If you’ve heard of the Employment & Investment Incentive Scheme (EIIS) but assumed it was too complicated to benefit from, the good news is that it is now much more accessible. The principle of the scheme is that someone investing in your company can get a massive 40% tax benefit on the investment. If you’re thinking of raising funds for your business, Q4 is a great time to bring investors in, as they will be able to claim their tax back when they file in the new year.
Take a fresh look at the EIIS in this blog.
What are the biggest changes in the EIIS scheme?
There are four key changes which make this scheme really interesting now.
- Previously, the company being invested in needed to be approved. This is not now the case, as long as your company meets the criteria.
- The claim is done on a self-assessment basis and the whole process is pretty simple.
- There is no longer a requirement to wait until 30% of the amount invested has been
expended on a qualifying purpose prior to investors availing of the relief. - The investor can claim the full 40% tax benefit in the first year (previously the benefit was split across the first and fourth years).
What kind of companies can benefit from EIIS investment?
Companies must be SMEs and registered in Ireland or another European Economic Area (EEA) State. They should be unlisted (not publicly traded); however, the one exception is that companies may be quoted on the Euronext Growth of the Irish Stock Exchange, or on the equivalent markets of other EU or EEA Member States.
SMEs fall into the following three categories, all of which qualify:
- medium-sized enterprise: fewer than 250 employees and an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million
- small enterprise: fewer than 50 employees and an annual turnover and/or annual balance sheet total not exceeding €10 million
- micro enterprise: fewer than 10 employees and an annual turnover and/or annual balance sheet total not exceeding €2 million.
Qualifying companies must have a tax clearance certificate and not be the subject of an outstanding recovery order or considered an “undertaking in difficulty” – i.e., not have a significant risk of going out of business in the short or medium term.
In addition, the company must remain a tax resident in Ireland, or an EU or EEA Member State, throughout the relevant period (four or seven years from the share issue).
How much can a company raise under EIIS?
Companies can raise a maximum of €5 million in any rolling 12-month period. If there are separate EII, SCI, and SURE scheme investments in a 12-month period, the total investment cannot exceed €5 million.
There is also a lifetime limit of €15 million for relief granted for shares issued since 6 April 1984. This applies to the total amounts raised under EII, SCI, and SURE schemes.
How can EIIS investment be used (qualifying purpose)?
The company must use the amounts raised for a ‘qualifying purpose’ within the relevant period of four (or seven) years. Some examples of how money raised under EIIS can be used by the company are:
- Purchasing stock
- Paying for light and heat
- Purchasing fixtures and fittings or plant and machinery
- Purchasing premises from which the trade will be carried on
- Extending the company’s premises
- Creating employment
To come within the meaning of a ‘qualifying purpose’ the amounts must be for the purposes of carrying out relevant trading activities or, where it has not commenced trading, to carry out research, development, and innovation (R&D+I). This clause means that companies such as professional services companies, financing companies, futures trading, land development, shipbuilding, coal or steel industries, hospitality establishments, and film production companies would not qualify for EIIS.
Amounts raised under EIIS cannot be spent on buying a trade or shares in a company (other than subscribing for shares in a qualifying subsidiary). A qualifying purpose does not include using the funds for the purchase – directly or indirectly – of an interest in another company, so that the company then becomes a qualifying subsidiary. It cannot be used to purchase a further interest in a qualifying subsidiary. It also cannot be used to purchase either directly or indirectly a trade.
How does an individual invest in a company under EIIS?
The tax benefit is available to anyone with a source of income who files in Ireland, i.e. PAYE, Capital Gains Tax exposures, dividend income, or rental income. But you cannot try to benefit from the scheme through some kind of reciprocal agreement (so, for instance, I can’t invest in my friend’s company and they in return invest in mine as a way for us to both get the 40% tax benefit).
Generally, the investor cannot be “connected with” the company or its subsidiaries (for a period of two years prior to the investment to four years after it). This would mean, for example, that the investor (or someone closely related to or in a relationship with the investor) cannot be/have been employed by the company, in a partnership with the company, or holding interest in the capital of the company. But it is possible for a director or employee to invest in their own company subject to certain conditions, such as not receiving payments from the company other than reasonable pay and expenses. In addition, the investor can have previously invested in the same company under the EIIS.
The company issues shares to investors for the amount invested. Eligible shares must be new shares issued by the company for a cash investment. They may be redeemable shares, which carry preferential rights to a dividend and preferential rights on a winding up. However, there can be no other terms or agreements made with the investor which would substantially reduce the risk that the investor will get their capital back or any expected dividend.
The shares can be converted into ordinary shares in the event that they are not redeemed, provided that the terms of the conversion are reasonable.
The maximum investment thresholds have also changed. Since 1st January 2020 there are two upper limits for individuals:
- €250,000 per year where shares are held for a minimum period of four years,
OR - €500,000 per year where shares are held for a minimum period of seven years.
How do investors claim the EIIS tax benefit?
The company, after issuing the shares for the investment received, initiates a Statement of Qualification (SOQ). The company has from the date of the share issue to four months after the end of the year of assessment in which the shares are issued to issue the SOQ to an investor. On receipt of the SOQ, the investor may claim the relief against their income tax liability.
The relief is given as a deduction from the total income of an investor. It will reduce the individual’s income tax liability, but not their PRSI or USC contributions. On receipt of a valid SOQ, the investor claims the relief by entering the amount in the relevant box on the Form 11 or Form 12 as appropriate. For investments made directly by an individual investor in a company, relief should be claimed in the year in which the investment is made.
This is an illustration of the process as published by Revenue:
What are the company’s other obligations under EIIS?
Qualifying companies that issue eligible shares as part of a qualifying investment must provide Revenue with certain information (the investments made, and qualifying shares issued) within the year that these investments occurred. The information required is set out in a Return of Qualifying Investments in a Qualifying Company (known as a RICT Return) which the company uploads via ROS.
Once the RICT Return is submitted, ROS will automatically generate the SOQ that a company can then give to its investors.
How to get started with this scheme
The difficulty getting bank loans is something we’ve discussed more than once on this blog, so the EIIS is definitely an option to explore if you are looking to bring cash into the business. Instead of jumping through hoops for a bank only to be turned down six months later, you can put your energies into raising interest within your professional network, with an investor group, or perhaps on a P2P platform like Spark Crowdfunding. You will have to give away equity, so this avenue isn’t for everyone.
One of the requirements under the scheme is a business plan that details the fundraising need and explains how the capital raised will be used. Revenue expects the business plan to include “both quantitative and qualitative details of the activities the investment is sought to support”, so you can’t just include a sentence saying you intend to fundraise but must support both the requirement you have as well as how the cash will be used to meet the need. This is probably where I would advise you to start, as a good business plan will help you to clarify your thinking and understand what the right level of investment will be. If you would like support with this, ask us about our business plan service.
There is an extensive document from Revenue (PDF) that details all the ins and outs of the scheme, including what happens when a company is a subsidiary, has purposes that are not trading or R&D+I, and what the obligations of different types of investment groups are. It’s worth taking a look through to ensure there aren’t disqualifying factors in your case, or you can ask us to assess your eligibility.
