The Employment and Investment Incentive Scheme (EIIS) remains an excellent source of equity funding for qualifying companies.
The Employment and Investment Incentive Scheme (EIIS) has been a critical source of funding for Irish small and medium-sized enterprises (SMEs) over the years. The scheme allows Irish taxpayers to claim up to 40% income tax relief on an investment in a qualifying Irish SME. While the scheme has been on the receiving end of some bad press of late, the legislation governing EIIS was updated as part of Finance Act 2018.
The new legislation has re-written and re-ordered the previous legislation to make it easier to follow. While there has not been much change to the tax relief or the type of companies that can qualify for EIIS funding, there have been significant changes to the administration of the scheme and to the permitted investment structures, which I believe will have a positive impact.
Up to €15 million available for companies
The changes to the Finance Act did not materially alter the type of company that can qualify for the relief. The European Union’s (EU) General Block Exemption Regulations (GBER) continue to govern companies that are eligible for EIIS investment. A company must be carrying on a qualifying trade within the State or through a branch in the State, or it must act as the holding company to a qualifying company. An EIIS investment cannot be made directly into a subsidiary, although a subsidiary can benefit, and its tax affairs must be in order.
The Finance Act introduced a new definition to the legislation called a ‘RICT Group’. A RICT Group can raise up to €5 million EIIS in any 12-month rolling period and up to €15 million in its lifetime. When looking at a qualifying company, one must also consider its RICT Group, the definition of which aims to identify other companies connected to the qualifying company through common control or ownership.
A qualifying company or any company in its RICT Group can raise only one of the following three types of EIIS investment:
- Initial risk finance: any past or present member of the RICT Group cannot be trading for more than seven years;
- Expansion risk finance: for a RICT Group trading for more than seven years, the EIIS investment must exceed 50% of the average turnover for the preceding five years, and the company must be entering a new market or launching a new product or service; or
- Follow-on risk finance: for a second or subsequent EIIS investment, the RICT Group must have foreseen this investment in the original business plan from the time of its initial risk finance.
Any companies raising EIIS investment must consider their original business plan and all future needs for EIIS funding. The legislation continues to contain significant anti-avoidance provisions.
Qualifying investment
A positive change introduced in the Finance Act is the type of shares in which an EIIS investor can invest. Previously, an EIIS investment could only be by way of ordinary shares with no preferential rights. From 1 January 2019, the EIIS investment can be made by way of redeemable preference shares, which is very similar to the investment structure used by Enterprise Ireland. As always, the shares must be newly issued, fully paid up, and the investor’s capital must be at risk (i.e. no guarantees for the four-year minimum holding period).
40% tax relief for investors
An EIIS investor must not be connected to the company in which they invest unless they have been granted EIIS or SURE relief on all previous subscriptions into the company. The SURE and SCI schemes were also re-written in the Finance Act, and are aimed at founders, promoters and other connected parties.
The scheme is open to all Irish taxpayers who can claim income tax relief of up to 40% in the year of investment.
Quicker tax relief claims
The process for claiming tax relief is the most significant change contained in the Finance Act. In the past, a company would typically apply to the Revenue Commissioners for outline approval in advance of raising an EIIS investment. Revenue would indicate whether it believed the company would qualify or not. This opinion was not legally binding.
Once the investment was completed, the company would again apply to Revenue for tax relief certificates. This process caused the majority of delays and generated negative press for EIIS.
Since 1 January 2019, companies can only ask Revenue a limited number of questions before it raises EIIS investment:
- What is included in the RICT Group?
- What type of investment is proposed (i.e. initial, expansion or follow-on)?
- Is the company a firm in difficulty?
Once the company has received the investment, it now self-certifies the tax relief (up to 40%) to the investor by issuing a ‘Statement of Qualification’ or ‘SQ EII 3’. The certificate can only be issued to the investor once at least 30% of the funds invested have been spent. The SQ EII 3 certificate is required by the investor to make their tax relief claim.
The company is also required to file a RICT Form with Revenue to advise that they have issued EIIS tax relief certificates. The company must also include the investment in its corporation tax return for the relevant year of assessment.
Market size
In the years following the recession, EIIS grew annually. However, the implementation of the full GBER regulations in 2017 caused a significant decrease in tax relief approvals due to the increasing complexity of cases. It also caused Revenue processing delays, which have been well publicised.
There is insufficient data available for 2018, but it is likely that tax relief approvals will experience another significant drop. With the improved legislation and self-certification process, EIIS should see resurgence from 2019 onwards and hopefully grow towards the €100 million level again.
Funding options
There are a large number of EIIS providers in the market, from regulated designated investment funds to various investment brokerages that offer access to their private client base. Companies should continue to seek EIIS funding, as the tax break for investors can facilitate access to significant equity funding.
Given the amounts raised in the past, there is plenty of demand from investors at a time when there is a concurrent shortage of growth capital in the Irish market.
Mark Richardson ACA is an investment director with the Goodbody EIIS Funds in association with Baker Tilly.
