International taxation and the potential of cross‐border mergers for optimal profit repatriation

• Published date: 01 April 2023
• Author: Thomas Kollruss
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22604

Received: 29 August 2022 Revised: 17 October 2022 Accepted: 26 October 2022

DOI: 10.1002/jcaf.22604

RESEARCH ARTICLE

International taxation and the potential of cross-border

mergers for optimal profit repatriation

Thomas Kollruss

Department of Accounting, Taxation and

Finance, IU International University of

Applied Sciences, Düsseldorf, Germany

Correspondence

Thomas Kollruss, Department of

Accounting, Taxation and Finance, IU

International University of Applied

Sciences, Düsseldorf, Germany.

Email: prof.dr.thomas.kollruss@gmx.at

Abstract

The article aims to investigate the use of cross-border mergers in worldwide

constellations as a strategy for receiving tax-optimized profit repatriation from

foreign subsidiaries. The study is carried out on the basis of an exemplary case

study of a cross-border merger.Moreover, theoretical, analytical, and conceptual

research methods used. The findings and implications are of general interest,

since a cross-border merger is in principle possible worldwide and not only in

certain country constellations. Generally, the results of the study apply to any

cross-border merger, for example, also to a merger of any EU corporation into

a foreign parent company irrespective of its residence. The results show that

multinational firms can use cross-border mergers as a stable strategy to obtain

tax-optimized profit repatriation from foreign subsidiaries and to optimize the

group tax rate. This general strategy worked out in the article solvesan essential

and widespread problem for investments in foreign subsidiaries, namely how

to repatriate the retained profits of foreign subsidiaries without triggering an

excessive tax burden. A comparable strategy has not yet been found or devel-

oped in the literature. Consequently, there is no literature on the possibility of

using cross-border reorganizations as a strategy for a tax-optimized repatriation

of profits.

KEYWORDS

cross-border reorganization, mergers and acquisitions, profit repatriation, strategy

1 INTRODUCTION

1.1 Problem

Companies have been investing in foreign subsidiaries.

This is one of the drivers and consequences of global-

ization. However, in the case of shareholding in foreign

subsidiaries, a major problem from the point of view of

a parent company is how to repatriate the retained prof-

its without triggering an excessive tax burden. This article

discusses the cross-border inbound merger of a foreign

subsidiary into a sister company as a strategy for receiving

tax-optimized profit repatriation from foreign subsidiaries

to avoid tax disadvantages and potential double taxation.

In principle, the cross-border inbound merger offers a

viable solution for a tax-optimized repatriation of profits,

as it enables the conversion of taxable dividend payments

into non-taxable withdrawalsof retained profits from a for-

eign permanent establishment. Moreover, the paper also

reveals how the legal corporate architecture of a (multina-

tional) group is influenced by tax purposes. Restructuring

the current legal corporate architecture may then depend

on taxation.

J Corp Account Finance. 2023;34:213–227. © 2022 Wiley PeriodicalsLLC. 213wileyonlinelibrary.com/journal/jcaf