Multinationals' Location, Financial and Real Responses to the EU-wide Implementation of CFC Rules by the ATAD

Abstract

This paper investigates the introduction of Controlled Foreign Company (CFC) rules by the Anti-Tax Avoidance Directive (ATAD) in the European Union. Using firm-level data from Orbis for the years 2012 to 2020 and employing a difference-in-differences research design, we study whether the implementation of CFC rules in the context of the ATAD alters location, financial and economic activity decisions of multinational enterprises (MNEs). Our results reveal that the newly implemented CFC rules were only partly effective in reducing income shifting. While the share of CFC subsidiaries decreases, the financial income of the persisting subsidiaries remains largely
unchanged. Moreover, we observe positive effects on the costs of employees assigned to a CFC subsidiary, suggesting that the economic activity exemptions introduced by the ATAD allows MNEs to circumvent the rules by opting for a simple approach enhancing economic activity in these locations.

Keywords: CFC legislation, Tax avoidance, Multinational firms, Corporate taxation

JEL Classification: F23, H25, K34