By Mary Lisbeth D'Amico

Ireland, France, and the United Kingdom have the best tax and legal environments for supporting venture capital in Europe, while Germany, Norway, Sweden, and the European Union accession countries still lag behind their peers, according to a study released Wednesday.

These are among the conclusions of a European Venture Capital Association study that looks at the tax and legal environments in 25 European countries and ranks them based on how they stack up in supporting the development of private equity and venture capital. The study calculated a composite score for each country based on seven criteria.

Europe has made improvements over the past two years, with an overall core of 1.84, up from 1.97 in 2004 (with 1 being the best score, three the worst), according to the EVCA.

In particular, most countries have now put in place legal structures that encourage VC investing by pension funds and insurance companies. But governments still need to focus more on encouraging innovation, according to EVCASecretary-General Javier Echarri.

“My frustrations are that progress is too weak on incentives for young companies to invest in research and development, in retaining talent, and for technology transfer,” he said Wednesday in a telephone interview from Brussels.

In particular, France has made significant improvements since the last such study was conducted in 2004, moving up to the second-ranked country after Ireland, up from tenth place. Mr. Echarri pointed to measures such as tax incentives for small and midsized enterprises, the government’s encouragement of performance-related incentives, and the lowering of taxes on stock options.

“The French government has made a conscious choice to encourage innovation,” he said. He also pointed to significant improvements in Spain and Belgium.

Germany Slips

But Germany has slipped even further behind its peers, falling from fourteenth to twentieth in the rankings since the last study. Although the country measures high on the regulatory side, it still has no policies in place to specifically encourage R&D investing or to facilitate tech transfer, Mr. Echarri said. Germany also still taxes VCs on their management fees.

“If we want to achieve strong impulses for economic growth, such as those countries in the top of the EVCA rankings, we need to do something about it now,” Thomas Pütter, chairman of the German Venture Capital Association, said in a statement Wednesday.

The tax treatment of private equity funds in Germany is expected to be clarified in a private equity law to be passed in 2008, the association said.

Norway, Sweden, and new EU accession countries also were among the lower-ranked countries, with Romania coming in last. Mr. Echarri said that many late EU entrants were suffering from inherited regulatory structures that were still in need of change.