CFC Rules and Investment Activity: The Role of the ATAD

In this paper, we study whether the introduction of the controlled foreign corporations
(CFC) rule provided by the Anti-Tax Avoidance Directive (ATAD) affects investment activities
of multinational enterprises (MNEs) in low-tax countries. We study investment activities
of MNEs from 26 European countries and examine whether parent firms reduced
the share of i) subsidiaries and ii) fixed assets in low-tax countries after the introduction
of the ATAD CFC rule. Our results show that parent firms decreased both the share of
subsidiaries as well as the share of fixed assets in low-tax countries. In additional analyses,
we find that the decrease in fixed assets cannot solely be attributed to a decrease
in mobile assets (intangible and financial assets) but also to a decrease in real economic
activities (tangible assets). Furthermore, while some of the decrease in investment activities
in low-tax countries is compensated by an increase in fixed assets in foreign countries
not subject to the CFC rule, we document an overall decrease in the share of foreign
subsidiaries. We also show that the change in investment activities of MNEs depends on
single design aspects of the ATAD CFC rule.More precisely, we find no change in the share
of subsidiaries or fixed assets in low-tax countries if the home country of the parent firm
i) offers an economic substance exemption or ii) is itself a low-tax country.