Tax It before Exit: Exit Taxation and Greenfield Investments

47 Pages Posted: 26 Jan 2024

See all articles by Georg Winkler

Georg Winkler

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

Date Written: January 16, 2024

Abstract

Exit taxation can impose a significant tax and cash flow burden on multinational enterprises (MNEs) in their cross-border operations, as it taxes unrealized capital gains. Using country-level data on newly established MNE subsidiaries in the European Union, I investigate the effect of exit taxation and the inherent cash flow aspect on MNEs’ greenfield investments for the period 2005-2019. The event study design with dynamic treatment estimation shows that exit taxation negatively affects greenfield investments by significantly reducing the annual growth rate of newly established subsidiaries per country with a lag of one year. On average, this results in about 123 fewer new subsidiaries in the EU per year and about 1,845 fewer over the entire observation period. By analyzing three exit tax payment methods, I also find that switching to less cash flow-burdening exit tax payment provisions increases greenfield investments in the following year. This result is mainly due to abolitions of immediate payment provisions, which represent the largest cash flow burden for taxpayers. My findings show that MNEs anticipate the potential exit costs of entering a new market and consider future cash flow aspects in their greenfield investment decisions.

Keywords: Exit taxation, corporate taxation, greenfield investment, foreign direct investment, multinational enterprises, Anti-Tax Avoidance Directive

JEL Classification: F21, F23, H25, M13

Suggested Citation

Winkler, Georg, Tax It before Exit: Exit Taxation and Greenfield Investments (January 16, 2024). WU International Taxation Research Paper Series No. 2024-01, Available at SSRN: https://ssrn.com/abstract=4696569 or http://dx.doi.org/10.2139/ssrn.4696569

Georg Winkler (Contact Author)

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
91
Abstract Views
515
Rank
524,147
PlumX Metrics