Tax Attractiveness and the Location of German-Controlled Subsidiaries

This paper analyzes whether taxation has an influence on the location decisions of multinational enterprises. As a tax measure, we employ a novel measure of tax attractiveness, the Tax Attractiveness Index. This index covers 18 different tax factors, such as the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, and thin capitalization rules. Our count data regression analysis is based on a novel hand-collected data set consisting of the subsidiaries of German DAX30 companies in 97 countries. Controlling for non-tax effects, we find that a country's tax environment as measured by the Tax Attractiveness Index has a significantly positive effect on the number of German-controlled subsidiaries located there. Hence, our study implies that location decisions depend on a bundle of tax factors as captured by the index. In a second step, we show that the location decisions of German DAX30 companies cannot be explained by the statutory tax rate alone. In contrast, withholding taxes, double tax treaty networks, and special holding regimes seem to play a decisive role in location decisions. Previous studies examining only the influence of statutory tax rates may thus have underestimated the effects of taxation on the activities of multinational companies and suffer from omitted variable bias