This paper examines the extent to which taxes affect internal versus external leverage by focusing on wholly-owned subsidiaries in Korea. Foreign subsidiaries are under classical system where double taxation of corporate and personal income provides interest tax shields, while domestic subsidiaries are under imputation system where such distortion between debt and equity is largely eliminated. We find that foreign subsidiaries do not exhibit higher overall leverage than domestic subsidiaries controlling for various firm characteristics. On the other hand, foreign subsidiaries exhibit higher internal leverage than domestic subsidiaries. We also find that foreign subsidiaries with excess foreign tax credit status use more internal debt when home country corporate tax rate is low. These findings suggest that taxes have first order impact on internal debt when marginal investor holds both debt and equity, but not on external debt possibly due to limited substitutability of comparable debt instruments.