Foreign Portfolio Investment and Shareholder Dividend Taxes

Posted: 21 Jan 2010 Last revised: 7 Mar 2016

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Mary Margaret Frank

University of Virginia - Darden School of Business

Date Written: March 6, 2016

Abstract

Using a new bilateral international tax database, we investigate the effects of dividend taxes on foreign equity portfolio holdings. Extending a model of capital market equilibrium with dividend taxation to an international setting, we provide intuition for a new, seemingly counter-intuitive empirical prediction. The model predicts that a change in the tax rate on dividends from risky assets, which is faced by a country’s domestic investors, is positively related to changes in foreign investors’ portfolio holdings in that country. The evidence from two unique research settings, which exploit changes in the national tax policies of different countries, strongly supports this prediction. These policy changes affected the dividend taxes faced by the country’s domestic investors but not the taxes faced by its foreign portfolio investors. More generally, the model predicts that a foreign investor’s equilibrium holdings in a country is negatively related to the dividend tax rate that she directly pays on assets in that country and positively related to the weighted-average dividend tax rate of worldwide investors in that country. Results from analysis using panel data provide strong empirical support for these predictions. These analyses also provide clarity regarding the mixed findings in the prior literature on the negative relation between withholding taxes and foreign portfolio investment. Combining the evidence across all analyses, the results are consistent with a country’s weighted-average dividend tax rate of worldwide investors affecting foreign investors’ portfolio allocations.

Keywords: Tax, International tax, Dividend tax, Foreign Portfolio Investments, Portfolio choice, Cross border investments

JEL Classification: G18, G11, G15

Suggested Citation

Amiram, Dan and Frank, Mary Margaret, Foreign Portfolio Investment and Shareholder Dividend Taxes (March 6, 2016). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1539422 or http://dx.doi.org/10.2139/ssrn.1539422

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Mary Margaret Frank

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm

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