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This paper analyzes the impact of corporate taxes on the capital structure in a country where bank financing is the main external financing source. It is found that the existence of a debt tax shield and provisions for tax loss carry-forwards has an important impact on the capital structure of the firm. These results adds to the evidence that taxes matters for the capital structure decision. The main differences between the results in this paper and the existing literature are that these results are obtained from 1) a bank based financing system where asymmetric information and agency problems are solved differently than under a market-based system and 2) the results are obtained from small and medium sized unlisted firms