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Taxes and the Financial Structure of German Inward FDI

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  • Fred Ramb
  • Alfons J. Weichenrieder

    ()

Abstract

The paper analyses the financial structure of German inward FDI. From a tax perspective, intra-company loans granted by the parent should be all the more strongly preferred over equity the lower the tax rate of the parent and the higher the tax rate of the German affiliate. From our study of a panel of more than 8,000 non-financial affiliates in Germany, we find only small effects of the tax rate of the foreign parent. However, our empirical results show that subsidiaries that on average are profitable react more strongly to changes in the German corporate tax rate than this is the case for less profitable firms. This gives support to the frequent concern that high German taxes are partly responsible for the high levels of intra-company loans. Taxation, however, does not fully explain the high levels of intra-company borrowing. Roughly 60% of the cross-border intra-company loans turn out to be held by firms that are running losses.

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Bibliographic Info

Article provided by Springer in its journal Review of World Economics.

Volume (Year): 141 (2005)
Issue (Month): 4 (December)
Pages: 670-692

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Handle: RePEc:spr:weltar:v:141:y:2005:i:4:p:670-692

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Keywords: Foreign direct investment; financial structure; taxation;

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References

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  1. Rosanne Altshuler & Harry Grubert, 2002. "Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy," Departmental Working Papers 200009, Rutgers University, Department of Economics.
  2. Reint Gropp, 2002. "Local Taxes and Capital Structure Choice," International Tax and Public Finance, Springer, vol. 9(1), pages 51-71, January.
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  12. Roger H. Gordon & Young Lee, 1999. "Do Taxes Affect Corporate Debt Policy? Evidence from US Corporate Tax Return Data," NBER Working Papers 7433, National Bureau of Economic Research, Inc.
  13. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
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