Do tax loss restrictions distort venture capital funding of start-ups?

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URL:	https://madoc.bib.uni-mannheim.de/58983
URN:	urn:nbn:de:bsz:180-madoc-589833
Document Type:	Working paper
Year of publication:	2021
The title of a journal, publication series:	ZEW Discussion Papers
Volume:	21-008
Place of publication:	Mannheim
Publication language:	English
Institution:	Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung Außerfakultäre Einrichtungen > Graduate School of Economic and Social Sciences - CDSB (Business Studies)
MADOC publication series:	Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject:	330 Economics
Classification:	JEL: M13 , G24 , H25,
Keywords (English):	Venture capital , taxes , loss carryforward , start-ups , anti-tax loss trafficking
Abstract:	Anti-tax loss trafficking rules disallow the use of loss carryforwards after a change in ownership or activity (such as significant changes in turnover, employment, or the product portfolio). This restriction could threaten accumulated loss carryforwards of start-ups. Accounting for the increased risk and reduced return on their investment, VC investors could reduce their funding. I analyze whether the venture capital (VC) funding of start-ups in Europe is affected by these regulations. I base my empirical analysis on several case studies and a panel analysis covering VC- funded companies in the EU28 Member States from 1999 to 2014. My findings suggest that strict anti-tax loss trafficking rules indeed impair VC funding. Especially more mature companies and companies in high-tech industries are affected.