The impact of taxation on corporate holdings

During the last years several tax reforms have become effective in Europe - Germany and Austria can be mentioned as two countries of reference. These reforms include amendments affecting the shareholding structure of corporations. A main goal of the German corporate tax reform 2000 was to facilitate the demerger of German cross holdings by repealing the taxation of capital gains realized on the disposal of shares in other corporations. The Austrian corporate tax reform 2005 induced the opposite effect: By introducing group taxation and thus the possibility to offset losses of foreign group members against domestic profits a stronger integration process of cross holdings was put up. As these tax reforms date back several years, now is an ideal point in time to empirically analyze their effect on the corporate decision making process can be found. For example taking a look at the current situation in Germany, seven years after the tax reform became effective one can find the following situation: 1. The demerger of German corporations is almost finished; especially the number of cross holdings has been largely reduced. Surprisingly, the main process of demerging took part starting not before 2004; two years after the reform became effective. 2. For the personal interconnections the opposite can be found: Even if the concentration within the network decreased between 1992 and 2001, it has increased again after the tax reform has become effective. Until now, it has barely been investigated if taxes had been the main motive for the disintegration process of German shares. The question whether the Austrian tax reform has increased Austria`s attractiveness as a location for holding companies has not yet been analyzed empirically. In addition, an international comparison in this field is still missing. Thus, the planned research project on the one hand aims to empirically investigate the influence of the tax framework on the shareholder structure in Germany and Austria and on the other hand enlarges the object of investigation to further European countries with relevant tax reforms during the last years. The results of the investigation will permit forecasts about the influence of future tax reforms regarding capital gains taxation or group taxation on the shareholder structure. So far quantitative tax research offers only few empirical investigations about the effects of corporate tax systems on the shareholder structure. The planned research project will therefore considerably contribute to reduce this research gap.

Over the last few years, several tax reforms have become effective in Europe - Germany and Austria can be mentioned as two countries of reference. These reforms include amendments that affect the shareholding structure of corporations. One main goal of the 2000 German corporate tax reform was to facilitate the demerger of German cross holdings, which were especially prevalent in the financial industry, by repealing the taxation of capital gains realized on the disposal of shares in other corporations. The Austrian corporate tax reform 2005, however, induced the opposite effect. By introducing group taxation and thus the possibility to offset losses of foreign group members against domestic profits, a stronger integration process of cross holdings was expected.Our results show that the repeal of the corporate capital gains tax in Germany had an immediate and widespread effect on the disposal of corporate shareholdings after 2001. Most of the corporate shareholdings analyzed were sold in 2002, the first year the tax reform had been effective. This can be seen as an indicator for an immediate response to the repeal of the corporate capital gains tax. We are also able to show that disposals were not limited to single industries and that small and medium sized firms especially, as well as non-listed firms have a higher disposal rate. Contrary to general expectations and prior research, firms from the financial industry did not show significantly higher disposal rates than firms from other industries.With respect to the introduction of the Austrian cross-border group taxation system, we are able to show that the number of eligible domestic and foreign group members significantly increased after 2004. In addition, we can show that foreign parent companies must set up Austrian intermediate companies in order to benefit from the tax advantages of the group taxation regime. Our results indicate that only companies that have already been invested in Austria prior to the tax reform in 2005 make use of the Austria group taxation regime, whereas we cannot find significant reactions for companies not invested in Austria prior to 2005.