Tax treaties and foreign equity holding companies of multinational corporations

Multinational corporations can organize indirect ownership chains with foreign equity holding companies in countries with low taxes and favorable tax treaties. This paper examines the relationship between tax treaty networks, multinational ownership chains, and effective tax rates by combining ownership and accounting data of multinational corporations with a network analysis of tax treaties. Empirical results suggest that multinational corporations organize direct or indirect ownership chains, consistent with the structure of tax-minimizing routes in a treaty network. The existence of a tax-minimizing direct route is estimated to decrease the probability of using a foreign equity holding company in an ownership chain by 6.2 percentage points. The existence of a tax-minimizing indirect route via a country is estimated to increase the probability of locating a foreign equity holding company in the country by 22.0 percentage points. Furthermore, multinational corporations appear to reduce their effective tax rates by using foreign equity holding companies in ownership chains.