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EIIS is a replacement for the Business Expansion Scheme (BES) and was introduced by the Government in 2011. The objective of EIIS is to encourage individuals to provide risk-based finance to unquoted private trading companies to create employment. EIIS is a tax relief incentive scheme enabling private investors to avail of one of the few remaining tax reliefs by deducting the cost of their investment for income tax purposes.
EIIS relief provides investors with either a 50%, 35% or 20% income tax refund. For example, if an investor makes a €100k investment, Revenue will refund €50k of income tax, giving a net cost of €50k. The total refund can occur within 1 month of investing if timed correctly.
EIIS offers one of the few remaining tax deductions offering up to 40% tax relief and is one of the few sources of total income tax relief, which includes, for example:
Please note that investors cannot offset EIIS relief against CGT
The maximum amount a company can raise through EIIS is €5.5m in any 12 month rolling period and €16.5m in its lifetime.
4 years, EIIS investments must be held for a minimum of 4 years or the tax relief will be clawed back. Please note that if a company sells an investor’s shares before the 4 years, the clawback will fall on the investor and not the company. Therefore, investors should seek prior agreement to be compensated by the company if the company is sold before the 4-year period elapses.
The structure of EIIS investments can be in many forms with the primary principle being that all investments are “risk finance” and “equity”. Different forms can be:
Once a company qualifies for EIIS, it is relatively simple to structure an investment to fit within the EIIS scheme.
Please note that the most common form of EIIS investment in Ireland is redeemable preference equity or fixed income return but equity investments are becoming more common in recent years.
The most common form of EIIS investing is redeemable preference equity. These types of investments are akin to a loan. An investor gives capital to a company for 4 years and receives a fixed rate of return of circa 7% – 8% per annum.
All interest/coupon is rolled up until the end of the investment period. This is to satisfy EIIS rules with no return of capital allowed to shareholders during the EIIS period (i.e. 4 years).
How it operates – €100k example:
Investors must make the full investment upfront and claim the refund of income tax later. Therefore, the timing of EIIS investments is crucial as most investors will reclaim the refund of tax through their income tax return.
If an investor makes a €100k investment in December, the investor could reclaim the tax relief one month later if an income tax return is filed in January. However, if an investment is made in January, an investor might have to wait 12 months before filing their next income tax return.
Therefore, companies should consider this when looking to raise EIIS. October – December annually is the best time to raise EIIS unless going through an EIIS Fund.
A RICT group is an EIIS qualifying company and all its Linked and Partner Businesses
Please see the technical Revenue guidance notes for discussions on Linked and Partner Businesses.
https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-16/16-00-02.pdf
A company is considered an ‘Undertaking in Difficulty’ where:
For example, a company has raised €1m of issued share capital and has accumulated losses of €400k. The company can be a qualifying company since only 40% of the issued share capital is accounted for in losses. However, if the company had issued share capital of only €100, it could not be a qualifying company. This is the case where companies are funded through director’s loans. If the directors are willing to convert these loans into share capital, it could be possible to qualify.
Please note that the test must be applied on the date of investment.
Yes, the age of the company (and its RICT group) is crucial to understanding if it qualifies for EIIS. You should consider the following:
Yes, it is possible to qualify once a company is older than 7 years, however, the company would need to look to expansionary risk finance.
Yes, it is possible to qualify for EIIS through a holding company. Please note that all subsidiaries must qualify for EIIS.
EIIS Shares must be:
The following conditions must be satisfied on the date the shares are issued:
The following conditions must be satisfied for the entirety of the EIIS period (i.e. 4 years):
Yes, there are several instances where EIIS relief can be withdrawn (or clawed back). The clawback can fall on either the investor or the company depending on the circumstances. As general rule, the clawback would fall on whoever is at fault for clawback arising, examples include:
Yes, 10/40ths of the EIIS relief can be claimed back if one of the following is not achieved:
Yes, the business plan is crucial to qualifying for EIIS. It must be in writing and contain:
Details of what is required in the business plan are set out in Para 14 of Article 21 (GBER).
No return of capital to EIIS investors within the following period:
There is a specific capital redemption window that allows EIIS investors to be repaid after 4 years even if additional follow on EIIS investors are waiting for the 4 year period to end.
Yes, when raising EIIS, the company must do the following:
Where a company issues shares qualifying for EIIS, it must file a RICT Form through Revenue online (ROS). The form is relatively straightforward to complete and could be done by founders with access to ROS.
An SOQ is provided to investors by the investee company to allow the investors to claim the tax refund. The SOQ replaced the previous EIIS certs.
Nominee companies are frequently used to hold EIIS shares. The benefit of a nominee company is to keep the company’s cap table clean. The main negative of a nominee company is that there will be additional annual compliance fees for the 4 years period.
There is no set rule on when a nominee company should be used. In general, nominee companies would be used where there are 5 or more EIIS investors.
The nominee company will require annual accounts to be prepared and filed with CRO and a return of third party information (Form 21R) to be filed with Revenue after each share subscription
Yes, details of the fundraise will be found in two public places:
No, the new system is self assessment and therefore, companies must self certify that their company is EIIS qualifying. The assistance of a competent tax advisor can provide guidance on this.
Please note that in contentious circumstances Revenue can provide a determination on specific elements of EIIS relief such as:
EIIS Funds raise money from individual investors and then invest in 3 – 6 companies over 12 months.
If your company is issuing redeemable preference shares (akin to a loan), the investors should have protections and covenants built into the agreement. These can range from restricting certain transactions or payments to founders as well as issuing new shares. There are no set terms but the more covenants agreed to by the company, the more likely people are to invest in the company.
Investment managers may take a board seat and provide financial guidance. However, all will have the ability to appoint a director if certain covenants are breached.
If you would like to learn more about the role of an EIIS investment manager, please contact us.
If your company is not successful or does not generate enough free cash flow to pay back investors, the investment can convert into ordinary equity.
At least quarterly but the more correspondence the better. Every time a founder sends a correspondence to an investor, there is a chance that the investor could help you out with a certain issue or problem the company is facing. EIIS Funds can be great here if there are 50+ investors reading company updates.
At the EIIS Innovation Fund we send all correspondence through DocSend which restricts investors’ ability to download and forward company updates.
