The European Private Equity & Venture Capital Association has launched its fourth Benchmarking study of European tax and legal environments at EVCA??™s Policy Meeting in Brussels today.

The study, carried out in collaboration with KPMG??™s M&A Tax Services, assesses the tax and legal situation across 27 European countries for limited partners and fund management companies, investee companies, as well as the environment for retaining talent at both investment firms and investee companies.

The aim of the study is to enable comparisons between different regimes, to highlight industry (RC) best practice and to engender more efficient tax and legal frameworks across a more integrated internal European market.

The study found that the gap between Europe??™s most and least favourable tax and legal environments has widened considerably. This year the highest ranking country(1) achieved 1.23, compared with 1.27 in 2006, and the lowest achieved 2.40, compared with 2.35 in 2006.

France achieved the highest score in the study, followed by Ireland and Belgium, pushing the UK out of the top three countries for the first time.

The study also found:

• The total European average for 2008 is relatively unchanged at 1.85, compared with 1.84 in the previous study in 2006
• An improved environment for pension funds and insurance companies to invest in private equity and venture capital funds, with the European average rising to 1.54 and 1.33 respectively
• Fund structures remain an obstacle to international fundraising, with the overall European environment for funds slightly worsening from 1.47 to 1.51. While most EU Member States provide a suitable domestic fund structure for private equity and venture capital, some features may be sub-optimal when it comes to cross-border fundraising and investment
• The European average for company incentivisation has slightly improved from 2.36 to 2.25, although it continues to significantly lag the overall average of 1.85
• The European average for fiscal R&D incentives still lags the study??™s overall European average of 1.85 but has improved from 2.13 to 2.03 resulting from a rising awareness of the importance of R&D investment for a country??™s future growth and competitiveness
• The European average to retain talent has worsened further, with a fall from 1.89 to 2.19. This is partly due to the inclusion of several Central & Eastern Europe states with very low capital and income tax rates, which have reduced the overall European tax rate.

In terms of member states:

• France has replaced Ireland as the most attractive fiscal and legal environment for private equity in 2008, with Ireland dropping to second place
• For the first time the UK fell out of the top three countries, displaced by a rising Belgium, which has made beneficial changes to its pension fund environment and new fiscal R&D incentives
• Southern Europe countries Greece, Spain and Portugal consolidated their position in the top half of the table with continuous improvements to their tax and legal regimes. Meanwhile the environments in the Netherlands and Luxembourg deteriorated, particularly because of difficulties in retaining talent and incentivising companies
• Germany, Austria, and Italy all dropped further behind, as reform-friendly countries such as Latvia, Poland and Estonia continued to constructively reform their markets. Meanwhile Lithuania newly included in the study entered straight into the top half.

Commenting on the research, Javier Echarri, EVCA Secretary General said:

???Amid the current financial turmoil, the need for a strong private equity and venture capital market is more crucial than ever. Fiscal and legal frameworks that encourage long term business investment will help Europe??™s economies adapt to their changing economic circumstances.

???Several European countries have shown good progress in the past two years, in improving the environment for private equity capital. But those countries slipping down the rankings should take this as a wake up call that their long term economic health is in jeopardy.

???Private equity??™s proactive style of business ownership ensures that companies remain globally competitive, by embracing change and fostering innovation. Policymakers must give serious consideration to these important contributions as they review their legal and taxation initiatives.???

Methodology

The data for this research has been compiled by KPMG??™s M&A Tax Services. The research assesses each of the 27 European markets on seven criteria:

Those relating to the environment for limited partners and fund management companies ??“ pension funds, insurance companies, fund structures and tax incentives; those relating to investee companies ??“ company incentivisation and fiscal R&D incentives; and the retention of talent at fund management and investee companies.

Information on these criteria was collected across 30 different variables, with a cut-off date of 1 July 2008.

To enable comparison between different national environments, each country was allocated a score per variable, with ???1??™ representing the best possible score and ???3??™ the worst. An average was then calculated per criterion, based on the scores for the underlying variables. Finally, a composite score per country was calculated by taking the average score across all seven criteria.

Equal weight was accorded to each of the seven criteria when calculating the countries??™ composite score.

The results from previous assessments in 2006, 2004 and 2003 are also shown in the table. While broad comparisons across the years provide a meaningful picture of a country??™s evolution over time and relative to its peers, strict comparison across the years is inhibited by the development of variables and the inclusion of new countries.