The Employment & Incentive Insurance Scheme (EIIS): An Approved Tax Relief Investment
The EIIS is a tax relief incentive scheme, which enables investors to claim Income Tax relief in respect of investments made in qualifying companies. It is one of the few tax reliefs that can be claimed against your total income, e.g. rental income, deposit income, annuity income and distributions from approved retirement schemes.
The EIIS was introduced under the Finance Act 2011 and it replaced the former Business Expansion Scheme (BES). The scheme allows individual investors to claim tax relief for qualifying investments up to a maximum of €150,000 per annum in each tax year up to 2020. The full amount of the tax relief available is 40% and it is available in two tranches; an initial 30% in the year the investment is made with a further 10% available in the fourth year after the investment is made providing the following conditions have been met:
- It has been proven that employment levels have increased at the company at the end of a period of 3 years from investment or
- Evidence is provided that the company used the capital raised for expenditure on research and development.
Relief can be claimed immediately by the investor in the case of established companies or in the case of new companies after four months’ trading. If the company is not trading at the time the shares are issued, relief cannot be claimed until the company commences trading. It must however commence trading within two years of the share issue, or spends at least 30% of the funds raised under the EIIS on research and development activities which are connected with and undertaken with a view to carrying on relevant trading activities.
Illustrative example of EIIS investment return
The following example illustrates the potential return to an EIIS investor on an investment of €100,000 assuming the investment grows by 12% over a 4 year investment period and assuming all EIIS conditions are met.
|Plus Upfront Fee at 3.5%*||€3,500|
|Total Cost to Investor||€103,500|
Tax Relief on Investment
|Year 1 - Income Tax Relief @ 30%||€ 30,000|
|Year 4 - Income Tax Relief @ 10%||€ 10,000|
|Net Cost of Investment||€ 63,500|
Return on Investment
|Sale Proceeds**||€ 112,000|
|Less Net Cost of Investment||€ 63,500|
|Gross Gain||€ 48,500|
|Less Capital Gains Tax***||€ 2,386|
|Net Return to Investor||€ 46,114|
* This entry fee has been based on the current entry fee to the BDO Davy EIIS Fund
** Sales proceeds is the original capital plus 12% return the investment
*** Capital gains tax based on the 12% coupon less the entry fee and allowing for the capital gains threshold of €1,270. ((€12,000 - €3,500 - €1,270)*33%)
A qualifying investor must be resident in the State for the tax year in which he/she makes the investment. A non-resident investor may qualify if they have income charged to Irish Tax in the tax year in which he/she makes the investment. An investor must subscribe on his/her own behalf for eligible shares in a qualifying company. Alternatively they could use a nominee to hold the shares or invest through a designated investment fund. An investor cannot invest in a company which he/she is connected to throughout the period of 2 years before and 4 years after making the investment
Investments must be made in suitable, unquoted qualifying companies. Some of the main criteria for a qualifying company are as follows:
- The company is a micro, small or medium sized enterprise with less than 250 employees and annual turnover less than €50million
- The company is incorporated in the State of another European Economic Area (EEA) State
- The company is resident in the State or is resident in another EEA State and carried on business through a branch or agency
- The amount raised of EII capital raised by the company cannot exceed €15 million
- The company must either exist wholly for the purposes of carrying on a trade or be a holding company of one or more qualifying subsidiaries
- The company cannot be under the control of another company
The EII Scheme is available to the majority of small and medium sized trading companies. The following trading activities are however excluded from the EII Scheme:
- Trading in once off or speculative transactions
- Dealing in commodities and futures in shares, securities or other financial assets
- Financing activities
- Professional service companies
- Dealing in or developing land
- Operations in the coal industry or steel and ship building sectors
- Film production
The majority of risks associated with investing under the EII Scheme relate to the underlying investment risks. There are however some risks associated with the scheme itself.
- Entitlement to EII relief is determined only when the share issue has taken place. The fact that the company may obtain Outline Approval does not guarantee the entitlement of EII relief. Therefore an investor may invest in a company which is refused EII relief post the investment
- If certain criteria are not met the balancing 10% of relief may not be available to an investor in Year 4.
- The investment is a medium-to-long term investment in an unquoted company with no early exit mechanism
- Investors are exposed to the performance of the qualifying company and as such may lose some/all of their invested capital.
- The value of the investment may go down as well as up.
DLS Capital Management looks to structure investments for investors seeking to reduce their tax liabilities. In 2009, we completed our first EIIS (formerly BES) fundraising project for Menard Limited, a 5MW wind farm located in Skrine, Co. Roscommon. We successfully raised €2 million and in 2015, the investors receive back their initial investment with 15% uplift on the value of their investment.
We believe that asset backed EIIS investments reduce a clients investment risk. Given the success of Menard Limited, we are looking at similar renewable energy projects, in both wind and solar, for clients to invest and claim tax relief in early 2017. If you would like more information on these EIIS investments please don’t hesitate to contact Sarah or Dervilla.