The exit of investors is an important event for private firms. Venture capitalists mostly decide to take this step via a trade sale or initial public offering (IPO). At this point, the companies can have accumulated substantial amounts of losses during their start-up phase. Those losses are treated asymmetrically for tax purposes. While profits are taxed immediately, losses can only be deducted against past (loss carry-back) or future profits (loss carry-forward), often subject to time or size constraints. In addition to the temporal and relative restrictions, anti-loss trafficking rules can lead to the forfeit of tax loss carry-forwards in certain cases, such as a change in activity or a change in ownership. The specific design of those rules differs between countries.

The above-mentioned tax loss provisions might affect the prices achieved when investors exit. Loss carryforwards can pose a valuable tax asset. Temporal and relative loss restrictions limit the usability of these assets. Additionally, anti-loss trafficking rules might apply when the ownership structure of a company changes. Depending on the specific regulation, the loss carry-forwards accumulated cannot be used at all, or with strict limitations.

The project aims to investigate whether tax loss restrictions lead to a decrease in prices when investors exit. I will focus on the two main channels, trade sales and IPOs. The role of loss carryforwards for acquisition premiums and stock prices has already received some attention in the literature. However, to the best of my knowledge, there exists no evidence of the impact of tax loss provisions, in particular anti-tax loss trafficking rules, in this context.

Project duration

01.10.2020 - 30.09.2021

Project members

Theresa Bührle (Coordinator)