Does lowering dividend tax rates increase dividends repatriated? Evidence of intra-firm dividend repatriation policies by German Multinational Enterprises

This paper analyzes the impact dividend taxes exert on the dividends repatriated from foreign affiliates to their German parent company. Based on an augmented Lintner model of firms' dividend payout decisions, the paper focusses on cross-border intra-firm dividend payments of wholly-owned foreign affiliates in the manufacturing sector to their parent companies in Germany. Firm-level
data from the Microdatabase Direct Investment (MiDi) of the Deutsche Bundesbank is used. Results firstly signal the validity of the original Lintner model for cross-border intra-firm dividend payments of German affiliates abroad, although
the target payout ratio and the degree of dividend smoothing are relatively low
once time-invariant unobserved heterogeneity is controlled for. Secondly, results from an augmented Lintner model imply that increases in dividend taxes
indeed have a statistically significant negative impact on the expected value of
dividends repatriated: A one percentage point increase in the dividend tax rate
would decrease dividends repatriated by about 3.5 percent.