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EVCA warns of tax and legal inefficiencies

Tax and legal frameworks across Europe are holding back development of the private equity market and limiting the funds available for European companies, according to the European Private Equity and Venture Capital Association (EVCA.) EVCA has published its second assessment of how favourable, or unfavourable, tax and legal environments are for the development of private equity and venture capital and for promoting entrepreneurship and competitiveness across Europe.

The objective of the research is to enable comparisons to be drawn between 21 European countries’ tax and legal frameworks to encourage policy makers at national and European levels to assess best practices currently in place and to initiate actions where needed.

Javier Echarri, EVCA secretary general, says: “This assessment should be used at both national and European levels to harmonise further the fiscal and regulatory environment of this industry. 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.”

Overall the assessment shows on a national level tax and legal restrictions still impede fund raising for private equity and venture capital funds and investments made by those funds in European countries. On a pan European level, discrepancies between countries hamper a higher level of cross-border activity. And this, according to EVCA, is a major obstacle to the creation of a more entrepreneurial and competitive environment in Europe. EVCA’s 2003 figures from across Europe show that although cross-border investments were up from 9.9% in 2002 to 13.2%, the majority of investments (82.2%) were still made in the country where the private equity firm making the investment is located.

Key findings from the report reveal the UK, Luxembourg and Ireland are the countries with the most favourable environment for the development of the private equity industry with composite results of 1.26, 1.49 and 1.53, respectively. Finland, Germany, Austria, Denmark and Slovak Republic score the lowest and provide the least favourable tax and legal environment for private equity and venture capital with scores between 2.30 and 2.49.

Nineteen of the 25 EU member states were surveyed as well as Norway and Switzerland. Of the recent Accession countries, the Czech Republic, Hungary, Poland and the Slovak republic are included.

EVCA identified 13 indicators that contribute to shaping a favourable environment. These include:- Fund structures for private equity and venture capital

– Merger regulation and its impact on private equity and venture capital

– Investments by pension funds in private equity and venture capital

– Insurance companies as potential investors in private equity and venture capital

– Company tax rates

– Company tax rates for small- and medium-sized companies (SMEs)

– Income tax rate for private individuals

– Capital gains tax rates for individuals

– Tax incentives for individual investors investing in private equity

– Taxation of stock options

– Entrepreneurial environment

– Fiscal incentives to enhance research and development (R&D)

– Bankruptcy and insolvency

Indication of a tax and legal environment favourable to the development of private equity and venture capital. (1 = more favourable/ 3 = less favourable)

Results for 2004(1)

Country Total Score

United Kingdom 1.26

Luxembourg 1.49

Ireland 1.53

Greece 1.75

Netherlands 1.76

Portugal 1.81

Belgium 1.82

Hungary 1.86

Italy 1.86

France 1.89

Switzerland 1.95

Spain 1.96

Total Average 1.97

Norway 2.04

Sweden 2.05

Czech Republic 2.12

Results for 2003(2)Country Total Score

United Kingdom 1.20

Ireland 1.58

Luxembourg 1.67

Netherlands 1.79

Italy 1.96

Greece 1.96

Total Average 2.03

Austria 2.53

Germany 2.41

Denmark 2.36

Portugal 2.32

Finland 2.25

Spain 2.17

Sweden 2.09

France 2.09

Belgium 2.08

1 This ranking covers additional countries relative to last year’s analysis. Moreover, some countries were evaluated on fewer than the 13 variables due to a lack of applicability or the inability to use the given information for ranking. Denmark, Poland, Slovak Republic and Switzerland were not scored on the fund structures variable and The Netherlands is not scored on the variable of capital gains taxation for private individuals.

2 Denmark was evaluated on only nine of the 10 variables, due to the lack of a conventional private equity structure in this country.