This is one of the conclusions of the European Private Equity and Venture Capital Association's third Benchmarking study, the results of which were presented in Brussels on Wednesday.

The study examined the tax and legal environments of the 25 EU Member States, and ranked the countries according to how well they support the development of private equity and venture capital.

Ranking countries on a scale of 1 to 3, with the lower score representing the more favourable legal and tax environment, EVCA placed Ireland at the top of the league, with a score of 1.27. France - the most improved country since the last survey in 2004 when it was tenth - was second with a score of 1.36, followed by the UK with a score of 1.46.

Ireland and the UK have been consistently ranked within the top three, while Norway, Sweden and Germany have ranked below average since the first survey in 2003.

The study found that there has been a slight overall improvement in the tax and legal environment for private equity and venture capital across Europe, with a composite average score of 1.84 in 2006 compared to 1.97 in 2004.

The report noted a wide divergence between countries at the top of the ranking and those at the bottom, although this gap has narrowed since the last survey. Romania, included in the survey for the first time, was bottom of the ranking, with a score of 2.35.

Meanwhile, the new entrants to the EU club are also below average, but are said to be making good progress.

While most of the countries studied have adopted appropriate domestic fund structures to attract domestic capital, very few countries provide incentives to invest in private equity and venture capital, scoring only an average 2.04. Tax incentives to retain talent within investee companies and investment funds were also found to be inadequate, as were fiscal R&D incentives.

"It is encouraging that the European tax and legal environment has improved overall, but the differences between the countries at the higher and lower end of the ranking should be noted," observed EVCA Secretary-General, Javier Echarri.

He concluded:

"It is worth highlighting those countries that have clearly focused on improving their competitive positions in this area, namely France, Spain and Belgium, is where the most important progress of the last two years is to be found."

"We would like to see a level playing field for domestic and international investors, but a domestic focus is all too evident across most countries."