organizational structure, or the global activity to receive cross-border finance, all of which would make them subject to alternative tax rules.<sup>5</sup>

# **III. DATA AND EMPIRICAL METHODOLOGY**

We focus on the non-financial private sector in Croatia, using a sample of private (non-listed), unconsolidated, non-state-owned Croatian firms from the B _v_ D Amadeus dataset (version: Jan. 2005). The data includes all formal-sector (registered) firms and was collected by _Creditreform Croatia_ , which reports that the data in Amadeus covers about 33% of the private sector (the remainder is mostly informal firms). Amadeus’ full coverage of Croatian firms begins in 1997. We create an unbalanced panel for 1998, 1999, 2002 and 2003, thus covering a period of two years before and after the corporate tax reform in 2001. We do not consider 2001 because firms may not have changed their capital structure in the first year of the reform due to the transaction time that is needed to issue new equity or debt.<sup>6</sup> The period between 1998 and 2003 provides a unique window of opportunity to study the effect of corporate taxation in Croatia; before 1997 Croatia had a higher corporate tax rate, while after 2004 there were some further changes in dividend and personal taxation.<sup>7</sup> We start with a sample of 71,748 firm/year observations for years 1998, 1999, 2002 and 2003. First, we drop 3,678 observations of financial firms, state-owned enterprises, publiclytraded firms, firms with consolidated statements, and firms operating in Free Trade Zones.<sup>8</sup> Next, we drop 1,737 observations of firms with incomplete financial data.<sup>9</sup> We next exclude

> 5 In contrast, large multinationals and dual-resident companies are typically engaging in cross-border tax arbitrage in order to take advantage of differences in corporate income tax rules between countries when double-taxation is absent. This extends to financing, where specific types of financing (e.g. international corporate bonds, currency swaps, hybrid instruments that have characteristics of both equity and debt) are sourced from countries with favourable tax conditions. 6 Notably, the findings in this paper are robust to the inclusion of years 2000 and 2001.

> 7 The new _Corporate Income Tax Act (NN No. 177/04)_ was voted in late 2004 and was effective from January 1st, 2005. Further changes in corporate taxation were introduced in 2005 and 2006 (i.e., _NN No. 90/05_ and _NN No. 57/06_ ).

> 8 Based on Croatia’s Law on Free Zones (NN 44/96 and later NN 92/05), companies in Free Trade Zones enjoy special tax treatment. The initial Amadeus sample contained 233 firm-year observations from private companies operating in Free Trade Zones. Also, since 96.9% of the companies in our sample are micro and small firms (see footnote 12), it is highly unlikely that these firms could have utilized tax incentives included in the Investment Incentives Law (NN No. 73/00), which offered tax reductions for firms that made investments of over €1.5 million and created at least ten new jobs linked to that particular investment.

> 9 We can safely assume that the observations with missing data are random, given that t-tests between these firms and the firms in the final sample reveal no significant differences in the dependent and independent variables.

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