FOREIGN DIRECT INVESTMENT DECISIONS & TAX PLANNING FOR CHINESE FIRMS

Abstract

This article is concerned with the role of tax planning in the foreign direct
investment (FDI) decisions of Chinese multinational corporations (MNCs).
It can be shown that tax planning (intergroup debt financing) enables Chinese
firms to locate value-added chain and direct investment (e.g. production)
in high-taxed foreign countries by offsetting the relatively high tax burden.
Therefore, tax planning can be regarded as an instrument to enhance the
competitiveness of a foreign country as a location for Chinese firms’ direct
investment regarding the net after-tax profits as a key determinant of decisions.
In this respect, this article shows how Chinese firms can utilise tax planning to
select Germany as a target location for direct investment. Moreover, Chinese
firms may use Germany as an intermediary location for tax planning, especially
for structuring Chinese FDI in the USA. In this respect, thin-capitalisation
and CFC rules must be considered as main restrictions for optimising the tax
burden (effective tax rate/ETR).