# 12-100/IV/DSF39 (2012-09-27)

Harry Huizinga, Tilburg University, and CEPR; Johannes Voget, University of Mannheim, Oxford University Centre for Business Taxation,CentER Tilburg University; Wolf Wagner, Tilburg University, Duisenberg School of Finance
Capital gains taxation, Cost of capital, International takeovers
JEL codes:
G32, G34, H25

In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Crosscountry differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. A one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225%. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.