Kiel Working Papers, Kiel Institute for World Economics
No 1252:
Taxes and the Financial Structure of German Inward FDI
Fred Ramb and 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.
Keywords: foreign direct investment, financial structure, taxation; (follow links to similar papers)
JEL-Codes: F23,; H25; (follow links to similar papers)
29 pages, May 2005
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