The taxation of passive foreign investment: lessons from German experience


  • The hospitality and support of the Deutsche Bundesbank Research Center is gratefully acknowledged. Alfons Weichenrieder is also affiliated with the University of Economics and Business,Vienna, and with CESifo. He gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft (DFG) and the hospitality of the Oxford University Centre for Business Taxation. We benefited from helpful discussions with Johannes Voget and from comments by participants of the Deutsche Bundesbank MiDi Workshop 2008, the Vienna Workshop on `Taxes and the Financial and Legal Structure of Firms,' 7–9 January 2009, the European Accounting Association Annual Congress 2009 in Tampere and the IIPF Congress 2009 in Cape Town. Helpful comments and suggestions by three anonymous referees are gratefully acknowledged. Email:; (corresponding)


Abstract The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low-tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low-tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium- and high-tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited.


Ce texte évalue l’impact des règles imposées aux succursales à l’étranger des sociétés allemandes – règles qui limitent l’usage de filiales étrangères localisées dans des pays à fiscalité légère pour mettre les revenus d’investissement passif à l’abri de la fiscalité dans le pays d’origine. Ces investissements passifs constituent une fraction significative de l’investissement direct à l’étranger des Allemands, et on découvre que les règles allemandes sont très efficaces pour restreindre les investissements dans des économies à fiscalité légère. Les résultats montrent que la réforme fiscale allemande de 2001, qui a unilatéralement introduit une exemption du revenu passif dans les pays à fiscalité médium or lourde, a entraîné un déplacement des actifs passifs vers les pays pour lesquels l’exemption était limitée auparavant.