Nordics score below par in study on tax and legal environment

Despite the low ranking the Nordic region is an increasingly popular region to invest in. Up until Q3 this year deal activity remained high in the region, and both the buyout and venture segments continue to attract the interest of international investors. According to Knut Traaseth, CEO of the Norwegian Venture Capital Association, the index disfavours the region due to the lack of tax incentives for investments in seed and early ventures. Marie Reinius, CEO of the Swedish Venture Capital Association (SVCA), concurs. "The current tax situation in Sweden probably has the highest impact on venture and early-stage investments, as well as business angels," she explains. There are a number of ongoing governmental investigations regarding changes in the tax system in Sweden, according to Reinius. One of the cases, which the SVCA is involved with, highlights the need for improved tax incentives for investments in unquoted companies. "We continuously work to improve conditions for private equity and venture capital," she adds.

The Norwegian corporate tax environment, on the other hand, is described by Traaseth as "favourable." He believes this, combined with stable framework conditions, is the most important factor for the industry, suggesting that these variables might not have been emphasised sufficiently in the survey. Traaseth explains Norway's low ranking in relation to the comparatively restrictive investment regime for pension funds and insurance companies. "Despite this," he adds, "Norwegian GPs have managed to raise large sums from other LPs, with a 30% increase from year end 2007." One example is Herkules' record-breaking third fund, which closed in November (see page 5).

The survey, which is published by the European Private Equity & Venture Capital Association (EVCA) and carried out in collaboration with KPMG M&A Tax services, analysed the tax and legal conditions for limited partners, fund management companies and investee companies, as well as the environment for retaining talent at investment firms and investee companies. Each country was assigned an overall score between 1.00 and 3.00, with 1.00 being the most favourable result. The total average score was 1.85, just 0.01 less than in the previous study, revealing that there has been little overall improvement in conditions since the previous study in 2006. The UK, the most active market for private equity in Europe, scored 1.45, and came fourth after Belgium, France and Ireland. Denmark, the highest scoring of the Nordic countries, was described as a "progressive follower," while Finland was classified under "fading countries" and was described as, "losing ground compared to their previous position in the European ranking." Sweden and Norway, both at the lower end of the ranking received the label "lagging countries," together with Estonia and Germany.

Nordic unquote" invited private equity legal adviser Are Herrem, partner and attorney-at-law at Norwegian law firm Selmer DA, to comment on Norway's position in EVCA's study on tax and legal environments.

"In general the study shows that the climate for private equity investments in Norway is quite favourable. In the benchmark study, Norway rates low on tax incentives for investors and management incentivisation of investee and fund companies. In our opinion this assessment may be correct criteria by criteria, but it is our experience that given the right structure based on local advice, the effective tax is low and very competitive.

"We believe that the Norwegian tax system deserves a better overall rating. For capital gains in companies, the rate is zero. The government has proposed to change that to 0.84% from next year. It is correct that Norway has no tax incentives for private equity investments, which has resulted in its lowest score, but when the effective tax rate for capital gains is zero, any incentives would be subsidies.

"In regard to the low score on management incentives, options schemes are hit hard by full employee tax at 48% plus a 14% employer's contribution. On the other hand, management equity ratchets such as leveraged management share investment programmes are taxed at 28% or even zero if made by a holding company. In our opinion tax on management investment schemes are quite favourable and justify better rating. The lesson is that to structure tax-efficient private equity investments in Norway, local advice is key."

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• Topics
• Regulation
• Nordics