Controlled foreign corporation rules and cross-border M&A activity

Hagen, Dominik von ; Prettl, Axel

Document Type: Conference presentation
Year of publication: 2017
Conference title: EAA Annual Congress 2017
Location of the conference venue: Valencia, Spain
Date of the conference: 10.-12. May 2017
Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre (Schreiber 1999-2019)
Subject: 330 Economics
Classification: JEL: F23 , G34 , H25 , H26 , H32 , H73,
Keywords (English): International taxation , CFC rules , Profit shifting , Mergers and acquisitions , Multinational entities
Abstract: We investigate the influence of controlled foreign corporation (CFC) rules on cross-border merger and acquisition (M&A) activity on a global scale. Using three different methods, we find that CFC rules distort ownership patterns due to a competitive advantage of MNEs whose parents reside in non-CFC rule countries. First, we show that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target’s income. Second, we show that CFC rules distort location choice of targets. Third, we show that CFC rules negatively affect the probability of being the acquirer in a cross-border M&A. Altogether, this study shows that CFC rules lead to less M&A activity in low-tax countries because profit shifting seems to be less feasible.

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