Do Tax Loss Restrictions Distort Venture Capital Funding of Start-Ups?

Abstract

I analyze the influence of anti-loss trafficking rules on start-up funding in Europe. Using data from venture capital (VC)-funded firms in the EU28 Member States between 1999 and 2014, I investigate regulations that restrict the use of loss carry-forwards following significant changes in ownership or activity. These restrictions potentially destroy the value of a start-up’s accumulated loss carry-forwards. Accounting for the increased risk and reduced return on their investment, VC investors could reduce their funding.My findings suggest that strict anti-loss trafficking rules indeed impair VC funding. Especially companies in high-tech industries are affected. Thus, this study highlights unintended effects of anti-loss trafficking rules and their implications for VC investment.

Keywords: venture capital, loss carry-forward, start-ups, anti-loss trafficking