  to  take  advantage  of  loss  offsets  and  at-risk 
rules144.  “Non-tax  factors”  are  of  two  types.  The  first  stems  from  the  possibility  for 
corporations  to  list  shares  on  public  exchanges,  which  incentivises  incorporation  by 
facilitating capital raising. The second lies in the difference between the limited liability 
of  corporate  shareholders  and  the  unlimited  liability  of  partners  and  unincorporated 
sole  proprietors.  While  shareholders  of  small  companies  must  often  pledge  personal 
assets  in  order  to  obtain  external  bank  loans,  partnerships  may  impose  discretional 
liability  limits.  The  following  countries  have  a  high  rate  of  limited  liability  registered 
companies: Romania (99%), Estonia (78%), Luxembourg (75%), Sweden (72%), Bul-
garia (70%), Cyprus (61%), Norway (58%). The following countries have a small rate 
of companies registered under limited liability: the Netherlands (13%), Germany 13%, 
Austria 14%, Czech Republic 17%, Portugal 18% Lithuania 19%, Italy 20%.  The fol-
lowing countries have a medium level of incorporation:  Spain 25%, France 27%, Slo-
venia  27%,  the  UK  28%,  Finland  33%,  Slovakia  41%,  Hungary  49%,  and  Belgium 
51%145.  

Figure 8.9 shows the degree of incorporation  as a  function of the difference between 
CIT and PIT146. The figure indicates that the higher the gap between PIT and CIT, the 
lower the degree of incorporation, suggesting that there is a correlation between taxa-
tion gap and the legal structure of enterprises.  

144 See Gordon/MacKie-Mason (1994). 
145 See Eurostat (2013). 
146 Eurostat  (2013)  provides  demographic  information  on  sole  proprietorships  (SP)  and  private  or  publicly 
quoted joint stock companies with limited liability (LL) for those owning shares. From this, the share of the 
corporate sector in the economy can be derived. Moreover, it is possible to obtain data on the ratio between 
the  top  PIT  rate  and  CIT  rate  for  companies.  The  higher  this  measure,  everything  else  being  equal,  the 
greater, the incentive to incorporate.  

132 

 
 
 
 
                                                 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 8.9: Association between incorporation of start-ups and difference be-
tween CIT and PIT 

n
o
i
t
a
r
o
p
r
o
c
n

i

f
o
e
e
r
g
e
D

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

-10

-5

0

5

y = -0.0061x + 0.4667
R² = 0.0843

25

30

35

10
Difference between PIT and CIT

15

20

Source: own elaboration based on data from OECD on PIT and CIT and data from Eu-
rostat on the degree of incorporation of start-ups 

However, decisions on the legal form of business are not only made on the basis of tax 
but also taking into account the non-tax benefits and costs.147 For instance, some en-
terprises  organized  in  the  corporate  form  may  collect  substantial  non-tax  benefits, 
such as gains from limited liability or the advantage of attracting capital. Others may 
incur  costs  from  incorporation,  e.g.  owing  to  capital  requirements  or  legal  obliga-
tions.148  For  instance,  one  interviewee  suggested  that  they  “did  not  have  enough 
money  to  start  a  public  limited  company  as  you  need  25,000  euros,  plus  other  ex-
penses such as appointing a permanent auditor were not at all affordable. We started 
a  limited  partnership  (we  are  two  people)  because  my  other  partner  does  not  have 
significant assets to put as security; he is in fact the limited partner.” Another enter-
prise  offered  that  they  “chose  a  partnership  because  it  faces  less  initial  costs,  less 
long-run fixed costs, and has no capital requirement”. However, one entrepreneur re-
plied that “the possibly only big determinant of the decision was that of achieving the 
status of corporation in order to enjoy an array of finer tax benefits. I incurred debt in 
order to register as public limited company and pay for the initial-capital requirement”. 
Economists  mention  limited  liability  and  improved  access  to  external  capital  as  main 
advantages  of  incorporation.149  Non-tax  costs  and  benefits  should,  therefore,  be 
weighed against the net tax advantage of corporate versus non-corporate income.  

Summarizing, on one hand it is possible to state that lower CIT rates tend to increase 
the  attractiveness  of  incorporation  as  a  choice  of  legal  structure  for  profitable  SMEs. 
On the other hand, decisions regarding incorporations are also and often made taking 
into account non-tax benefits.  

147 See De Mooij/Ederveen (2008), MacKie-Mason/Gordon (1997) and Goolsbee (2004). 
148 See De Mooij/Ederveen, 2008, p. 682.  
149 See Egger/Keuschnigg/Winner (2009), pp. 1-49. 

133 

 
 
 
 
                                                 
 
 
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enterprises 

8.5.  The impact of CIT rates on company growth 

CIT  can  affect  growth  by  reducing  the  cash  flow  of  the  enterprise  that  is  subject  to 
taxation. This affects the investment potential both for organic growth (i.e. expansion 
of  activities  of  the  enterprise)  as  well  as  its  ability  to  finance  external  growth  (e.g. 
through  acquisition  of  other  enterprises  in  the  same  tax  jurisdiction)  and  the  attrac-
tiveness of enterprises in other tax jurisdictions. There are indeed three main potential 
scenarios concerning M&As:  

1.  If  the  target  enterprise  captures  the  entire  surplus  generated  by  the  acquisi-
tion, then the tax has no effect on the acquisition decision. Here, the tax sys-
tem  should  have  no  impact  on  whether  the  acquisition  goes  ahead  since  the 
acquirer’s  valuation  is  post-tax  –  a  higher  tax  rate  would  lower  his  valuation, 
and hence lower the price paid.  

2.  If the acquirer can increase the value of the income stream in the target com-
pany,  then  it  will  be  more  likely  to  acquire  a  target  company  in  the  country 
with a lower statutory tax rate. 

3.  If the acquirer can reduce costs in the target, then it will be more likely to ac-
quire  a  target  company  in  the  country  with  a  high  value  of  tax  allowances.  A 
higher  value  of  allowances  could  be  generated  by  more  generous  allowances, 
or by a higher statutory tax rate. 

8.5.1.  Evidence of impact from the case studies and the survey 

Figure 8.10 shows that the tax advisers who responded to our survey  confirmed that 
CIT has an impact on the investment potential of SMEs. More than half of tax advisers 
who  responded  to  our  survey  thought  that  CIT  rates  had  a  large  impact  on  the  in-
vestment potential of SMEs.  

This  is  confirmed  by  some  case  study  interviewees  who  suggested  further  that  in 
many SMEs, profits are to a large extent reinvested in the growth of the company and 
thus CIT can have a negative effect on investment by reducing liquidity. Just to cite a 
few, one interviewee stated that “CIT differences can influence competitiveness heavi-
ly, to a point where you might well choose not to invest in locating in a country any-
more, causing your company to lose market shares in a geographical market, or even 
in the market for a particular good if a specific country has a wider market for it”. An-
other interviewee stated that  [because  of special CIT provisions] “we could secure a 
higher level of liquidity in our first 5–6 years, which, among other things, enabled us 
to invest a total of (ca.) 1.2 million euros in three other companies, in shares”. Simi-
larly,  another  interviewee  indicated  that  “the  Notional  Interest  Deduction  is  reducing 
my effective CIT rate, leaving me with more liquidity for the funding of long-term in-
vestments.”  And  a  fourth  interviewee  indicated  that  “If  we  had  to  pay  an  increased 
income  tax  […],  we  would  have  less  money  for  other  investment,  such  as  ads,  soft-
ware  and  etc.“  and  finally  a  fifth  interviewee  suggested  that  “the  rate  at  which  we 
could re-invest earned profits was, thanks to lower CIT, almost twice as much as the 
one of our German headquarters.” 

134 

 
 
 
 
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enterprises 

Figure 8.10: Which of the following aspects are influenced by CIT provisions 
on profits, retained earnings and dividends? (90 respondents) 

60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

Large impact

Medium Impact

Small impact

The financial
structure of
SMEs (i.e.
debt/equity
ratio)
54.83%

23.46%

21.71%

Investment by
SMEs

Investment in
Start-ups

SMEs growth

Start-ups'
success rates

54.03%

33.19%

12.78%

28.82%

35.71%

35.47%

47.56%

26.05%

26.39%

19.34%

34.43%

46.24%

Source: Tax Advisers Survey 

The  literature  agrees  that  CIT  can  have  substantial  effects  on  investment.  Empirical 
evidence obtained from both enterprise-level and industry-level data covering a num-
ber  of  OECD  countries  indicates  that  there  indeed  exists  a  relationship  between  in-
vestment levels and CIT. At the enterprise level the following effects have been found 
(Johansson et al., 2008150): 

  A  reduction  of  the  statutory  CIT  rate  from  35%  to  30%  implies  a  long-run  in-

crease of the investment–to-capital ratio of approximately 1.9%. 

  The size of the negative tax effect on investment appears to be similar for small 

enterprises and LSEs. 

At  the  same  time,  the  case  studies  indicate  that  while  taxation  might  affect  the  in-
vestment potential of SMEs, this does not mean that CIT affects the actual decision of 
entrepreneurs to pursue growth through investment. As one interviewee stated, “there 
never was a decision to implement a growth strategy or not, simply the company kept 
on  growing  since  the  very  beginning.  However,  I  can  still  say  that  the  favourable 
scheme  was  one  of  the  main  factors  why  the  company  could  grow  so  much  and  so 
stably.”  Another  interviewee  confirmed  the  benefits  of  lower  taxation  but  suggested 
that this was tangential to the decision to invest rather than the main motivation: “We 
have  acquired  a  small  company  in  the  Canary  Islands,  and  we  were  obviously  really 
happy to know they are taxed at 4% there. Obviously I cannot say this was the main 
reason why we acquired that enterprise, but it was one of the factors guiding our deci-
sion”. Another entrepreneur confirmed that there  are no direct relations between CIT 
rates and growth decisions and he stated that: “I do not think that country differences 
in  CIT  rates  play  a  more  important  role  than  connectivity,  research  oriented  policies, 
or in general macro-economic situations”.  

From  an  M&A  perspective,  evidence  from  interviews  with  companies  show  that  small 
companies tend not to be influenced by CIT rates when considering a M&A operation, 

150 See Johansson/Heady/Arnold/Brys/Vartia (2008), p. 33. 

135 

 
 
 
                                                 
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enterprises 

focusing instead on strategic factors such as the potential position on a given market. 
At the same time, it has been suggested that the development of a single set of rules 
for the EU for M&As operations would facilitate SMEs in the use of such tools. As one 
interviewee  stated,  “cross-country  mergers  and/or  acquisitions  should  have  common 
rules, as in, one single legislation, since it makes no sense that any different pair of a 
merger  or  an  acquisition  can  be  treated  differently  depending  on  the  countries  the 
(two) partners are based in. Secondly, mergers and acquisitions should not be taxed, 
anywhere in the Union, and thirdly they should probably also be incentivized through 
tax reliefs and further exemptions, so as to promote internal-market integration”. 

To  summarise  it is  possible  to  state  that  while  CIT  rates  might  affect  the  investment 
potential of SMEs, this does affects the actual investment decisions of entrepreneurs. 

8.6. 

Impact of CIT deductions, allowances, incentives, depreciation 
schemes 

In addition to the statutory CIT rate, special provisions, such as deductions, allowanc-
es, tax incentives, depreciation schemes, can affect the way entrepreneurs behave in 
order to make use  of  such opportunities. These provisions are often  not SME  specific 
and thus affect both LSEs and SMEs. Nevertheless they may have different effects on 
companies of different size (e.g. due to the ability of these companies to benefit from 
the provision). 

Some recent  research in particular has begun  to focus on tax planning, or how  com-
panies  expand  after-tax  profits  by  adjusting  to  tax  policy  through  financial  arrange-
ments  within  related  enterprises.  Tax  planning  for  instance  exploits  differences  in 
countries’ tax policies and often involves sophisticated arrangements wherein  compa-
nies  create  one  or  more  subsidiaries  for  the  purpose  of  shifting  income  from  high  to 
lower tax jurisdictions.  

Similarly,  tax  incentives  have  become  a  popular  instrument  to  support  research  and 
development (R&D)  activities of  companies. They  offer a reduction to  companies’ tax 
burden depending on the volume, or increase, of the enterprise’s expenditure on R&D. 
The popularity of this instrument arises from the fact that it is rather simple to imple-
ment through the existing system of CIT, implying low additional administrative costs 
both at the side of authorities and enterprises151.  In addition, R&D tax incentives are 
neutral in terms of the content of R&D activity being supported, and they reach out to 
all types of companies, including small companies and service companies. This instru-
ment provides a  reliable base for  financial planning and R&D decisions of  companies. 
There are several options to design R&D tax deductions, such as carry-forward or cash 
refund possibilities. 

Depending on the system of  CIT, tax incentives may be designed either  as an allow-
ance or as a credit. However, compared with government financing and/or conducting 
the R&D program directly, some scholars found that fiscal incentives are ineffective in 
raising private R&D spending, with very low response rates by companies152. 

151 See Köhler/Rammer/Laredo (2012), p. 3. 
152 See Hall/Van Reenen (2000). 

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enterprises 

8.6.1.  Prevalence of specific provisions in CIT codes 

Compared  with  LSEs,  taxes  may  play  a  more  important  role  in  the  cost  structure  of 
SMEs because they do not have the financial and human capacity to develop sophisti-
cated tax minimisation strategies. As a result, some countries have special tax provi-
sions available for investments undertaken by SMEs. For instance,  SMEs in the Czech 
Republic  can  take  advantage  of  a  reduced  15%  CIT  rate  for  companies  granted  High 
and New Technology Enterprise (HNTE) status for periods of three years153 that can be 
renewed.  Japanese  SMEs  may  take  advantage  of  either  an  investment  tax  credit  of 
7% or an additional depreciation of 30% for the acquisition of qualifying machinery or 
equipment154.  Belgium  also  allows  more  generous  investment  deductions  for  small 
corporations than for LSEs. Finland, Spain and the UK allow more generous deprecia-
tion allowances for investments made by SMEs155. Similarly, the USA permits addition-
al expensing allowances to qualifying property owned by small corporations under sec-
tion 179 expensing156. 

8.6.2.  Impact of SME specific provisions 

While specific deductions, allowances, incentives and depreciation schemes in the tax 
code are relatively popular across many countries, the impact on SMEs as compared to 
LSEs is not always clear.  As shown in Figure 8.11 according to the respondents to our 
tax adviser questionnaire, slightly more than half of tax advisers consider that special 
SME  rates  or  tax  incentives  do  not  affect  the  behaviour  of  companies  depending  on 
their size.  In  other words, for a majority of tax advisers in our sample, there is little 
impact beyond an immediate improvement of  cash flow for smaller  companies taking 
advantage  of  specific  provisions.  At  the  same  time,  a  sizeable  minority  suggests  in-
stead that companies are affected by SME specific provisions depending on their size. 
The  situation  is  reversed  for  tax  planning  opportunities  where  a  majority  of  the  re-
sponding tax advisers discern differences in impacts on companies depending on their 
size.  While  the  survey  did  not  investigate  further  how  these  impacts  manifest  them-
selves  in  individual  companies,  it  is  difficult  to  elicit  clear  answers  in  company  inter-
views (mainly because most entrepreneurs do not know whether and how they might 
have behaved in the absence of such SME specific provisions). 

153 See Deloitte (2014), p. 14. 
154 See (2002), p. 11. 
155 See OECD (2014). 
156 See www.irs.gov/publications/p946/ch02.html. 

137 

 
 
 
 
 
                                                 
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enterprises 

Figure 8.11: Do these drivers affect the overall behaviour of enterprises de-
pending on their size? (195 respondents) 

1.33%

55.91%

1.74%

51.75%

42.75%

46.51%

1.02%

42.08%

56.90%

Special tax rate for SMEs Specific SME incentives

Don't know

No

Yes

1.33%

55.91%

42.75%

1.74%

51.75%

46.51%

Tax planning
opportunities

1.02%

42.08%

56.90%

Source: Tax Advisers Survey 

Figure 8.12 illustrates the size impact of the SME provisions in greater detail. Indeed, 
tax  advisers  in  our  sample  suggested  that  the  smallest  companies  benefit  (or  make 
use  of)  the  least  of  the  specific  tax  provisions  aimed  at  them.  More  than  90%  of  re-
spondents  suggested  that  micro-companies  derive  low  benefits  from  such  provisions 
compared with more than 50% of advisers who thought that medium-sized companies 
derive at least a low benefit. 

138 

 
 
 
 
 
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– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

Figure 8.12: To what extent enterprises of different sizes benefit from (make 
use  of)  CIT  deductions  on  investments  (e.g.  R&D  or  other  investment)  in 
practice? (129 respondents) 

3.96%
3.71%
1.72%

90.62%

Micro

3.96%

3.71%

1.72%

90.62%

4.35%
8.55%

25.11%

61.99%

Small

4.35%

8.55%

25.11%

61.99%

11.21%

19.31%

50.66%

18.82%

Medium

11.21%

19.31%

50.66%

18.82%

17.85%

49.50%

22.58%

10.06%
Large

17.85%

49.50%

22.58%

10.06%

Don't know

High

Medium

Low

Source: Tax Advisers Survey 

Going  into  further  detail,  Figure  8.13  shows  perception  amongst  our  sample  of  tax 
advisers of the effects of CIT deductions for investment on the effective tax rates for 
SMEs.  According  to  this  result,  57%  (48%  +  9%)  think  that  SMEs  obtain  at  least  a 
small reduction in taxes compared with LSEs. At the same time, 25% think that SMEs 
are at a disadvantage as a result of such provisions and 18% think this kind of provi-
sion in the tax code has no differential impact on companies depending on size. 

Figure  8.13:  What  is  your  perception  of  the  impact  of  CIT  deductions  for  in-
vestments (e.g. R&D or other investment) on the effective tax rate for SMEs? 
(141 respondents) 

9%

15%

10%

48%

18%

Significant increase tax paid
by SMEs relative to larger
enterprises: 15%
Small increase tax paid by
SMEs relative to larger
enterprises: 10%
No impact: 18%

Small reduction on tax paid
by SMEs relative to larger
enterprises: 48%
Significant reduction on tax
paid by SMEs relative to
larger enterprises: 9%

Source: Tax Advisers Survey 

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8.6.3.  Impact of R&D tax incentives on SMEs 

Among  all  deductions,  R&D  incentives  have  enjoyed  particular  popularity  and  media 
coverage in recent years due to their presumed  correlation with innovation and com-
petitiveness.  

Tax  incentives  for  R&D  are  often  considered  to  have  some  advantages  over  direct 
support  for  R&D,  including  procurement  of  R&D  or  grants.  They  are  a  market  based 
tool  that  aims  at  reducing  the  marginal  cost  to  enterprises  of  R&D  activities,  leaving 
companies to decide on which R&D projects to fund. 

Tax  incentives  for  R&D  include  expenditure-based  tax  incentives  –  most  importantly 
R&D tax credits, R&D tax allowances and payroll withholding tax credit for R&D wages 
–  and  income-based  tax  incentives  –  most  importantly  regimes  that  tax  royalty  in-
come and other income from knowledge capital at a preferential rate. 

Design features of R&D tax incentives include the type of tax on which the incentive is 
based,  what  R&D  expenditures  qualify  for  a  tax  reduction  (total  volume  of  increase 
over a reference base; all categories of R&D expenditure or only intramural, extramu-
ral,  personnel  expenses;  exact  definition  of  R&D),  the  target  group  of  beneficiaries, 
and  whether  unused  claims  can  be  carried  over  or  refunded  in  cash.  There  are  four 
types of R&D tax incentives: 

  Accelerated  depreciation  schemes  for  investments  (machinery,  equipment, 
buildings,  and  intangibles)  used  for  R&D  activities.  This  has  been  for  instance 
the case for Italy, which was one of the first to start such a scheme. 

  Special  R&D  allowances  enable  enterprises  to  deduct  more  than  100%  of  their 
current eligible R&D expenditures from their taxable income. This is the case for 
the UK where two levels of deduction are offered: 130% for enterprises in gen-
eral, and 175% for SME. 

  Special exemptions of wage and/or social taxes for employees in R&D activities. 

The Dutch scheme WBSO157 allows the deduction of R&D labour costs only. 
  Tax credits allow enterprises to directly deduct a specific share of their R&D ex-
penses  from  the  CIT  liabilities.  This  type  of  R&D  tax  incentive  is  currently  the 
most widespread. 

8.6.3.1.  Prevalence of R&D tax incentives 

In  recent  years,  a  number  of  European  countries  have  introduced  specific  reliefs  for 
revenues arising from intellectual property: 

 

Ireland has had longstanding favourable treatment for revenues arising from the 
exploitation of intellectual property rights158. 

  The  Netherlands  taxes  net  income  from  self-developed  patents  and  software  at 
5%.  Belgium  provides  an  80%  exemption  from  net  income  for  self-developed 
patents resulting in an effective tax rate of just below 7%159. 

  Luxembourg  has  a  similar  approach  under  which  such  income  is  taxed  at  ap-
proximately  6%.  Spain  takes  a  different  approach  in  that  it  exempts  50%  of 

157  See  http://english.rvo.nl/subsidies-programmes/wbso-rd-tax-credit-and-rda-research-and-development-
allowance . 
158 See www.eip.com/downloads/eip_patent_box_2011.pdf . 
159 See www.eip.com/downloads/TAX_patentbox_feb12.pdf . 

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revenues from tax but allows expenses to be deducted in full resulting in an ef-
fective tax rate much below its headline corporation tax rate160. 

 

  The Patent Box in the UK is a scheme that appears to be particularly successful 
and popular among British companies. Under the Patent Box regime companies 
will  be  taxed  on  profits  arising  from  the  exploitation  of  the  patents  and  other 
qualifying rights at 10% instead of the normal Corporation Tax rate161(21% rate 
for 2014). 
In Austria, incentives available for research intensive entities include a 10% vol-
ume-based  tax  credit  on  all  qualifying  R&D  related  expenditures,  even  if  the 
company is in a tax loss or low profit position. This benefit is refundable to the 
extent  the  credit  exceeds  the  amount  of  the  tax  liabilities.  Data  gathered 
through  the  interviews  shows  that  small  companies  in  Austria  not  only  have  a 
good knowledge of the opportunities coming from the tax incentives for R&D but 
often they have increased their investments in research and development activi-
ties.  The  reason  behind  that  choice  was  that  in  absence  of  the  tax  deductions 
they would not have had the necessary resources to invest in new projects162.  

8.6.3.2.  Impact on SMEs 

Many  large  multinational  companies  are  already  holding  their  patents  in  tax  efficient 
ways. By contrast, SMEs usually do not implement complex international tax planning 
and  for  them  specific  regimes  such  as  a  patent  box  could  represent  significant  extra 
relief from their corporation tax liabilities. For some of these companies (but only the 
most innovative and research intensive) tax planning could  be a valuable resource to 
reduce their income tax base.  

Indeed, empirical evidence in other studies suggests that smaller companies are more 
responsive  to  R&D  tax  incentives163.  As  one  interviewee  suggested,  “deductions  play 
an  important  role  especially  in  the  R&D  division,  which  therefore  has  been  positively 
influenced  by  such  allowance  schemes”.  Similarly,  another  interviewee  indicated  that 
“we simply invested a lot in R&D and I believe we would have done much less lacking 
those  premiums/deductions”  and  a  third  company  suggested  that  while  “my  enter-
prise’s  success  in  terms  of  economic  growth  was  more  due  to  the  quality  of  the  re-
search projects we carried out, the three R&D grants we benefited from were a clear-
cut asset in achieving that growth”. 

At the same time, it should be noted that tax incentives are only one of many factors 
that drive investment in R&D. As one company suggested, “we benefit from R&D cred-
its, but we would invest anyway. R&D decisions are based solely on business needs”. 
In  addition,  another  interviewee  indicated  with  specific  reference  to  EU  policy  that, 
“Deductions  are  not  relevant  if  they  are  not  well  targeted.  However,  for  example, 
when they are implemented in the context of partnerships between SMEs and univer-
sities  they  can  prove  useful.  These  must  be  particularly  important  with  respect  to 
some  important  assets  (servers,  laptops,  patents,  trademark  registration).  The  Euro-
pean Commission should promote innovation, not R&D”. 

160 See http://www.luxembourg.public.lu/en/investir/propriete-intellectuelle/index.html . 
161 See https://www.gov.uk/government/policies/making-corporate-taxes-more-competitive/supporting-
pages/innovation-and-investment . 
162 See Deloitte (2012), p 3. 
163 See e.g. Lokshin (2007), Hægeland/Moen (2007) and Baghana/Mohnen (2009).  

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In  addition  to  the  benefit  to  the  company  carrying  out  the  R&D,  from  a  taxpayers’ 
point  of  view  it  is  important  to  consider  the  cost  of  implementing  such  R&D  related 
incentives. The overall costs associated with the R&D tax incentives schemes depend 
both on the uptake of the scheme by  companies and  on the design of the tax incen-
tives. Significant differences exist in the generosity of R&D tax incentives across coun-
tries and within countries between small companies and LSEs. Figure 8.14 shows that 
for every USD invested in R&D the tax subsidy ranges from 0.4 cents in France (with 
no difference between SMEs and LSEs) to less than 0.1 cents in the Netherlands where 
there is large difference between SMEs and LSEs164. 

Figure 8.14: Tax treatment of R&D: Tax subsidy rate for USD  1 of R&D, LSEs 
and SMEs, 2008 values 

Source: OECD, The International Experience with R&D Tax Incentives, 2011 

Despite the cost, most evaluations find significant input additionally for R&D tax incen-
tives in the short run. Positive effects are found for different types of R&D tax incen-
tives, as well as for tax credits, tax allowances and for schemes that address CIT and 
social  security  contributions.  One  may  thus  conclude  that  R&D  tax  incentives  are  a 
useful tool to stimulate private R&D and raise the level of business R&D expenditure to 
a higher level.  

In  particular  comparing  the  overall  amount  of  investments  made  through  the  use  of 
such schemes and investment figures if tax incentives were not in place, it is possible 
to say that under certain conditions, SMEs can benefit more than LSEs from these in-
struments. Evidence from case studies and desk research suggests that entrepreneurs 
tend to implement more R&D projects in response to tax reductions. At the same time, 
it  is  not  clear  (and  very  difficult  to  measure)  the  extent  to  which  they  lead  to  high 
quality research outputs that would not have been generated otherwise. 

164 It should be noted that these figures refer to year 2008. 

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8.6.4.  Impact of depreciation mechanisms on SMEs 

Finally, depreciation is one of the important factors affecting company investment de-
cisions because it is deducted from a gross stream of return generated from the asset 
when calculating tax profits.  

Different depreciation mechanisms are applied in Europe. For example: 

 

 

In Finland buildings and other constructions are depreciated by using the declin-
ing balance method. Depreciation for each building is calculated separately, with 
the  maximum  percentage  varying  from  4%  to  20%,  depending  on  the  type  of 
construction.  Depreciation  of  machinery  and  equipment  is  calculated  using  the 
declining  balance  method  with  a  maximum  rate  of  30%.  Patents  and  other  in-
tangible  rights,  such  as  goodwill,  are  amortised  on  a  straight-line  basis  for  ten 
years  for  tax  purposes,  unless  the  taxpayer  demonstrates  that  the  asset  has  a 
shorter useful life. Assets with a useful life of less than three years may be writ-
ten off using the free depreciation method, i.e. deduct up to 100% of the costs 
of assets in a single tax year165. 
In the Netherlands tax depreciation on real estate is limited so that the written 
down  value  cannot  be  reduced  below  certain  limits.  In  practice  this  will  mean 
that depreciation of real estate used for investment purposes cannot be depreci-
ated below its value for real estate tax purposes. For real estate used in a busi-
ness, the limit will be 50% of the value for real estate tax purposes166. 

As  Figure  8.15  shows  that  according  to  the  tax  adviser  survey  43%  of  respondents 
indicated that there were accelerated depreciation schemes for assets compared with 
56% who said these did not apply in their country. 

Figure  8.15:  Does  the  fiscal  system  in  your  country  include  accelerated  de-
preciation rates for particular assets? (136 respondents) 

1%

43%

56%

Yes: 43%

No: 56%

Don't know: 1%

Source: Tax Advisers Survey 

165 See http://www.pkf.com/media/1954368/finland%20pkf%20tax%20guide%202013.pdf . 
166 See http://www.srlaccountants.nl/english/services/tax/corporate%20tax.html . 

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Following on from the above, in Figure 8.16 the majority of advisers responding to our 
survey  suggested that depreciation schemes are particularly helpful (with 56% of re-
spondents  saying  they  have  a  medium  impact  and  26%  high  impact)  for  medium–
sized enterprises while only 13.23%, indicating that they had a low impact, compared 
with  56.4%  who  chose  this  answer  for  the  smallest  companies  (micro-companies). 
Clearly, the highest impact is perceived to accrue to the LSEs  with more than half of 
respondents indicating a high impact for this type of company. 

Figure 8.16: Impact of accelerated depreciation rates on different size enter-
prises (80 respondents) 

3.71%

28.85%

11.02%

56.42%

Micro

3.71%

28.85%

11.02%

56.42%

3.73%

31.46%

3.41%

26.72%

40.32%

56.64%

24.49%

Small

3.73%

31.46%

40.32%

24.49%

13.23%

Medium

3.41%

26.72%

56.64%

13.23%

5.18%

56.58%

13.54%

24.71%

Large

5.18%

56.58%

13.54%

24.71%

Don't know

High

Medium

Low

Source: Tax Advisers Survey 

Finally,  the  survey  also  shows  (Figure  8.17)  that  49%  (12%  +  37%)  of  respondents 
suggests  that  accelerated  depreciation  rates  have  at  least  a  small  positive  impact  on 
the tax burden of SMEs compared with LSEs, compared with only 8% (3% + 5%) who 
suggest that these mechanisms present a disadvantage for SMEs. 

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Figure  8.17:  What  is  your  perception  of  the  impact  of  accelerated  deprecia-
tion on the effective tax rate for SMEs and LSEs? (134 respondents) 

15%

3% 5%

12%

28%

37%

Source: Tax Advisers Survey 

Significant increase tax paid
by SMEs relative to larger
enterprises: 3%
Small increase tax paid by
SMEs relative to larger
enterprises: 5%
No impact: 28%

Small reduction on tax paid
by SMEs relative to larger
enterprises: 37%
Significant reduction on tax
paid by SMEs relative to
larger enterprises: 12%
Don't know: 15%

These results are confirmed by interviews with companies where it emerges that small 
entrepreneurs  find  depreciation  mechanisms  to  be  particularly  useful,  in  particular 
because “spending on machinery and other items subject to depreciation is extremely 
important”  for  SMEs  in  certain  sectors.  As  a  result,  “the  deductibility  of  depreciation 
expenses  for  assets  […]  did  help  us  grow  faster”  and  “accelerated  depreciation  […] 
just  leaves  us  with  more  money  to  finance  our  operations  [..]  because  key  assets  to 
be  used  in  these  operations,  such  as  IT  and  communication,  are  less  of  a  cost”.  An-
other interviewee confirms that “depreciation of tangible assets increases our amount 
of liquid money available for current, every-day operations” and yet another company 
indicated that special depreciation rates are “very important for machinery, equipment 
and they can be used for the training of employees (over multiple years) and for ad-
vertisements”.  As  a  result  “depreciation  can  play  an  important  role  in  affecting  in-
vestment decisions”. 

At  the  same  time,  some  interviews  also  indicated  certain  scepticism  with  respect  to 
the  impact  of  depreciation  on  investment  decisions.  When  asked  if  the  presence  on 
depreciation  schemes  had  any  influence  on  acquisition  decisions,  another  company 
replied, “as an entrepreneur, you do not suddenly buy a machine or something, today 
instead of tomorrow, just because you can depreciate it. You buy one if you need it.” 
Similarly,  another  interviewee  suggested  that  “In  heavier  industry,  depreciation 
schemes  will  have  an  effect.  However,  in  lighter  industries  such  as  software  and  IT, 
this is not as great.”  

8.7. 

Impact of CIT on administrative burden and compliance costs 

The CIT system imposes costs on corporations beyond the revenue that is collected. In 
particular, corporations expend significant resources in keeping tax records, research-
ing the tax laws, filing returns, responding to audits, and launching appeals.  Ultimate-
ly, these costs translate into a lower return on companies’ investments, reduced em-
ployment compensation, and/or higher prices for the products they produce.  

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Figure 8.18 shows the time required to comply with different types of taxes across the 
EU/EFTA. Time required for CIT  compliance is significantly lower than for other types 
of taxes such as labour or consumption taxes (despite reductions in the administrative 
burden of these other types of taxation). In the EU and EFTA region companies, and in 
particular  SMEs,  allocate  on  average  37  hours  to  tax  compliance  procedures  for  CIT, 
compared  with  about  84  hours  for  labour  taxes  and  about  55  hours  for  consumption 
taxes). 

Figure 8.18: Time to comply in the EU & EFTA by type of tax  

Source: Paying Taxes 2015, World Bank Doing Business, 2015 

Figure  8.19  gives  an  indication  of  the  number  of  payments  and  time  spent  on  tax 
compliance across the  20 countries covered in the study.  The average number of tax 
payments  is  1.5  for  profit  taxes,  2.8  for  labour  taxes  and  8  for  other  taxes.  Clearly 
there are large differences across the EU, not just in terms of the rate to be paid but 
also  in  terms  of  the  amount  of  human  and  administrative  resources  required  for  tax 
compliance.   

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Figure 8.19: Number of payments in the EU & EFTA area in 2015 

Source: Paying Taxes 2015, World Bank Doing Business, 2015 

SMEs  are  more  heavily  impacted  by  tax  compliance  obligations  than  LSEs  are.  Our 
case  studies  have  found  that  the  vast  majority  of  SMEs  rely  on  outside  professional 
assistance  to  comply  with  their  CIT.  Smaller  corporations  are  likely  to  lack  the  tech-
nical knowledge to properly complete an income tax return, may not be familiar with 
recent  tax  changes  and  would  in  all  probability  find  it  cost-inefficient  to  attempt  to 
develop  this  expertise  internally.  Furthermore,  economies  of  scale  suggest  that  the 
costs of such compliance are higher on a per sales basis for SMEs than for LSEs. 

Although the availability of outside tax assistance reduces the overall compliance bur-
den  (at  least  in  terms  of  time  allocated)  for  these  companies,  the  cost  of  this  assis-
tance  and  the  time  needed  to  complete  all  the  procedures  are  commonly  reported 
sources of compliance  problems by SMEs across the  case study interviews conducted 
for this study. 

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Thus, in relation to profit taxes such as CIT, the main comment from companies them-
selves related to the need to make paying taxes as easy as possible. The presence of 
a  “one-stop-shop”  system  is  usually  considered  as  good  way  to  ease  the  procedures 
and decrease the burden enterprises face. Also the provision of the use of the internet 
to pay taxes can be a major driver to simplify tax compliance for SMEs. 

8.8.  Summary of conclusions 

The qualitative part of the analysis run in the context of this project aimed at investi-
gating  the  impact  of  CIT  on  SMEs  based  on  interviews  and  a  survey  of  tax  advisers. 
More  specifically  the  goal  was  to  understand  the  perception  that  entrepreneurs  have 
about the  effects that  CIT  rates, provisions, allowances  etc. have on  their companies 
and  the  business  strategies  they  develop  and  implement  on  the  market  in  different 
phases  of  the  company  life  cycle.  The  findings  of  this  section,  therefore,  provide  a 
qualitative / anecdotal picture of companies’ perceptions regarding CIT.  

Generally CIT is seen by entrepreneurs as one of many tax and non-tax related factors 
that impact on entrepreneurial activity and business performance. However, compared 
with other types of taxes, corporations of different sizes tend to be less worried about 
CIT than about input taxes such as labour taxes or social security contributions. 

When  dealing  with  issues  related  to  access  to  finance,  financial  or  legal  structure  of 
their companies, entrepreneurs tend not to base their choices on CIT,  but on various 
non-tax  factors,  such  as  entrepreneurial  culture  and  background,  credit  availability 
and  strategic  decisions  related  to  their  positioning  on  the  market.  However,  legal 
structures can be affected by the difference between PIT and CIT rates.  

A very similar conclusion can be drawn with regard to growth decisions. SMEs tend to 
develop and design business strategies based on their priorities, the market, the com-
petition, the positioning of their products and innovation opportunities. However, there 
is some evidence that CIT reduces investment and therefore growth.  

R&D tax incentives, deductions and special or accelerated depreciation rates are very 
important tools for companies. Although they tend to benefit LSEs to a greater extent 
they can also provide significant advantages for SMEs.  

Finally, micro companies and SMEs are slightly more affected (though it is not possible 
to calculate the difference in percentage) than LSEs by the administrative and compli-
ance  costs  surrounding  CIT.  The  vast  majority  of  SMEs  rely  on  outside  professional 
assistance  to  comply  with  their  CIT,  because  they  are  usually  too  small  in  terms  of 
human resources to have the necessary knowledge and expertise available internally.  

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9.  KEY FINDINGS AND RECOMMENDATIONS  

In  the  first  section  of  the  study,  the  financial  ratio  analysis  examines  and  compares 
key  financial  indicators  for  SMEs  and  LSEs  in  the  sample  countries.  It  provides  first 
evidence  that  effective  tax  burdens  for  corporations  across  Europe  are  significantly 
different from one country to another. While Italy, Germany, Finland and Belgium ex-
hibit some of the highest fiscal burdens, Ireland, Estonia and Bulgaria can be found at 
the other end of the spectrum and provide corporations with comparably low effective 
burdens.  Moreover,  the  financial  ratio  analysis  indicates  that  only  five  countries 
(France,  Greece,  Bulgaria,  the  UK  and  the  Netherlands)  treat  SMEs  more  beneficially 
than  LSEs  with  respect  to  effective  tax  burdens.  While  it  is  not  possible  to  identify  a 
clear pattern in the effective tax burdens that SMEs and LSEs face in the countries in 
the  sample,  the  sectorial  analysis  shows  that  enterprise  size  affects  companies’  tax 
burden in the construction, hotels and restaurants and manufacturing sectors, while in 
the  commercial  sector  there  seems  not  to  be  a  particularly  high  difference  between 
SMEs and LSEs. 

In the next section of the study, the qualitative analysis provides an overview of appli-
cable tax incentives for SMEs and compares them to those tax incentives in place for 
R&D  activities.  In  general,  SME  tax  incentives  are  not  as  frequently  implemented  as 
R&D  tax  incentives.  The  most  common  form  of  relief  for  SMEs  is  a  reduced  tax  rate. 
Reduced  tax  rates  exhibit  quite  unfavourable  properties  as  they  introduce  additional 
distortions  to  the  tax  system  and  insufficiently  target  the  kind  of  corporations  that 
should  be  targeted  by  SME  tax  incentives.  Tax  credits,  additional  deductions  on  ex-
penditures incurred and accelerated depreciation schemes, on the other hand, are less 
frequently utilized and if applied, eligibility criteria are often very restrictive (i.e. only 
corporations  from  certain  industries,  activities  or  regions  are  eligible).  In  contrast  to 
that, R&D tax incentive schemes predominantly include tax credits and additional de-
ductions on investment expenditure incurred. Moreover, they tend to be applicable to 
a much wider range of corporations. 

Interestingly, Member States do not uniformly limit the eligibility to SME tax incentives 
by referring to the criteria and threshold values proposed by the SME definition of the 
European Commission (number of employees, turnover and balance sheet total). This 
is  particularly  true  for  special  tax  rates  that  are  almost  exclusively  bound  to  income 
thresholds. Also, our analysis shows that discrimination between medium-sized, small 
and  micro  enterprises  takes  place.  In  fact,  most  incentives  only  benefit  micro  and 
small enterprises, whereas medium-sized corporations remain mostly unaffected. 

The quantitative analysis confirms these findings. Using the European Tax Analyzer as 
well  as  the  Devereux-Griffith  model  to  estimate  effective  tax  burdens,  we  find  medi-
um-sized  corporations  to  virtually  benefit  exclusively  from  R&D  tax  incentives  (with 
reductions ranging from 0.93% in Luxembourg to 25.24% in Ireland), whereas small 
corporations  additionally  incur  relief  from  SME  tax  incentives  between  2.54%  and 
29.47% in five Member States (Belgium, France, Ireland, Spain and the UK). Benefits 
for micro companies occur even more frequently and usually are even more generous 
(reductions up to 53.05% in Lithuania). There is, however, no clear evidence for SME-
related tax competition among Member States. 

Moreover, the quantitative analysis indicates that R&D tax incentives are more advan-
tageous for SMEs compared to LSEs due to restrictions concerning maximum absolute 
reliefs. LSEs, on the other hand, can circumvent high tax burdens with the help of op-
timized  location  and  financing  strategies.  In  many  Member  States,  the  latter  more 
than  offset  the  advantages  incurred  by  small  and  micro  corporations  due  to  SME  tax 
incentives.  

149 

 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

In the last major section of the study the impact of the CIT on company life and busi-
ness strategies is examined by means of case studies and a tax adviser survey. Both 
inquiries  indicate  a  rather  moderate  impact  of  the  CIT  on  entrepreneurs’  decision-
making.  When  dealing  with  issues  related  to  financing,  legal  structure  or  investment 
decisions,  entrepreneurs  perceive  their  decisions  to  be  largely  based  on  non-tax  fac-
tors, such as entrepreneurial culture, credit availability and market positioning rather 
than on tax considerations. At the same time, extensive empirical literature has found 
tax provisions to impact financing and the choice  of legal form as  well as investment 
decisions. In particular, a positive impact on the level of investment  has been  shown 
for R&D tax incentives. The conducted interviews confirm these findings, as entrepre-
neurs report that investment deductions, accelerated depreciation schemes and other 
incentives helped them to invest more and considerably lowered their tax burdens. 

Another important issue surfacing in the case  studies was the compliance burden  re-
lated to corporate taxation. Evidently, the compliance burden of corporations decreas-
es with size. This is mainly due to the large share of fixed costs related to tax compli-
ance  and  the  requirement  for  outside  professional  assistance  for  most  SMEs  as  most 
of  them  do  not  have  the  human  resources  to  cope  with  the  CIT  and  other  business 
taxes by themselves.  

Altogether,  the  following  key  take-aways  emerge  from  the  analysis  and  need  to  be 
considered when inferring policy recommendations with regard to SME tax policy: 

 SME  tax  incentives  do  not  neutralize  the  advantages  of  international  tax  planning 
activities  of  LSEs.  Especially  medium-sized  corporations,  which  are  most  likely  to 
directly  compete  with  LSEs,  remain  almost  unaffected  by  country-specific  SME  tax 
incentives. 

 SMEs themselves are more concerned about the complexity of tax codes and relat-
ed compliance costs than about the  absence of tax planning opportunities. Moreo-
ver, case studies and surveys indicate that SMEs particularly appreciate tax incen-
tives which facilitate investments and growth. 

 Most SME tax incentives add complexity and distortions to tax codes, mainly due to 

comprehensive eligibility restrictions based on size, income and other factors.  

 Special  tax  rates  are  the  most  common  form  of  SME  relief.  Eligibility  to  these  tax 
rates is linked to the income instead of investment levels. Hence, special tax rates 
only provide limited incentives for SMEs to pursue additional investment opportuni-
ties. 

These findings lead to the following overall  policy recommendations with regard to 
SME tax incentives for the Member States: 

 First  of  all,  we  do  not  recommend  to  base  tax  incentives  explicitly  on  the  size  of 
corporations  or  their  incomes.  Not  only  does  this  provide  corporations  with  tax 
planning  opportunities,  but  it  may  even  constitute  a  disincentive  to  grow  beyond 
such  size  thresholds.  Instead,  incentives  should  focus  on  encouraging  “desirable” 
outcomes such as innovation, investment and growth.  

In  developing  good  practices  for  SME  tax  incentives,  the  following  criteria  should 
guide tax legislators: 

  Effectiveness:  The  tax  incentive  should  provide  enterprises  with  increased  li-

quidity and enable additional investments and growth. 

  Neutrality of the tax system: Enterprises should benefit from the incentive ir-
respective  of  their  legal  form.  Moreover,  the  growth  of  enterprises  must  not 
be  hampered.  Eligibility  thresholds  relating  to  the  size  of  enterprises  provide 

150 

 
 
SME taxation in Europe 

– An empirical study of applied corporate income taxation for SMEs compared to large 
enterprises 

an  incentive  to  remain  small.  Hence,  tax  incentives  with  exclusive  eligibility 
for SMEs introduce additional unwanted distortions to the tax system.  

  Transparency  for  investors:  The  size  of  the  relief  should  be  foreseeable  and 
predictable  for  entrepreneurs  and  investors.  This  enables  them  to  appropri-
ately consider the relief when making investment decisions. 

  Manageability for tax legislators: The losses in tax revenue should be foresee-

able. Moreover, administrative costs need to be manageable. 

 Secondly,  an  appropriate  tax  instrument  to  support  the  development  of  SMEs 
would  be  a  tax  credit  that  is  granted  as  a  certain  percentage  of  qualifying  invest-
ment costs (e.g. acquisition costs of certain assets). Such tax credits are frequently 
implemented in the context of R&D tax incentives. The tax credit should be limited 
to a maximum amount. In addition to limiting revenue losses, this secures a  rela-
tively  higher  relief  for  SMEs  compared  with  LSEs.  By  determining  the  applicable 
percentage as well as the maximum amount of relief, each Member State could in-
dividually determine how generous the incentive shall be and up to which size en-
terprises shall benefit considerably from such a measure. 

 Thirdly, policy makers should rather ensure an equally low level of taxation as well 
as fair, transparent and simple tax codes instead of targeting SMEs exclusively with 
specific  tax  measures.  In  doing  so,  the  general  business  environment  for  all  kinds 
of  investments  including  SMEs  is  improved,  while  avoiding  further  complexity  and 
tax planning opportunities.  

151 

 
 
 
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    doi: 10.2769/027673