The Value of a Loss: The Impact of Restricting Tax Loss Transfers

We study the economic consequences of anti-loss trafficking rules, which disallow the use of loss carry-forwards as tax shield after a substantial ownership change. We use staggered changes to anti-loss trafficking rules in the EU27 Member States, Norway and United Kingdom from 1998 to 2019 and find that limiting the transfer of tax losses reduces the number of M&As by 18%. The impairment is driven by loss-making targets. Turning to the broader impact on industry dynamics, we find decreases in survival rates of young companies in response to tighter regulations. Some of these start-up deaths are compensated by new firm entrants. We further detect that loosening of regulation spurs firm entry and survival. Finally, tightening (loosening) anti-loss trafficking rules impairs (increases) return on assets, especially for R&D-intensive firms that are more prone to loss-making in their life cycle.

Bührle, Theresa, Elisa Casi-Eberhard, Barbara Stage und Johannes Voget (2023), The Value of a Loss: The Impact of Restricting Tax Loss Transfers, ZEW Discussion Paper Nr. 23-037, Mannheim.