Employment & Investment Incentive Scheme
test test | May 04, 2012
The Employment & Investment Incentive Scheme (EIIS) was introduced in the Finance Act and replaced what was commonly known as the Business Expansion Scheme (BES).
The Employment & Investment Incentive Scheme (EIIS) was introduced in the Finance Act and replaced what was commonly known as the Business Expansion Scheme (BES). The introduction of funds to a company may be facilitated for example way of a director’s loan, third party finance or share capital. If funds are introduced by way of share capital the subscribers should consider the EIIS. The provision of a director’s loan is favourable as it affords flexibility for the repayment of the director’s loan. However under the EIIS, a qualifying individual will receive an income tax deduction of 30% – 41% on the amount invested in certain qualifying companies. The EIIS relief is granted to:
• To qualifying individuals
• For amount subscribed for eligible shares
• In a qualifying company.
There are numerous conditions to the availability of this relief and we will set out hereunder a brief outline of the conditions in order to avail of the relief. However, one of the conditions are that the shares must not be sold for a minimum period of 3 years in order to retain the tax benefits. A detailed review of the company, shareholders and trading activities would need to be undertaken in order to ascertain whether the EIIS relief would be available.
a) Under the EIIS provisions, qualifying investors can avail of a tax deduction for the cost of investing in certain companies.
b) Tax relief is available in two stages:
• 30% will be given as a deduction from the individual’s total income in the year in which the shares are issued (see exception below)
• A further 11% deduction may be available as a deduction at the end of the holding period (3 years), provided the company concerned has increased its number of employees and related payroll expense since the investment or the company used the capital raised for expenditure on R&D
c) If the company is not trading at the time the shares are issued, relief cannot be claimed until the company:
• Has been trading for four months. It must commence trading within 2 years of the share issue, or
• Expends at least 30% of the funds raised under the scheme on R & D which are connected with an undertaken and with a view to carrying on relevant trading activities.
d) The lifetime company investment limit is €10m and the cap on the amount that can be raised in any 12 month period is €2.5m
e) The funds invested must be used to by the company to achieve the following:
• Increase the number of employees and the average emoluments paid by the company during the relevant period, or
• Increase the amount of expenditure by the company on R&D activities during the relevant period.
f) The maximum amount qualifying for relief is €150,000 per qualifying individual per year. The shares must be new ordinary share capital and carry no preferential rights.
g) An individual cannot avail of the relief if he or she is connected with the qualifying company (however see exception below).
Generally an individual is considered to be connected with a company if he or she owns more than 30% of:
• The issued share capital of the company,
• The loan capital and issued share capital of the company,
• The voting power of the company
• Or would be entitled to 30% or more of the company’s assets in the event of a winding up
However, the connected party rules do not apply were the issued share capital and loan capital of the company does not exceed €500,000. Therefore, in an owner managed company situation EIIS relief can generally be claimed up to €500,000 provided all other conditions are satisfied.
h) In order to qualify for the investment to qualify for EIIS relief the company must be a small or medium sized company and must carry on a qualifying trade. The EIIS is open to trades generally, however companies carrying on the following cannot qualify for the EIIS:
• Dealing in commodities or future or in shares, securities or other financial assets,
• Financing activities,
• Professional services,
• Dealing in or developing land,
• Occupying woodlands,
• Operating or managing nursing homes or residential care homes,
• Coal, steel or shipping activities,
• Operating or managing hotels, guesthouses, self-catering accommodation etc.
• The production of a film
i) Medium sized enterprises operating in non assisted areas are limited to their seed/start up stage of development. (Regional Aid Map 2007 – 2013 Ireland details the current assisted areas).
j) If the company repays any debt to the individual (other than a trade debt), makes a loan to the individual or otherwise attempts to pass the funds back to the investors, the individual’s relief will be reduced accordingly.
k) If the individual wishes to sell their shares after the 3 year retention period, there will be other commercial, taxation and company law provisions that will be required to be reviewed before the EIIS is implemented. If the company is to acquire the shares, the company will require distributable reserves.
l) The relief must be applied for to the Revenue Commissioners by the company. The individual may claim tax relief based on furnishing the certificate of relief.
The content of this article is a general overview of the EIIS and therefore should not be relied upon for specific taxation advice. If you consider the above to be of interest to you, a detailed review of the company, shareholders and trading activities would need to be undertaken in order to ascertain whether the EIIS conditions would be satisfied for your particular circumstances.
Catherine Mc Govern
PKF O Conner Leddy Holmes