In the last quarter of 2008, the European Private Equity and Venture Capital Association (EVCA) launched its fourth benchmarking study of European tax and legal environments, carried out in conjunction with KPMG’s Mergers & Acquisitions Tax Service.

The survey covers 27 countries and focuses on how favorable the tax system is in each for venture capital and private equity. It aims to compare tax regimes, as well as to promote the most efficient fiscal and legal framework for these types of investment within an integrated European market.

The countries are graded on a scale of 1 to 3, with 1 the highest possible score and 3 the lowest. This year, France was the best ranking country achieving a score of 1.23, followed by Ireland (1.32) and Belgium (1.33). The study revealed that there are bigger differences between Europe’s most and least favorable tax and legal environments than in previous years. Another key finding was that while most EU member states provide a suitable domestic fund structure for private eqity and venture capital, cross-border fundraising and investment faces more barriers.

Romania took 24th place out of 27 countries surveyed, with a score of 2.27. As Valentin Tic, Tax Partner at KPMG in Romania, points out “the results of this study are interesting because they show that many countries which are traditionally considered to have high taxes provide quite a favorable environment for venture capital and private equity. In contrast some new EU member states like Romania with low headline rates of corporate and personal tax do less well.”

Daniela Nemoianu Istocescu (photo), Partner in KPMG in Romania’s Advisory Department has assisted numerous private equity and venture capital funds with the legal aspects of their investments in Romania.

As she points out, "It is essential for the Romanian authorities to demonstrate that Romania, as part of the emergent CEE market and a relatively new member of the EU, is prepared to face the challenges brought by the financial crisis, as well as to recover some of the transition delays, by promoting clear, coherent and long-term sustainable policies and strategies, by insuring continuity and transparency in their approach to private equity investors and by aligning to the development trends of the European tax and legal environment."

Nevertheless, Nemoianu and her colleague Wilson Balachandra, Partner in KPMG in Romania’s Financial Advisory Services Department, see much potential for private equity investments in Romania. As Balachandra comments, “Infrastructure development projects could be partly financed by private equity funds and venture capital, and indeed there are some large funds out there that specifically focus on this type of investment. So the authorities just need to take a few steps to enhance the legal and fiscal environment so that Romania competes better with its European peers as an investment destination for this type of funds.”

In the present global economic downturn it is more and more important for governments to stimulate investment by creating the right tax structures to encourage private equity and venture capital, as KPMG specialists outline. “ Romania presents many opportunities for these funds, which will help the economy by stimulating growth, particularly if used to support the country’s infrastructure needs. So the Romanian government needs to provide a simple, clear tax framework to encourage these investments,” said Patrick Leonard, coordinator of KPMG in Romania’s Tax Department.