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Introduction
The own equity base of many companies in Europe, especially smaller companies, is rather weak. This makes companies vulnerable during recessions and also aggravates the problems of structural changes and re-orientations of the businesses. Building up equity has become even more important to SMEs due to increased use of rating systems and the revision of banks capital requirements (Basel II). For mainstream SMEs the retention of earnings represents a very important element for the increase of their equity and for the financing of their growth. Tax systems, amongst other factors, play an important role for the decision of entrepreneurs whether or not to retain earnings. Studies indicate that, from an isolated tax point of view, debt financing of business assets is more favourable than to finance by retained earnings or new equity in Europe. While these academic studies try to capture the overall effects of tax systems e.g.inform of “effective tax rates and cost of capital” the question remains to what extent such indicators are valid to understand the decisions of business owners (especially of small businesses) that will usually not calculate and use such data.