Euro harmonisation a distant dream

On the whole, European countries have a long way to go to make their tax and legal environments conducive to the development of private equity and venture capital.

In its second study of the legal and fiscal environments in European private equity markets, the European Private Equity and Venture Capital Association (EVCA) found a number of areas for concern.

In particular it discovered two key weaknesses: on a national level, numerous tax and legal restrictions impede fundraising for private equity and venture capital funds and investments made by those funds in European countries; while on a pan-European level, serious discrepancies between the tax and legal environments hamper a higher level of cross-border activity (although the number of cross-border deals increased from 9.9 percent of the total in 2002 to 13.2 percent in 2003).

The study examined 19 of the EU member states, plus Norway and Switzerland. Of the recent accession countries, the Czech Republic, Hungary, Poland and the Slovak Republic were included for the first time.

With a score of 1.0 representing the best possible tax and legal environment and 3.0 the worst, the UK, Luxembourg and Ireland were ranked first, second and third, with scores of 1.26, 1.49 and 1.53 respectively. All three were ranked in the top three in 2002, although Luxembourg and Ireland swapped places.

Next came Greece (1.75), the Netherlands (1.76), Portugal (1.81) and Belgium (1.82). Italy, Hungary, France, Switzerland and Spain recorded slightly above average scores, with marks between 1.86 and 1.96. Meanwhile, Norway, Sweden, the Czech Republic and Poland were slightly below average with scores between 2.04 and 2.13. In the final grouping came Finland, Germany, Austria, Denmark and the Slovak Republic, with scores ranging between 2.30 and 2.49.        

“This assessment should be used at both national and European levels to harmonise further the fiscal and regulatory environment of this dynamic, growth driving industry,” said EVCA secretary-general Javier Echarri. “If Europe wants the private equity and venture capital industry to reach its full potential in financing growth, development and entrepreneurship, then Europe must make its tax and legal environments more effective.”

The study examined supply-and demand-side factors. The supply side took into account such things as an appropriate domestic fund structure; the possibility of pension funds and insurance companies investing freely in private equity and venture capital; and tax incentives for individuals investing in private equity. Demand criteria included tax rates for SMEs; income tax for private individuals; taxation of capital gains and stock options; merger regulation; fiscal incentives; and bankruptcy rules.

Among countries to have improved their tax and legal environments between 2002 and 2003 were Greece, which moved up from sixth in the rankings to fourth, and Portugal, which climbed from 12th to sixth. Among those whose positions have worsened were Italy, which fell from fifth to ninth, and Sweden, which went down from ninth to 14th.