FinanzArchiv / Public Finance Analysis vol. 70 no. 4 527 Tax-Treaty Effects on Foreign Investment: Evidence from European Multinationals Mário Marques and Carlos Pinho* Received 7 February 2012; in revised form 2 October 2013; accepted 27 November 2013 This paper reexamines the effects of bilateral tax treaties on investment location deci- sions, using a large panel of European countries. It provides evidence that tax treaties induced a positive and significant impact on the number of foreign subsidiaries incorpo- rated in the last decade. Findings also suggest positive effects of treaty features other than withholding tax rates and double-taxation relief methods. When they are analyzed separately, we also find evidence confirming that the host country’s corporate tax rate is a determining factor in the location of foreign subsidiaries. Keywords: investment location, bilateral tax treaties, effective tax rate, corporate taxa- tion, panel data JEL classification: F 23, H 25, H 32 1. Introduction One important trend in the context of globalization is the notable increase in foreign direct investment (FDI). There is an extensive body of empirical research arguing that, among other factors, the tax burden plays a role in determining business strategies, including foreign investment location (see Devereux, 2006, and De Mooij and Ederveen, 2003, 2006 for surveys). For instance, De Mooij and Ederveen (2006) surveyed empirical literature on income tax effects and found a typical tax semielasticity of −2.1. A phenomenon that emerges in connection with international investment is international double taxation, which occurs when foreign-source income is taxed by both home and host countries and no unilateral or bilateral double- taxation relief is provided. About 50 percent of current bilateral tax treaties worldwide were signed since 2000. The aim of bilateral tax treaties is “to remove the obstacles that double taxation presents,” which cause “harmful * Marques: University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal (mmar- ques@eeg.uminho.pt); Pinho: University of Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal (cpinho@ua.pt). We thank the editor (Alfons Weichenrieder) and two anonymous referees for their valuable inputs on earlier versions of this paper. Also, we are indebted to Paulo Guimarães for his helpful comments and suggestions. FinanzArchiv 70 (2014), 527--555 doi: 10.1628/001522114X685474 ISSN 0015-2218  2014 Mohr Siebeck