The tax incentives for investment in new business ventures was amended substantially in 2018. The new scheme was to apply until 31 December 2021.
The employment and investment incentives scheme and start-up relief for entrepreneurs (SURE) have some common features although they are aimed at different investors. EIIS allows relief for third-party investors. Sure allows relief for investors who are the principal or main person in the investee company.
A new start-up capital incentive relief was also introduced for early-stage investors. This has less onerous rules in relation to the terms of relief. The relief is subject to the European Union state aid rules on business support. Certain types of aid are permitted under a general block exemption (GPE or) and the relief in common is for the tax reliefs is designed to fit within the parameters of GPE or.
Mode of Investment
Investment in EIIS companies can be direct or through a fund established for that purpose.The relief operates as a deduction from the total income of the investor in the year of investment.
Investment Funds other than Designated Investment Funds may raise investments that qualify for relief under this Part, specifically Investment Limited Partnerships and Limited Partnerships, which for the purposes of this Part are referred to as qualifying investment funds.
Generally the holding period for the investment is four years. Relevant trading activities which qualify for the reliefs are similar to those previously applicable stop professional services as defined are excluded.
There are extensive rules prohibiting any receipt of value from the company during the investment period. This applies to the investee company and related and group companies.
The company must be an SME company as defined. It is based on its meeting tests in respect of turnover assets and number of employees. The test is considered in relation to the company and its linked or group businesses as defined.
The companies must be unlisted (not quoted on the stock exchange and there must be no arrangements or intention in relation to such listing at the time of the share issue.The share capital of the investee company (and its group companies) must be fully paid up.
There must be a business plan which is a written plan with details of product sales profitability development establishing financial viability with both quantitative and qualitative details of the activities which the investment supports. The investment must be based on the business plan.
The qualifying company and its group must have made its first commercial sale less than seven years before the initial risk finance investment. There is an exception for an expansion risk finance investment which is an issue of shares to fund entering a new product in the market for a new geographic market.
An expansion risk finance investment may be qualifying but only where it is based on a business plan prepared with a view to entering a new product or geographical market and the amount to be raised by the issuance of eligible service is no more than 50% of the group’s annual turnover in the previous five years. In this instance the shares may be eligible even though the company has been operating for more than seven years.
Expansion risk finance investment can be undertaken even if an initial risk finance investment was undertaken in the previous seven years. It can also be issued even if the investee company and its group has been operating for more than seven years.
Eligible shares in the company must be issued. Preference shares may be issued in respect of an EIIS investment. They may carry a preferential right to return on capital or dividend. They may be redeemable. Ordinary shares only may issue in respect of each sure investment.
Follow-on risk finance investment is the issue of shares subsequent to the initial investment or an expansion risk finance investment. It is qualifying only if the initial or expansion risk finance involve the issue of shares foresaw the possibility of follow-on risk finance in the business plan upon which such initial or expansion risk finance based.
Nominees who deal in shares the subjects of the investment are deemed to represent the owners and are obliged to make returns to revenue.
The maximum that the company (and its group companies can raise is €5 million in an annual period and €15 million maximum in total. This includes previous PES relief as well as the EIIS relief.
Investments over this amount do not qualify for tax relief. The minimum investment that may be made is €250 per tax year. The maximum investment which person may make in a tax year is €150,000.
Finance Act 2019 made a number of amendments to the Employment Investment Incentive (“EII”). From 8 October 2019, full tax relief is available in the year in respect of which the investment is made.
In addition, from 1 January 2020, the overall maximum investment relief amount allowed is increased from the current maximum of €150,000 to €250,000 and €500,000 depending on the length of the investment (4 years and 10 years respectively).
With effect from 1 January 2020, the choice as to the year of assessment that the deduction can be claimed, that has been available to designated funds, is removed by limiting the availability of the deduction to the year the amount was subscribed to the designated fund.
In the case of EIIS relief an individual is not qualifying if they are connected with the company at any time two years before shares were issued and the relevant period of four years investment. Connection is broadly defined to include relationships to the relationship of individuals business relationships such as partners and relationships via companies.
A person is interested if they have directly or they and their connected parties have any interest in the capital of the company (qualifying company (including group companies). This includes shares loan capital and equivalent rights.
It covers rights to acquire such rights by way of contract or option. It includes having such rights at the relevant date or at future date. If the subscription for shares is by way of an arrangement by which another person is to subscribe for shares in another company they are deemed connected to the other company.
From 9 October 2019 relief is given at the marginal rate. Prior to that date the below arrangements by which 30% relief is given followed by 10% after the relevant period if certain conditions were made, applied.
Again for investments from 1 January 2022, if the same conditions are not met, a portion of the relief will be withdrawn. It is specifed how this relief will be withdrawn and the date from which interest will apply to its withdrawal.
Provided that a qualifying investor makes qualifying investment in a qualifying company it is entitled to relief for 30/40 of the amount subscribed. This 75% deduction is allowed against total income of the person concerned in the year in which the investment is made.
Investments are made to a designated investment fund, the investor can opt to claim the relief in the year in which they subscribe to the fund rather than the year in which the shares are issued to the fund provided the shares are issued in the following year, the fund is a closed fund and the closing date for participation is before the first investment.
If conditions are satisfied the investor is entitled to a further 10/40 (25%) relief by way of deduction for the tax year after the subsequent period ends. This is the period of three years from the date of the investment.
The conditions for attaining this further relief is that the total number of qualifying employees in receipt of income from the company or subsidiary at the end of the period must increase by at least one additional qualifying employee relative to the position at the outset and the investment was made.
This is the employment threshold n the qualifying employee must not be a director and must work at least 30 hours per week in employment capable of lasting at least a year.
The total employment income (including non-pecuniary income) paid by the qualifying company in the third year must exceed the total of such income in the year before the subscription was made by at least the employment income of one employee. If there is a general reduction in the pay rate the qualifying amount is reduced accordingly.
Alternative R&D Expenditure
Alternatively there are conditions relating to the research and development and innovation expenditure. If the amount of research development and innovation expenditure in the third year exceeds that in the year before the investment the second 25% relief will be given in the fourth year.
This refers to research and development activities as defined under the taxes act or innovation defined as a process innovation or organisational innovation which are also described under the taxes legislation.
Qualifying Company Conditions
The investment must be made in a qualifying company. The conditions apply to the group and associated companies. See above. It must be
- incorporated in the state or in another EEA state
- comply with section 490 and 491 TCA
- comply with the GBE or not be a business in difficulty and there must be no arrangement for a listing
- must hold a tax clearance certificate
- must be and remain resident in the in Ireland or the EEA carrying on relevant training activities from a fixed place of business to the whole of the relevant period
- not control be controlled by another company; other than a qualifying subsidiary
- all capital must be fully paid up
- company must exist only for the purposes of carrying out qualifying activities will be a holding company or making loans to one-off or more such qualifying subsidiaries
- investment funds must be used for the purpose of relevant trading activities or acquiring shares in a notable subsidiary which carries on such activities
Companies involved in international trade financial services and tourist traffic undertakings must be certified in order to qualify. Internationally traded financial services may qualify provided that are certified by Enterprise Ireland.
Provisions relating to green energy companies that formally applied continue to apply.
The following activities do not qualify
- adventures or concerns in the nature of trade (singular activity)
- dealing in commodities futures in shares security or financial assets
- financing activities
- professional service companies
- dealing in or developing land
- operating hotels guest has self catering unless certified as a tourist traffic undertaking by the National Tourism Development Authority
- coal and steel sectors
- film production
An investment is a qualifying investment if the money subscribe for eligible shares in the qualifying company used wholly or mainly for a qualifying purpose within the relevant period. A qualifying purpose is use by the company or a qualifying subsidiary for the purpose of carrying out relevant trading activities or for research development and innovation connected with such trading activities.
Use of the money must contribute directly to the creation and maintenance of employment. It must not comprise include the director indirect acquisition of an interest in a company which becomes a subsidiary or the acquisition of a further interest in a subsidiary or a trade
other than a qualifying subsidiary.
If a part of the funds raised are used wholly or mainly for a qualifying purpose, then only that portion is allowed tax relief.
Ceasing to Qualify
The company ceases to be a qualifying company if it is wound up or dissolved before the relevant period expires unless this is done from bone fide commercial reasons are not part of a tax avoidance scheme or arrangements and the company’s net assets are distributed to its members before the end of the period or thereafter
There are provisions which seek to prevent relief been granted for the arrangements are in substance risk free including where there are agreements or arrangements which substantially reduce the risk to the investor.
Such arrangements may include rights attaching to shares, terms the shareholder agreement or other arrangements with the company bits group for connected persons by way of guarantee et cetera
Start-up Capital Initiative
This is available to investors who would otherwise be deemed to be connected with the company to associates. The connected person rules by which somebody has an interest in the shares of the company does not apply to associates of the investors of the company and the investment company comply with certain conditions.
The shares loan capital voting powers and rights to assets and winding up held by the associate are not taken into account if the investor subscribe to shares in a company complying with the following conditions
The qualifying company
- must be a micro-enterprise or must exist only for the purpose of carrying on a qualifying new venture
- must not have commenced preparations for that trade or business more than seven years before the shares were issued
- must not have any partner or linked businesses.
If the above conditions are complied with the company may raise up to €500,000 in its lifetime by way of the issue of eligible shares.