The Impact of Dividend Exemption on the Activities of Japanese-owned Foreign Affiliates

In 2009, Japan introduced a dividend exemption system that exempts 95% of dividends paid from foreign subsidiaries to their parents from home country taxation. As a result, Japan's international tax system moved from a worldwide tax system to a territorial tax system. This paper examines the impact of this tax reform on the activities of Japanese-owned foreign affiliates in terms of the number of foreign affiliates, profit, sales, employment, and investment. We find that the statutory corporate tax rate of the host country negatively affects the number of foreign affiliates established in that country over the entire data period from 2004 to 2013. However, we find no evidence that, in response to the decrease in the repatriation tax rate induced by the tax reform, Japanese multinationals established new affiliates or increased their reported profit, sales, employment, and investment.