No. 128: The Value of a Loss: The Impact of Restricting Tax Loss Transfers

Year: 2023
Type: Working Paper


This paper examines the economic consequences of anti-loss trafficking rules, which disallow the use of tax loss carry-forwards after a substantial change in ownership or activity. Using staggered changes to anti-loss trafficking rules across EU28 Member States and Norway from 1998 to 2019 in a stacked-cohort difference in difference design, we find that limiting the transfer of tax losses leads to a 22% decrease in the volume of mergers and acquisitions in targets that are more likely to have tax loss carryforwards. M&As related to profitable targets are not affected, confirming the tax channel mechanism. We further study the broader economic effects of anti-loss trafficking rules: we observe decreases in birth and survival rates of young companies in response to stricter regulations and vice versa. Our findings further suggest that tighter (looser) anti-loss trafficking rules impair (increase) firms’ return on assets, especially for R&D intensive firms. Furthermore, a 22% decrease in successful patent applications in case of tighter rules suggests that limiting the transferability of losses affects innovative activity.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, Goethe University Frankfurt, University of Cologne and Leibniz University Hannover who share the same research agenda.

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