This study investigates the impact of the nexus requirement on entities’ location decisions for intellectual property and investments. The nexus requirement links the preferential IP Box taxation to domestic research activity, aiming to reduce cross-border patent shifting. Using a stacked difference-in-differences design on a sample of European entities, I analyze whether entities alter their location decisions for investments and intellectual property after the nexus requirement applies. Analyses reveal that the nexus requirement is effective in reducing entities’ patent shifting to IP Box entities. Additional results suggest that multinational entities reallocate capital and labor investment from non-IP Box entities toward IP Box entities to meet the nexus requirement and retain the IP Box tax benefit. While substance requirements were intended to prevent IP and profit outflows from high-tax countries without IP Boxes, they have instead led entities to reallocate investments and innovative activity from these countries to countries offering IP Boxes.

This study estimates compliance costs of applying for corporate R&D tax credits. Using representative firm-level data on R&D expenditure and applications for R&D tax credits from Germany, we estimate compliance costs as foregone tax benefits. For this purpose, we compute potential benefits from applying for the German R&D tax credit and then examine whether or not firms applied for this incentive. Compliance costs are signficiant and constitute on average 10% of expected benefits per firm. The costs are larger for firms of micro and small size and smaller in the chemical and pharmaceutical sector.

Our study assesses the impact of state tax policies on entrepreneurship in Poland, focusing on innovative industries. We analyze the creation and closure of self-employed enterprises from 2016 to 2022 across approximately 2,400 municipalities. Our findings reveal a positive spatial autocorrelation in the density of self-employed enterprises utilizing innovation-related tax relief, particularly in and near large cities. However, many small firms did not take advantage of these reliefs. Notably, municipalities with self-employed enterprises benefiting from R&D tax breaks experienced fewer closures. In contrast, the presence of IP Box users was linked to fewer new establishments, especially in manufacturing. Both types of relief positively influenced innovative sectors like Information and Communication, and Professional, Scientific, and Technical activities.

We analyze the relative cost effectiveness of R&D tax credits and IP boxes as instruments for stimulating R&D. We set up a model in which there are three types of market failures, all of which lead to under-investment in R&D in the absence of government intervention. Assuming that the marginal cost of public funds exceeds 1, then in the absence of any unobservable input to R&D firms, we unambiguously find that tax credits are more cost effective than IP boxes in achieving the same impact on the level of R&D. We consider two cases in which there is an unobservable input for the R&D firms: in both cases, the tax credit remains more cost effective.