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EIIS continues to grow apace with Irish SMEs

The Employment and Investment Incentive Scheme continues to be an attractive method of investment, but with changes coming down the line regarding tax relief, businesses and investors need to look before they leap

For individual investors, EIIS is a way to invest in qualifying SMEs and start-ups and claim tax relief on their investments under certain conditions

Since 2011, the Employment and Investment Incentive Scheme (EIIS) has helped SMEs nationwide receive essential early-stage funding, helping them establish their business, create and retain employment, and expand into other markets.

For individual investors, it’s a way to invest in qualifying SMEs and start-ups and claim tax relief on their investments under certain conditions. It’s an incentive from which SMEs and start-ups have greatly benefited and are set to continue to do so in the future.

What makes it most attractive to investors is that it’s one of the few sources of total income tax relief available to Irish taxpayers.

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The importance of EIIS has seen Revenue make further moves to ensure it’s more accessible for both businesses and investors. In 2021, for example, it removed the requirement for companies to spend at least 30 per cent of investment received before investors could obtain tax relief.

To qualify for EIIS, the main criteria SMEs must fulfil is that the company is under seven years of age. If not, they must intend to use the investment raised to develop a new product offering or to expand into one or more new markets.

While the EIIS offers tax-friendly investments and many benefits, both SMEs and investors need to make sure they read the fine print before making any decisions.

While it is an attractive proposition for all parties, it’s advised for investors to carefully review the upcoming changes first before making any decisions. The tax changes are brought about based on applying for the EU’s General Block Exemption Regulation (GBER) from an EU state aid perspective.

GBER seeks to enable EU governments to give higher amounts of public money to a broader range of companies without having to request prior permission from the European Commission.

All of this is intended to reduce administrative burdens on local and national authorities and encourage EU governments to channel aid towards economic growth without giving recipients an unfair competitive advantage.

Irish investors should find out what tax returns they’re entitled to first before jumping in. Speaking about the breakdown on tax relief for the EIIS, the percentage you receive will depend on factors like an investor’s income level, said Tom Maguire, partner of tax at Deloitte Ireland.

“Right now, tax relief at a 40 per cent rate would be available for investors depending on their income levels. From January 1, 2024, the level of investor tax relief will depend on various criteria. There will be a new 50 per cent rate of tax relief, but it’s restricted to where the company has not been operating in any market.

“Then there are other rates, which vary from 20 per cent to 35 per cent depending on whether the investment is through various financing levels or certain funds. These will be significant changes, and the investor must review such matters carefully.”

Some other changes to EIIS include the maximum investment eligible for relief. Investors can claim relief of up to €500,000 per annum, with relief now requiring a minimum holding period of four years for all investments.

For companies, the maximum investment limits has been raised to €16.5 million for its whole lifetime, compared to €15 million before, and to €5.5 million per annum.

“Any reduction in a tax relief should always be looked at. The point of EIIS is to get cash into entrepreneurial companies to ensure they can live, survive and thrive,” he said

“If they become the next [big thing], then great, but cash is the lifeblood of business and anything that decreases the attractiveness of making such investments to a company must be carefully considered.”

Maguire notes what the Minister for Finance, Michael McGrath, said as part of the committee stage debates: “In light of the introduction of the new relief for investment in innovative enterprises or angel investor relief, which also comes within the terms of GBER, I will be bringing forward technical amendments to Part 16 [which deals with EIIS] on Report Stage to ensure that these reliefs are fully aligned. These amendments will not impact the level of relief the investor can claim.”

Minister McGrath did note that the further review would focus on simplifying the scheme for all to understand. In some cases, companies have been looking for clarity on specific changes and are concerned that it would narrow the potential benefits of EIIS.

Yet EIIS is a detailed scheme and one that takes time to understand first. While these changes are in draft form, they could still change in early 2024.

“By its nature, EIIS is complex, and any conversation about it generally ends up with a mention of the 108-page manual that comes with it,” explained Maguire. “No doubt this will have to be updated when the changes brought about by Finance (No2) Bill 2023 are brought into law; whether that brings a net increase or decrease in pages will have to be seen.”

With that, Maguire does mention that when it comes to investment, simplicity will always triumph over complexity and that Minister McGrath’s comments on further reviewing the scheme were to be welcomed.

A further review of EIIS will happen in early 2024. It will focus on the potential for further simplification of the scheme while also taking into account the conditions imposed by the EU General Block Exemption Regulation.

“In addition on tax generally, the minister commented on Budget Day that ‘in the coming weeks, Revenue will establish a dedicated Tax Administration Liaison Committee (TALC) subgroup focused on identifying any opportunities to simplify and modernise the administration of business supports’,” he added.

“The terms of reference of this subgroup will be agreed at TALC and a report on the recommendations of the subgroup will be delivered during the course of 2024.”