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A Lesson in Valuation from Estonia: The Difference Between the Fundamental Value of Equity Under Distributed and Traditional Profit Taxation Systems

Verslas: teorija ir praktika, 2018, Vol.19 (1), p.146-156

COPYRIGHT 2018 Vilnius Gediminas Technical University ;2018. This work is published under https://creativecommons.org/licenses/by/4.0/ (the “License”). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 1648-0627 ;EISSN: 1822-4202 ;DOI: 10.3846/btp.2018.15

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  • Title:
    A Lesson in Valuation from Estonia: The Difference Between the Fundamental Value of Equity Under Distributed and Traditional Profit Taxation Systems
  • Author: Kantšukov, Mark ; Sander, Priit
  • Subjects: Accounting - Business Administration ; Business Economy / Management ; distributed profit taxation ; dividend discount model ; Equity ; Equity (Finance) ; equity valuation ; financial leverage ; Fiscal Politics / Budgeting ; Income taxes ; Micro-Economics ; National Economy ; Profits ; Taxation ; theoretical finance ; Valuation ; Value creation
  • Is Part Of: Verslas: teorija ir praktika, 2018, Vol.19 (1), p.146-156
  • Description: Corporate value creation and management are one of the key issues for any business enterprise. A gap exists in research into the implications of the distributed profit taxation (DPT) system in Estonia for corporate value creation. Under the Estonian system of corporate taxation, companies need not pay income tax on undistributed earnings, allowing them to postpone income tax liability indeterminately. This theoretical paper compares the relationship between a company’s equity value and taxation of profits under traditional (or classical) (TPT) and DPT systems. A TPT system is a system where the amount of corporate income tax is determined by the profit the company earned during the taxation period. We show that fundamental equity value under a DPT system should be higher vis-à-vis equity value under a TPT system (ceteris paribus). To illustrate this, we use a dividend discount model and values from a hypothetical company. The equity value under DPT is also higher when financial leverage is considered. The results suggest that conventional valuation models and their inputs should be adjusted when valuing Estonian companies. Ignoring these adjustments runs the risk of undervaluing the equity of Estonian companies, as well as the equity of companies operating under similar tax regimes.
  • Publisher: Vilnius: Vilnius Gediminas Technical University
  • Language: English;German;Lithuanian
  • Identifier: ISSN: 1648-0627
    EISSN: 1822-4202
    DOI: 10.3846/btp.2018.15
  • Source: CEEOL: Open Access
    ProQuest Central
    DOAJ Directory of Open Access Journals
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