Tax-aided financial services companies and the cost of capital

Over the past two decades, the governments of several European countries have implemented special tax devices to attract the finance centres of multinational companies. This paper determines how the cost of capital for investments made by multinationals is affected by the tax regimes bringing into play the Irish financial services company, the Belgian coordination centre, the Dutch finance company and the Luxembourg company coupled with a Swiss branch. It gives evidence that intermediation of a tax-aided services company in the financing scheme of a foreign subsidiary provides a tax saving. However, the home and source countries' tax regimes influence the pecking order among treasury and finance centres. The study also comments on the possible abolishment of these tax-advantaged regimes.