This paper explores the effects of a federal law that obligates previously unregulated municipalities in Germany to set a minimum tax rate on firms’ taxable profits. In particular, we examine the tax-policy response of municipalities that compete locally with “tax-haven municipalities”, i.e.municipalities that originally have set lower and, in some cases, even zero tax rates. The analysis distinguishes treated and not-treated municipalities based on their distance to a tax-haven. Our results show that the majority of municipalities do not change their tax policy. Apart from the tax-havens, only high-tax municipalities show a response – they reduce the business tax rate without experiencing a decline in tax revenues. •In 2004, Germany introduces a minimum tax on the local profit tax.•The paper uses a spatial diff-in-diff approach to analyse the effects on local tax-competition.•We examine the tax-policy of municipalities that compete with tax-havens.•Apart from the tax havens, only high-tax municipalities are found to revise their tax policy.•Without experiencing revenue losses, high-tax municipalities reduce their tax rates.