If companies make losses, for tax purposes they can be carried forward and set off against future profits. The majority of European countries limit the use of loss carry forwards in case of a sale of the company and/or a change in activity. While those regulations target transactions solely motivated be the intention to transfer loss carry forwards, without other economic reasons, they can affect start-ups, too. Especially innovative technology start-ups accumulate losses in their early stage, since their product first has to be developed until it is marketable. If the ownership of the company changes before enough income has been generated to fully utilize existing loss carry forwards, the company faces the risk of losing potentially significant future tax savings.
The project aims to investigate the effect of tax loss restrictions on the financing of start-ups. In particular, it will be analyzed whether venture capital investors forego or reduce the funding of start-ups if there is a risk that the expenditure might not be tax-deductible later on. This will create new insights into the determinants of venture capital funding. A critical look is taken at the role of tax loss restrictions. While distortions of venture capital funding has been used as an argument against the implementation or tightening of such regulations, so far there exists no empirical evidence supporting this claim.