The Influence of Tax Loss Carry-Forwards on the Valuation of Corporations in the Context of Acquisitions

Seminar Paper, 2017

18 Pages, Grade: 1,3


Table of Contents

1 Introduction

2 Theoretical Foundations
2.1 Mergers & Acquisitions
2.2 Company Valuation
2.3 Treatment of Tax Loss carry-forwards

3 Analysis
3.1 Expert Interviews
3.2 Case Study and Mathematical Relationship
3.3 Findings

4 Conclusion

Appendix A

Appendix B

Appendix C

1 Introduction

During the last decades, mergers & acquisitions (M&A) have increased substantially in popularity (Institute of Mergers & Acquisitions, 2017). Their growth in transaction volume and the number of transactions bespeak the importance of this topic. Although theory seems plausible, the success of M&A-transactions does not always meet expectations. On the one hand, this is often owed to unrealistic assumptions, especially overrated hypothetic synergy effects. On the other hand, it origins in the complexity of such transactions. Due to the variety of determinants, it is hard to quantify exact values for target companies. This results in vague purchase prices.

Due to the complexity of M&A, the determinants that have an influence on the valuation of companies need to be researched individually. This study focuses on one aspect of the valuation of corporations in the context of acquisitions – the influence of tax loss carry-forwards, which are assumed to have a large impact (Scholz, 2000, p. 170f.). The paper pursues two main objectives. First, it is figured out how relevant tax loss carry-forwards are in the context of acquisitions. Second, the most important factors, which affect the value contribution of the tax loss carry-forwards, are determined.

However, there are several limitations set in advance. The study will only cover corporations, not business partnerships1 because they are not subject to corporate income tax2 and income tax3 loss carry-forwards are assigned to the partners instead of the company itself (transparency principle).4 Furthermore, thin capitalization regulations (especially interest carry-forwards) are not treated either. Minor differences in the tax bases for corporate income tax and trade tax5 due to special tax reduction and addition regulations are excluded as well. All calculations are performed by using an effective tax rate, which includes the corporate income tax plus solidarity surcharge and the trade tax.

The main body of the paper is divided into two parts. The first part includes the theoretical foundations, beginning with a short introduction into the topic of M&A and company valuations for the further clarification of the topic. Afterwards, legal foundations about the treatment of tax loss carry-forwards in case of transactions are presented. The subsequent analysis part includes mainly two qualitative research methods. At first, two expert interviews are conducted to find out how relevant the topic is in practice and how it is practically addressed. At second, the mathematical relationship between tax loss carry-forwards and the corporate value is determined by doing a case study. Thereby, a fictitious corporation is assessed. For a comprehensive research, different cases are considered. Finally, the findings are presented and a conclusion, that summarizes the findings, is drawn.

2 Theoretical Foundations

2.1 Mergers & Acquisitions

To understand the context of such transactions, a short introduction into the topic is needed. Although the term mergers & acquisitions is internationally common, it is not being used consistently in literature (Wirtz, 2003, p. 10). But in general, all transactions associated with purchases or disposals of company shares are included (Hinne, 2008, p. 5).

Two forms of such transactions can be distinguished. Usually, the companies´ legal independence after the transaction serves as differentiation criterion (Jansen, 2008, p. 128). While acquisitions are characterized by the maintenance of the legal independence of all involved participants (Jansen, 2008, p. 128), at least one of the involved companies gives up its legal independence in case of mergers (Hinne, 2008, p. 5). So, mergers are similar to acquisitions with the additional step of the integration of the companies into a coherent corporate structure.

In Germany, mergers can be further distinguished between mergers by absorption and mergers by new formation (Grünert, 2007, p. 28f.). As these cases are specifically regulated in the Umwandlungssteuerrecht, they are not further treated in this study. The focus is on acquisitions.

In general, there exist two options to perform acquisitions. First, the acquiring company can purchase the majority of shares (equity) of the target company (so called share deal), which is a purchase of rights by civil law6 (§ 453 BGB). Second, the acquiring company can purchase most of the assets of the target company (so called asset deal), which is a purchase of objects by civil law (§ 433 BGB).

2.2 Company Valuation

In the context of acquisitions, different methods and approaches for company valuation exist. Company valuation aims for calculating the present value of a company (Voigt et al., 2005, p. 22). These company values are rough and highly subjective because assumptions and estimates about the future development of the company must be made.

Depending on the used variables, a multitude of valuation methods exists, for instance via book or market values, net asset value, liquidation value, future earnings, future cash flows or multiples (Voigt et al., 2005, p. 26ff.). The underlying principle is always that the company value is the value of equity which is then again formed by subtracting the value of debt by the total company value (Matschke and Brösel, 2007, p. 43).

Because of its broad dissemination and plausibility, the valuation by discounted cash flows (DCF) is used during this paper. There are different approaches regarding the DCF-method (Matschke and Brösel, 2007, p. 121). These are the

- equity-approach and the
- entity-approach;

whereby the entity-approach can be further distinguished into the WACC-approach and the APV-approach. They do not differ in principle but in calculation-manner (Voigt et al., 2005, p. 37). For reasons of simplification, only the WACC-approach will be further explained as this one is used later. The company value is thereby calculated by discounting the estimated future free cash flows by means of the average weighted cost of capital (WACC) as discount rate and afterwards subtracting the net debt (Schacht and Fackler, 2009, p. 207). The related equation is found in section 3.2 where it is further used.


1 German companies can be legally distinguished into corporations and partnerships.

2 Regulations regarding the corporate income tax are primarily covered by the Körperschaftsteuergesetz (KStG).

3 Regulations regarding the income tax are primarily covered by the Einkommensteuergesetz (EStG).

4 For purposes of trade tax determination, tax loss carry-forwards are assigned to business partnerships but as the value contribution of trade tax savings is limited and, moreover, very specifically regulated, it is beyond the scope of this study.

5 Regulations regarding the trade tax are primarily covered by the Gewerbesteuergesetz (GewStG).

6 Regulations regarding the civil law are primarily covered by the Bürgerliches Gesetzbuch (BGB).

Excerpt out of 18 pages


The Influence of Tax Loss Carry-Forwards on the Valuation of Corporations in the Context of Acquisitions
University of Applied Sciences Aalen
Catalog Number
ISBN (eBook)
ISBN (Book)
Betriebswirtschaftslehre, Business Administration, Bewertung, Valuation, Verlustvorträge, Loss Carry-Forwards, Betriebswirtschaftliche Steuerlehre, Tax Management
Quote paper
Daniel Ehrmann (Author), 2017, The Influence of Tax Loss Carry-Forwards on the Valuation of Corporations in the Context of Acquisitions, Munich, GRIN Verlag,


  • No comments yet.
Read the ebook
Title: The Influence of Tax Loss Carry-Forwards on the Valuation of Corporations in the Context of Acquisitions

Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free