Cost of Capital for Cross-Border Investment: The Fallacy of Estonia as a Tax Haven

Seppo Kari and Jouko Ylä-Liedenpohja ()
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Jouko Ylä-Liedenpohja: University of Tampere and CESifo

Baltic Journal of Economics, 2004, vol. 5, issue 1, 28-43

Abstract: The initial cost of equity of a foreign subsidiary, financed by its parent from abroad, and the opportunity cost of reinvesting its marginal foreign profits both depend on repatriation taxes. Only investments financed from intramarginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent’s owners. We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.

Keywords: repatriation taxes; taxation of multinationals; cross-border investment; Estonia (search for similar items in EconPapers)
JEL-codes: H25 H32 H87 (search for similar items in EconPapers)
Date: 2004
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Working Paper: Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:bic:journl:v:5:y:2004/2005:i:1:p:28-43

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