Faculty of Economics and Business Administration Publications Database

Taxes and the Financial Structure of German Inbound FDI

Ramb, Fred
Volume: 141
Number: 4
Pages: 670 - 692
Month: December
ISSN-Print: 0043-2636
ISSN-Online: 1610-2886
Link External Source: Online Version
Year: 2005
Keywords: Foreign Direct Investment; Financial Structure; Taxation

The paper analyses the financial structure of German inward FDI. 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. We find that the corporate tax rate of the foreign parent has no significant impact on the financial structure of a German subsidiary. However, among subsidiaries that are directly held by a foreign investor those firms 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 per cent of the cross-border intra-company loans turn out to be held by firms that are running losses.