From a CAPM-type model the cost of equity is derived for a …rm operating under various foreign tax systems. The …rm’s shares are traded in a market which is una¤ected by these systems. The cost of capital depends on the foreign tax system, even for fully equity …nanced projects. This is neglected in much of the literature. For a corporate income tax the main factor which reduces the cost of equity is the depreciation deductions. Compared with a neutral cash ‡ow tax, this reduces the cost of equity because it acts as a loan from the …rm to the government.