This paper analyses the impact of corporate taxation on a firm's debt policy. We contribute to the existing literature in two ways: 1. we incorporate firm heterogeneity with respect to firm size and legal form, 2. we explicitly model persistence in the debt-to-asset ratio. Econometrically this implies the use of dynamic panel data econometrics. We employ a panel of about 110,000 firms from 22 EU countries between 1999 and 2007. In line with theoretical expectations, we find that the debt ratio is positively affected by the statutory corporate income tax rate. Additionally, we find that capital structures exhibit a substantial degree of persistence over time. Finally, our empirical results show that large firms react more sensitively to the incentives of corporate taxation, while this effect is considerably smaller for stock companies.