The corporate tax rate and regime are policy instruments that are the subject of
considerable attention for the role they play in attracting foreign multinationals making location
decisions across countries. This paper examines the effects of corporate tax on these location
decisions of newly established multinational subsidiaries across 26 European countries over an eight
year period. We contribute to the existing literature by examining the effects of a non-linear
response of firm location decisions to changes in the tax rate. We find that accounting for this nonlinearity improves the performance of the model for all of the alternative measures of the tax rate.
We also show that there are large variations in the sensitivity to tax rates across sectors and firm size
groups. In particular, financial sector firms are more than twice as sensitive to changes in
corporation tax rates relative to other sectors.