Conventional tax systems favor equity financing and discriminate against debt financing. While firms are allowed to deduct interest expenses from their tax base, the return on equity is not tax deductible, which creates an incentive for firms to rely more heavily on debt rather than equity. The tax distortion in financing decisions can be removed by granting an allowance for corporate equity (ACE). In this system, interest expenses on loans as well as a notional interest on equity are deductible. A similar system is currently in force in Belgium. Against this background, the objective of this project is to assess the consequences of an ACE regime for Germany with respect to aggregate tax revenue and the tax burden of German corporations. For this purpose, we employ a corporate microsimulation model, ZEW TaxCoMM. Besides this quantitative analysis, we discuss the question how an ACE system could be implemented into the current German tax system. Finally, we evaluate other countries’ (especially Belgium’s) experience with an ACE regime on the basis of existing studies.