Controlled foreign corporation rules and cross-border M&A activity


We investigate the influence of one main anti tax avoidance measure, controlled foreign corporation (CFC) rules, on cross-border merger and acquisition (M&A) activity on a global scale. Using three different statistical methods and a large M&A data set, we find that CFC rules distort ownership patterns due to a competitive advantage of multinational entities whose parents reside in non-CFC rule countries. First, we show that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target’s income. Second, we show that CFC rules distort the acquirer’s location choice of targets. Third, we show that CFC rules negatively affect the probability of being the acquirer in a cross-border M&A. Altogether, this study shows that for affected acquirer countries, CFC rules lead to less M&A activity in low-tax countries because profit shifting seems to be less feasible. This behavior change could result in an increase in global corporate tax revenue.