Is Taxation Important for the Allocation of FDI in EU Countries?

Abstract

The foreign direct investment (FDI) amount suggests the country’s attractiveness to foreign investors. However, it can also reflect the tax benefits provided by the recipient country or achievable in a combination of tax rules of the investor-state and the recipient country. If these benefits represent an opportunity for aggressive tax planning, it leads to profit shifting, which the international organizations and their members try to combat. We used the economic data and specific tax indicators of the European Member states in the period of 2013 to 2019. We estimated panel regression models to determine that three indicators of the tax system of the investor’s state attract FDI allocation. They include the non-residency of the company having management in another state, the absence of withholding tax on interest paid, and the patent box or other preferential tax regime on income from intellectual property rights. In the recipient country, two indicators proved to be statistically significant and positively impacted the FDI stock: the possibility of group taxation with the holding company and the accessibility of unilateral ruling on, e.g., interest spread or royalty spread. The absence of CFC rules, no taxation of deemed income from interest-free loans, and tax deductions of intra-group interest costs in the investor’s country positively affect the level of managerial services and the amount of interest paid to the investor’s country from the recipient country.