In M&A transactions, tax losses often carry significant value – particularly when (i) they can be used post-closing and/or (ii) they can provide a shelter for potential pre-transaction tax risks.

(i) Post-closing usage of tax losses:

In many jurisdictions, rules on the preservation of tax losses after a change of ownership can materially influence deal structuring, pricing, and negotiations.

Germany applies strict change-in-ownership rules that typically result in the forfeiture of tax loss (carryforwards) when more than 50% of the shares in a company change hands within a five-year period. Although there are exemptions (such as the built-in-gains exemption and the restructuring clause), the default assumption is loss forfeiture – a factor that often leads to conservative valuations and downward adjustments in purchase price models.

By contrast, other countries such as France provide more flexibility. Under certain conditions, pre-transaction tax losses may be retained if the core business continues post-transaction. These jurisdictional differences play a crucial role in cross-border deal planning.

Where losses can be preserved, they may be capitalized as tax assets, directly influencing purchase price negotiations. Buyers may be willing to pay more if the expected future tax savings from carried-forward tax losses are factored into the valuation. This requires mutual agreement between the parties on a business plan that substantiates the future usage of the tax losses.

(ii) Tax losses as a shelter for potential historic tax risks:

Even if tax losses are forfeited under the harmful change in ownership rules of a specific jurisdiction and as part of an M&A share transaction, such tax losses can still have value.

For the period until closing, such tax losses can, under certain circumstances, provide a shelter for historic income tax risks being identified as part of a tax due diligence.

Instead of a purchase price deduction for such identified tax due diligence risks, parties can agree that the tax losses provide protection for such historic income tax risks. This may potentially facilitate more balanced economic results.

Our recommendation:

Tax losses should be treated as a key item in the tax due diligence and tax structuring process, and should be considered early by the parties for M&A deal negotiations.

Dealmakers should analyze the local rules on loss preservation early in the process and consider whether structuring alternatives (e.g., asset deals or pre-transaction reorganizations) can mitigate the risk of forfeiture allowing for an adequate economic usage of tax losses.

In multi-jurisdictional transactions, a comparative view of national rules is essential. Misalignment can lead to mismatched assumptions and late-stage friction in negotiations.

Conclusion: 

Tax losses are not just an accounting artifact, they can be a core driver of deal value. Understanding whether they survive a transaction and/or can provide a shelter for historic tax risks is critical to pricing accuracy and post-deal success.