We study the economic consequences of anti‐loss trafficking rules, which disallow the use of loss carryforwards as a tax shield after a substantial ownership change. We use staggered changes to these rules in the EU27 Member States, Norway, and the United Kingdom from 1998 to 2019 and find that limiting the transfer of tax losses is related to the number of mergers and acquisitions (M&A) declining by 18%, driven by loss‐making targets. Turning to broader industry dynamics, we find decreases in survival rates of young companies after tighter regulations. Loosening of regulation is associated with increased firm survival. Tightening (loosening) anti‐loss trafficking rules is related to decreased (increased) industry productivity, especially in R&D‐intensive industries that are more prone to loss‐making. Finally, tighter anti‐loss trafficking rules are associated with lower deal synergies and risk‐taking. All effects concentrate in strict regimes.

In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Cross-country differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. We estimate that a 1 percentage point increase in the capital gains tax rate reduces the value of equity by around 0.3%, which suggests that the capital gains tax significantly raises firms’ cost of capital. Furthermore, we find that the implied capital gains tax burden is higher at times of high economic growth and low stock market valuation.