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The taxation of passive foreign investment: lessons from German experience

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  • Martin Ruf
  • Alfons J. Weichenrieder

Abstract

The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low-tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low-tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium- and high-tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 45 (2012)
Issue (Month): 4 (November)
Pages: 1504-1528

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Handle: RePEc:cje:issued:v:45:y:2012:i:4:p:1504-1528

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References

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  1. Fred Ramb & Alfons J. Weichenrieder, 2005. "Taxes and the Financial Structure of German Inward FDI," Kiel Working Papers 1252, Kiel Institute for the World Economy.
  2. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
  3. Thiess Buettner & Martin Ruf, 2007. "Tax incentives and the location of FDI: Evidence from a panel of German multinationals," International Tax and Public Finance, Springer, vol. 14(2), pages 151-164, April.
  4. Jack Mintz, 2004. "Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment," International Tax and Public Finance, Springer, vol. 11(4), pages 419-434, 08.
  5. Alfons Weichenrieder, 2005. "(Why) Do we need Corporate Taxation?," CESifo Working Paper Series 1495, CESifo Group Munich.
  6. Alfons J. Weichenrieder & Jack Mintz, 2008. "What determines the use of holding companies and ownership chains?," Working Papers 0803, Oxford University Centre for Business Taxation.
  7. Manning, W. G. & Duan, N. & Rogers, W. H., 1987. "Monte Carlo evidence on the choice between sample selection and two-part models," Journal of Econometrics, Elsevier, vol. 35(1), pages 59-82, May.
  8. Egger, Peter & Larch, Mario, 2008. "Interdependent preferential trade agreement memberships: An empirical analysis," Journal of International Economics, Elsevier, vol. 76(2), pages 384-399, December.
  9. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer, vol. 3(1), pages 67-81, January.
  10. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
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Cited by:
  1. Schindler, Dirk & Møen, Jarle & Schjelderup, Guttorm & Tropina, Julia, 2013. "International Debt Shifting: Do Multinationals Shift Internal or External Debt?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79749, Verein für Socialpolitik / German Economic Association.
  2. Egger, Peter & Wamser, Georg, 2011. "The Impact of Controlled Foreign Company Legislation on Real Investments Abroad: A Two-dimensional Regression Discontinuity Design," CEPR Discussion Papers 8460, C.E.P.R. Discussion Papers.
  3. Anna Gumpert & James R. Hines, Jr. & Monika Schnitzer, 2011. "The Use of Tax Havens in Exemption Regimes," NBER Working Papers 17644, National Bureau of Economic Research, Inc.
  4. Stefan Bach, 2013. "Has German Business Income Taxation Raised too Little Revenue over the Last Decades?," Discussion Papers of DIW Berlin 1303, DIW Berlin, German Institute for Economic Research.
  5. Dirk Schindler & Guttorm Schjelderup, 2010. "Multinationals, Minority Ownership and Tax-Efficient Financing Structures," CESifo Working Paper Series 3034, CESifo Group Munich.
  6. Shafik Hebous, 2011. "Money at the Docks of Tax Havens: A Guide," CESifo Working Paper Series 3587, CESifo Group Munich.

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