The Irish Government has announced changes to the Employment and Investment Incentive (EII), to bring it into line with EU regulations.
The EII is a tax relief that can be used by trading companies to attract equity-based risk finance from individuals. It allows individual investors to obtain income tax relief on investments made, in each year, into EII-certified qualifying companies. The scheme will run until 2020.
The majority of SMEs can qualify, providing they are under seven years old. Qualifying companies that wish to raise finance under the EII must issue ordinary shares to the investor in respect of the amount invested. The company must use the money raised to carry on a qualifying trade. Invested funds cannot be used for debt repayment. The investor must keep the shares for at least four years.
According to the Irish Finance Department, officials recently became aware that the EII does not accord with Article 21(3) of the European Commission's General Block Exemption Regulations (GBER). These rules require that risk finance aid schemes – such as the EII – should be restricted to independent private investors, and that they must not provide relief to persons with close connections to the undertaking.
GBER allows EU member states to avoid state aid approval for schemes, in certain instances, which might otherwise need approval as compatible with the internal market.
The Finance Department has now announced that only independent private investors, within the meaning of GBER, are eligible for relief under EII. Individuals can no longer claim relief under EII for investments made in a company to which they are connected.
An individual is deemed to be connected with a company where that individual, or an associate of that individual, owns any of the share capital, loan capital, or voting rights of a company. An individual is also connected with a company if they have a right to any of the assets of the company on a winding up. Relationships through partnerships and trusts are also included.
The EII will continue to be available to first-time investors and to investors who have already made an EII investment in a particular undertaking and who only hold EII-related shares.
Finance Minister Paschal Donohoe said: "I am acting decisively to correct the error in the scheme. I now propose to review the EII scheme, and the legislation underpinning it, to ensure it operates as a competitive, efficient, and effective measure in accordance with state aid rules and my Department's Tax Expenditure Guidelines."
"The review will be completed in the first half of 2018 so that any resultant legislative changes can be brought forward in the context of Budget 2019."
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