German law to allow start-ups to claim tax breaks on losses

BERLIN, Sept 13 (Reuters) - Germany’s government plans to allow start-ups to claim tax breaks on losses even after a change in ownership in a bid to boost investment into fledgling firms, a copy of a draft law seen by Reuters on Tuesday showed.

The draft law is expected to be approved by the German cabinet on Wednesday and would cost the finance ministry around 600 million euros ($674 million) per year in lost tax revenue, according to the document.

Currently, losses suffered under a previous owner cannot be used by new investors to reduce a start-up’s tax liability. Under the new rules, investors will be able to claim the tax breaks provided the business continues to operate.

This is to prevent companies being bought and gutted solely to take advantage of the tax breaks on losses carried forward.

German start-ups already struggle to raise funds when compared with their U.S. peers due to a shortage of venture capital, especially for later stages of growth.

While the number of financing rounds increased in Germany in the first half of 2016, the total value of investments tumbled by more than 50 percent to 957 million euros, according to a study by consultants EY.

Mittelstand companies, the small-to-medium-sized firms that form the backbone of the German economy, will also benefit from the legislative changes.

The Foundation for Family Businesses welcomed the new rules, saying it would make restructuring easier and increase flexibility needed for firms to compete internationally.

The new law is expected to apply retroactively from Jan. 1, 2016. ($1 = 0.8902 euros) (Reporting by Matthias Sobolewski; Writing by Caroline Copley)