22 Jan 2022

Employment and Investment Incentive Scheme (EII Scheme)

Employment and Investment Incentive Scheme (EII Scheme)

The EII Scheme is one of the few remaining tax relief schemes that applies to Income from ALL sources

As anyone who is currently paying the higher rate of Income Tax will testify, it has become increasingly difficult to find methods of reducing your overall tax liability. Traditionally pensions are the most common method used to reduce your tax bill but they do have some drawbacks.
One of the most common complaints I hear is that you can’t access your pension pot until aged 60 and any contributions made must be in relation to earned income. If you are someone who has other sources of income such as Rental Income, Dividend Income, Deposit Income and ARF income, what options do you have if you want to reduce your tax bill.

The Employment and Investment Incentive Scheme (EII Scheme) is one of the few remaining tax relief schemes that applies to Income from ALL sources.
The EII Scheme is an income tax relief incentive scheme which can provide all income tax relief to Qualifying Investors for investments made in certain qualifying Irish small and medium sized companies (“SMEs”)*
The Employment and Investment Incentive Scheme (EIIS) is a source of equity funding for Irish small-and-medium-sized enterprises (SMEs). Qualifying companies must use the monies for research and development, expansion, and the creation or retention of jobs.

This investment can be made either directly into a company (commonly known as a private placement) or through a Designated Investment Fund. The funds invest in an array of companies to diversify the risk of the investment. Additionally, Funds tend to be regulated by the Central Bank of Ireland and are covered under the Investor Compensation Scheme against fraud.
Each year over €40 million was invested through the EII scheme in 80-100 companies.  This has been much higher than in previous years and it is expected that this figure will grow to €60m per annum over the next couple of years.

You can claim relief once you have received a 'statement of qualification' from the company. It is your responsibility that you meet all of the necessary investor conditions prior to claiming relief.
The main terms of the EII Scheme are as follows;
The minimum investment period is four years from the date the fund invests in the respective companies.
The investor earns up to 40% relief on their income taxes. The investment amount can be deducted from gross income for income tax purposes.

An individual investor can obtain income tax relief on investments made with the minimum value being €10,000 up to a maximum of €250,000 per annum or €500,000 per annum for those who invest for a minimum of 7 years. A married couple may each invest individually.
The 40% tax relief is obtained for the year the investment is made, i.e. for an investment made in 2020, the investor will get 40% relief in his/her 2020 tax return (usually filed in 2021).
Prospective Investors should determine the suitability of the investment based on an assessment of their own personal circumstances, attitude to and capacity for investment risk. The investment may be suitable for investors:
Eligible to claim tax relief of up to 40% on investment amount – for offset against income arising in year of qualifying investment.
One of the last remaining sources of total income relief – can be offset against rental income.
Potential for additional capital return on exit – subject to investment agreement.
An EIIS investment will benefit indigenous Irish companies.
Investing in a fund can provide access to invest in larger and more established companies, not normally accessible through the private placement market.

There are some drawbacks as follows;
EIIS investments are subject to a minimum four-year holding period.
Equity risk is being taken on by the investor, which ranks behind debt in the company.
A poorly structed transaction may result in loss of tax relief or may inadequately protect the rights of investors.
An EIIS investment is subject to investment risk. Return of investor funds is not guaranteed.
From a company perspective, Irish companies looking to fundraise and grow can raise up to €15m in equity capital under the EII Scheme, subject to a limit of €5m in any 12-month rolling period. This money can be used for new products, or to expand into new markets, for the construction of a new warehouse or office facility and numerous other options.

There is a number of small restrictions on the type of trade a company can carry out to access the EII Scheme but most trades qualify. The most common trade that is non-qualifying would be professional services.
Some of the main benefits for a company raising funds this way are that it is a competitive way of funding for equity, the company carries equity on balance sheet and not debt, cashflow benefits versus traditional debt products requiring repayments and it can be accessible for earlier stage companies or ones struggling to gain traction with the pillar banks.
Like all investments you should seek professional advice and be sure that it fits with your appetite and ability to absorb risk. It is certainly worth investigating to see does it suit you.

Conor Harte is a Financial Planner with Wealthwise Financial Planning who are based in Block C, Hartley Business Park , Carrick on Shannon, All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141

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