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 activitiesof multinational enterprises (MNEs) in low-tax countries. We study investment activitiesof MNEs from 26 European countries and examine whether parent firms reducedthe share of i) subsidiaries and ii) fixed assets in low-tax countries after the introductionof the ATAD CFC rule. Our results show that parent firms decreased both the share ofsubsidiaries 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 decreasein mobile assets (intangible and financial assets) but also to a decrease in real economicactivities (tangible assets). Furthermore, while some of the decrease in investment activitiesin low-tax countries is compensated by an increase in fixed assets in foreign countriesnot subject to the CFC rule, we document an overall decrease in the share of foreignsubsidiaries. We also show that the change in investment activities of MNEs depends onsingle design aspects of the ATAD CFC rule.More precisely, we find no change in the shareof subsidiaries or fixed assets in low-tax countries if the home country of the parent firmi) offers an economic substance exemption or ii) is itself a low-tax country.
Rechbauer et al. (Wed,) studied this question.