Compensation of high interest rates by tax holidays: A real options approach

It is worth noting that increased credit risks imply increasing interest rates on credit. In the paper, we study the possibility to apply the tax holidays mechanism (on corporate profit tax) for a compensation of high-level interest rates. Tax holidays have been used until present days in South-eastern Asia, Eastern Europe and some Western European countries. One of the most successful applications was the tax holiday program in Puerto Rico which was initiated in 1949. Tax holidays granted for a period of 10-15 years have also been introduced for start-up corporations specialized in Hi-Tech products in Singapore. In Italy, beginning in 1986, 10 years tax holidays were established, for firms that were settling their activity in the southern part of the country. Many developed and developing countries (included China. India, Brazil, Malaysia et al.) provide tax holidays to attract foreign investment. In Russia, tax holidays were commonly used in the nineteen-nineties (a list of the regions where those mechanisms were introduced can be found in [4]). Tax