The article analyzes the impact of the Tax Reform Act 2008 on financial decisions of incorporated and unincorporated firms.

Effective from 2008, Germany's top marginal income tax rate rises from 42 to 45 per cent. However, sole proprietorships and partnerships can opt for a preferential tax rate of 28.25 per cent for retained profits (§ 34a EStG). If they do so, profits are taxed again upon distribution. Using...