The Taxation of Passive Foreign Investment - Lessons from German Experience
32 Pages Posted: 22 Apr 2009
Date Written: April 2009
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.
Keywords: foreign direct investment, CFC regulation, passive investment
JEL Classification: H25, H73
Suggested Citation: Suggested Citation