This article examines the impact of the international tax system on the location decision of a foreign permanent establishment (PE) including cross-border loss relief and activity clauses. Germany, e.g., operates a hybrid system of international taxation, under which foreign income from PEs located in a tax treaty partner country is usually exempted from domestic taxation, while foreign income from non-treaty countries is subject to a tax credit regime. However, even if exemption is the standard method in a treaty, its application is often restricted by activity clauses which in fact require a switch-over from the exemption to the credit method. This hybrid system allows for an analysis of both main systems to avoid international double taxation taking into account cross-border loss relief. The case-by-case analysis in this article shows that the underlying international tax regime of the home country also shapes the location decision for foreign investments of their residents. Thereby, a hybrid system of international taxation distorts investment decisions as it provides selective location decisions for investments in foreign PEs with regard to the method to avoid double taxation and the respective tax consequences.