How easy is it to be an entrepreneur in Europe? And which country is the best – and worst – for doing business? Jamie Oliver examines the impact of financial, economic, legislative and cultural factors across the EU.

Running a small business is a minefield, wherever you are. But as more niggly laws, rules, directives and other general interferences are introduced at a pan-European level, you would think that, at the very least, we are creating a level playing field of inconvenience.

Far from it. No matter how much the European Union legislates, there are 101 ways in which the success or failure of a start-up business is altered according to the country in which it operates. It’s impossible to ignore the importance of national characteristics, culture and history. And then there’s the national laws on everything from tax to bankruptcy laws, as well as the vagaries of local grants, funds and differing finance. In some countries, these can smooth the way for an entrepreneur. In others, no such luck.

So which is the best country in which to be an entrepreneur? A report by the European Private Venture Capital Association (EVCA) has analysed 31 different factors at the national legislative level, including the entrepreneurial culture, availability of funding and the local tax and legal environments, in an attempt to determine how favourable or otherwise they are to start-ups. It makes for interesting reading. (Click here to see the pdf illustration for this article and also see the end of this article for a full explanation of the analysis. Click here to download Adobe Acrobat)

The UK is the “least difficult” country in which to start up, the report finds, with a “minefield” score of 1.2, while Ireland comes second (1.58). One shudders to imagine what it’s like in last-placed Austria (2.53) or second-worst Denmark (2.48).

In its wisdom, the European Commission hopes to improve this patchy performance. And no wonder. In June 2003, the European Commission produced a Green Paper on Entrepreneurship in Europe, which sets out ideas for an entrepreneurship policy agenda. It states that on the whole, Europeans prefer employment to self-employment. And it reports that Europe’s record for new entrepreneurial activity lags far behind the US: a mere 4.5 per cent of EU citizens (from six per cent in the UK and Ireland to less than two per cent in France) are taking steps to start a business, or have started one in the past three years. In the US, the equivalent figure is 13 per cent.

On the world map of entrepreneurs, Europe performs even worse. The Global Entrepreneurship Monitor (GEM), comprised of universities and research bodies from 37 countries, found that in 2002, as a bloc, the EU comes second to last, ahead of only Central and Eastern Europe. The highest levels of entrepreneurship are in developing Asian countries followed by Latin American countries.

The EC’s Green Paper focuses on how to produce more entrepreneurs, focusing on individuals as prospective entrepreneurs, on firms’ capacities to grow, and on the readiness of society at large to appreciate entrepreneurship. Its recommendations follow a number of EU-wide initiatives. As well as the introduction of the Euro and the creation of a Central European Bank, the EU gives out billions in regional grants. And let’s not forget the European Council’s so-called Lisbon Strategy, a 10-year plan “to bring about economic, social and environmental renewal in the EU... to make the EU the world’s most dynamic and competitive economy.”

So how’s it all going? Three years into the Lisbon Strategy and Europe is in deep recession. The CBI’s European equivalent, called UNICE, has stressed its concerns, commenting that the European economy “is failing to break out of its lethargic state”.

The great irony in all this, of course, is that while the European Union trumpets its Big Plans to promote entrepreneurialism, it is simultaneously hitting businesses with burdensome legislation. It’s not just the lunacy of straight banana directives. With the 48-hour week, flexi-time policy initiatives, health and safety laws, and a whole pile of other social, environmental and other directives, Europe places an increasing burden on the entrepreneur.

UK suckers?
It’s a commonly held view among UK entrepreneurs that while Europe invents the legislation, we’re the only mugs who abide by it. Is it true? Rebecca Harding, an economic advisor to the Treasury who also participated in the Global Entrepreneurship Monitor, believes that UK businesses are spoilt by the UK’s favourable legislative environment at the start-up stage.

“To set up a company in the UK is easy. For the first 24 months there’s little regulation. You only need to do audited accounts. The problems come for many firms after that, or when employing staff. It’s at that point that the costs shoot up. But in continental Europe, they have to deal with rules and regulations from day one. So although it may put off some people from starting firms in Germany or Holland, for example, the ones that do start tend to last.”

In fact, many European business people are every bit as vocal as Brits about the onus of rules and regs, both at national and EU level. “The German government intensifies laws in the process of adopting EU laws to German legislation, particularly in terms of environmental legislation,” claims Frank Baecke-Heger, editor of leading German business magazine Markt und Mittelstand.

“There are rules for the floors of restaurants,” explains Edgar van Bueren of Dutch business magazine publisher Scope. “They say floors must be smooth so it is easy to clean. But ministry of labour rules say a floor must have a rough surface so the waiters can’t slip and fall!”

French coffee shop entrepreneur Philippe Bloch is another with concerns. “For some reason, when a Frenchman goes to McDonald’s in Paris and orders his meal to go, the restaurant must pay 5.5 per cent VAT to the government. If the same customer eats the same meal in the restaurant (to stay), the restaurant must pay 19.6 per cent in taxes to the government. Everyone agrees that having a flat rate of 5.5 per cent would make sense, increase revenues and profitability and create jobs, but this decision will have to be approved by all EU members. If one says no, then the whole project will be cancelled. The negotiations have been going for years already.”

Nevertheless, UK businesses still come out worse, claims Dr Marion Carter, who runs an environmental consultancy in Warwickshire as well as being a moderator in the Environment, Rural and Tourism Group for the Small Business Council (SBC).

Carter says the extra burden is due to the UK’s legal framework. Whereas the Germans and French run a Napoleonic, or inquisitorial, system of laws, the UK retains a Roman-based or adverserial system. In the UK, compliance with rules or regulations is seen as obligatory, the penalty being prosecution. On much of the continent, she claims, the attitude is simply “this is what we want to do”.

Carter has witnessed the difference in interpretation first hand. On one occasion, Carter and her associates were debating new EU rules on an environmental waste issue with German counterparts. The Germans went out of their way to stress how they had strictly applied the rule at a national level. “But how can you comply with the rules?” she asked, “when the technology is not even available.” The German delegation eventually conceded that it could not. For Germany, it is enough simply to aim to comply.

But there is work to do. As a moderator at the SBC, Carter is about to start research into how regulations are implemented – or not – across Europe. It will surely be an important document.

National factors
While the EU debate rages, however, the most important factors influencing growing businesses are at national level. Despite common interest rates and a single European currency in many EU countries, Europe’s business landscape is altered by a hotch-potch of separate tax regimes which remain the responsibility of national governments. They reflect domestic priorities, traditions and attitudes.

A European Commission report shows how member states adopt different approaches towards encouraging research and technological development. In Finland, Sweden and Germany, it finds that financial incentives are used in the form of grants, subsidies or low interest loans, since these can be focused on key technological sectors and activities that the governments consider to be a priority.

Portugal, Spain and Italy, however, with a weaker innovative performance, have adopted general fiscal incentive prog-rammes, i.e. tax credits and bonus schemes. These enable governments to try to stimulate expenditure across a range of innovation activities, as opposed to within specific sectors.

Spain offers an interesting example of how incentives support growing businesses. It has redesigned its incentive regime and is the first EU country to provide an all-encompassing definition of innovation within its fiscal legislation. This, the report adds: “enables the government to provide incentives for several activities, such as industrial design and technology acquisition, which other countries have chosen not to assist.”

Also praised in the report is the UK, whose current R&D tax credit is specifically designed for small businesses. The UK is also one of the EU leaders with regard to tax incentives for individual investors. The Enterprise Investment Scheme (EIS) was introduced in 1994 to encourage individuals to invest in small higher-risk trading companies to help alleviate the problems faced by such companies in raising equity finance. Holland, France and Ireland also offer tax credits or tax relief.

High taxes
High company taxes clearly have a very negative impact. The highest tax rates in Europe are in Italy (40.3 per cent), followed by Belgium (40.2 per cent) – way above the EU average of 32.6 per cent.

In Germany, where the current rate is between 38-40 per cent, taxes are “paralysing” entrepreneurial activity according to Markt und Mittelstand editor Baecke-Heger. “Entrepreneurship is paralysed by too many laws and rules and regulations, by wage agreements with the unions and high taxes and tributes.” Most university graduates, he says, “would rather be employed with a big corporate group than establish a company of their own,” he says.

“Entrepreneurs don’t invest anymore,” adds Baecke-Heger, “and no-one wants to employ anybody because of the bureaucracy involved. In 2002, Germany had almost 40,000 insolvencies. We have a lack of workstations and apprenticeship places everywhere.”

Some believe that offering special rates for small businesses is a worthwhile incentive. Belgium is one of many countries which have introduced lower tax rates for small firms. The lowest rates are to be found in Ireland (12.5 per cent), with France (15.45 per cent on income up to 38,120 per annum) and the UK (19 per cent) following. Neither Germany nor Italy has special rates.

But Patricia Callan, assistant director at the Irish Small Firms Association, believes it’s the low company tax rates in Ireland as a whole that have had a positive effect. “Attracting big global corporations to Ireland has encouraged many Irish people to start spin-offs,” she says. This is true particularly with software firms. IDA Ireland, a government body set up to attract foreign investment to Ireland, estimates there are up to 600 software firms in the country, many of which are spin-offs from the likes of Microsoft, SAP and Oracle, which have established European bases in Ireland. Interestingly, Ireland has also legislated to introduce an additional school year over the past ten years, giving students a year of business and civic studies to help them be better prepared for working.

Set-up costs
Another aspect of Ireland’s favourable entrepreneurial environment is the time and costs involved in setting up a business. Across Europe, these costs can be critical in encouraging – or preventing – start-up ventures from flourishing. Ireland again leads the way here, while Belgium and Greece saddle their citizens with the costliest and most lengthy set-up costs. Rebecca Harding, an economic adviser to the Treasury Select Committee, says that in Germany, solicitors will have registered companies in their drawers so when someone goes to them to set up a company they have the documents all ready. “All they have to do is change the name. Otherwise it takes nine months.”

One country which is seeking to address this issue is France. It used to cost 7,500 (roughly £5,250) simply to set up a company in France. Now it costs just one euro. It’s a symbolic change, but an important one, says French entrepreneur Philippe Bloch. Founder of Columbus Café (billed, by him, as the French answer to Starbucks), Bloch says: “You can start a company more easily than used to be the case. But it’s still a nightmare actually running one.”

The rules have also been changed to help entrepreneurs when things go bad. “If a business went down before,” Bloch explains, “the staff would be entitled to social security payments straight away, but the risk taker would not. That has now changed.”

Another change in France is the requirement from bankers that entrepreneurs must put up any property as a guarantee. This has been dropped. “In France, entrepreneurs are always the ‘bad guys’,” says Bloch. “Institutions are always on your back, especially banks. I know the banks are horrible everywhere, but they are very horrible here.”

These new rules have been driven in large part by Renaud Dutreil, the minister of state for Small and Medium-sized Enterprises. His efforts are part of France’s realisation that its competitiveness has fallen behind other parts of Europe. During the last electoral campaign French President Chirac promised to “promote the creation of a million new businesses over five years.” The current figure is 175,000 a year, so putting that in perspective, Chirac has only promised an additional 25,000 new firms a year. It’s hardly ambitious. The French government also aims to expand research and development investment to three per cent of GDP and to “make France the European country with the highest level of inward direct investment by 2012”.

But, worthy as this is, it will take a massive sea-change in its “exasperating” labour laws to kick-start French youth to start up their own businesses, says Bloch. “Every time you employ a person in France you have to call in an HR specialist to ensure you do everything correctly,” he moans.

And then, there’s the much-derided 35-hour week in France. Again, it’s had a dramatic impact in France, but you can hardly blame Europe for that. It’s perhaps the ultimate proof that while pan-European legislation creates lots of problems, it’s the minefields that are laid at a national level which can cause the most damage.

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AUSTRIA
Population: 8.1 million
Start-ups: 22,500 (1999)
Company tax rate: 34 per cent
Insolvencies: 9,023 (2002)
Economic growth: 0.6 per cent (GDP real growth, 2002)

It’s official. The worst country in Europe to be an entrepreneur is Austria. Taxes are above average (34 per cent), there’s no special rates for SMEs, capital gains tax is high (25 per cent), set-up and administrative costs are high, and a host of other unfavourable rules relating to fund structures, merger regulations, pension funds, stock options and fiscal R&D incentives make Austria a very unfriendly place to do business. Combined with the value of the euro, the Austrian economy was dangerously close to recession last year.
Overall rating: 2.5

FRANCE
Population: 59.2 million
Start-ups: 170,000 (2002)
Company tax rate: 34.33 per cent
Insolvencies: 39,000 (2002)
Economic growth: 1 per cent
(GDP real growth, 2002)

Despite its notorious employment laws and Napoleonic bureaucracy, it’s actually not that bad in France, especially with recent changes initiated by Renaud Dutreil, the minister of State for Small and Medium-Sized Enterprises. Fund structures, special tax rates for SMEs, tax incentives for investors, and newly low set-up costs, together with a number of fiscal R&D incentives all help, while high CGT and high company tax are among the other downers.
Overall rating: 2

GERMANY
Population: 82 million
No. of companies: 3.4 million
Company tax rate: 38-40 per cent
Insolvencies: 38,000 (in 2002)
Economic growth: 0.4 per cent (GDP real growth, 2002)

It’s not just high unemployment which is crippling business right now in Germany. “Entrepreneurship is paralysed by too many laws, rules and regulations,” says Frank Baecke-Heger, editor of Markt und Mittelstand, “by wage agreements with the unions and high taxes and tributes.” In almost every area, from merger regulation, through company tax rates, CGT, tax incentives, VAT charges, stock options taxation and most especially in terms of its fiscal R&D incentives, Germany’s business environment is hostile to the entrepreneur.
Overall rating: 2.5

IRELAND
Population: 3.7 million
Company tax rate: 16 per cent
Insolvencies: 379 (2002)
Economic growth: 5.2 per cent (GDP real growth, 2002)

Second only to the UK as a nice place to do business, Ireland has a very progressive and enlightened attitude. The lowest company tax rate (16 per cent) and SME tax rate (12.5 per cent) in Europe, the cheapest set-up costs and “optimal” fund structures have seen the Irish economy steaming ahead. According to IDA Ireland’s Brendan Halpin, the Emerald Isle “skipped the industrial revolution, and unsaddled by the remnants of a steel or coal industry, has become the place to be for high-tech, pharmaceutical and finance.
Overall rating: 1.5

HOW THE SCORES WERE CALCULATED
The total scores shown in the illustration on page 51 are based on a report by the European Private Equity and Venture Capital Association (EVCA) in its research paper Benchmarking European Tax & Legal Environment. The scores range from one, for the least difficult conditions, to three for the most difficult conditions. We have applied a “minefield bomb” rating to make this simpler.

For illustrative purposes, we extracted some of the key factors. These were: the typical number of days it takes to set up a company, the cost to set up a company, company tax rate for SMEs, tax incentives for individual investors, tax incentives for business R&D expenditure and the entrepreneurial environment. The full list is based on 31 factors, also includes 1. fund structures (tax transparency for domestic investors; the ability to: avoid permanent establishment for international investors from treaty or non-treaty countries; to incorporate a tax efficient capital investment/ incentive for fund managers; to avoid paying VAT on management charges; to avoid paying VAT on carried interest; freedom from undue restrictions on investments); 2. merger regulation (is notification mandatory?; is there an obligation to suspend?); 3. regulation on pension funds and company tax rate (profits and dividends); 4. Company tax rate for SMEs; capital gains tax rate for individuals; tax incentives for individual investors; stock options taxation. 5. Fiscal R&D incentives (tax incentives for business R&D expenditures (e.g tax credits); tax incentives for R&D capital expenditures (e.g. special depreciation rates or write-off possibilities); tax incentives to enhance technology transfer; tax incentives to enhance the contracting of researchers; tax incentives to enhance co-operation between firms and research institutes/ universities; tax incentives to promote the creation of innovative firms.

For a full copy of the research, contact the EVCA at www.evca.com, e-mail evca@evca.com or call 00 32 2 715 00 20.

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