Employment Investment Incentive Scheme – 2024 updates

As has been the case for the past number of years, there has been an update to the EIIS rules in the most recent Finance Act. The main purpose of the EIIS is to encourage individuals to invest in Irish companies, however, some of the new rules introduced in Finance Act 2023 are likely to act as a deterrent for potential investors.

Rate of relief updates

One of the biggest changes introduced is that there will be a tiered system of tax relief and it will be dependent upon two things:

1.    Whether the investment was made directly to the investee company or through a financial intermediary.

2.    The life stage of the investee company.

Investors are no longer guaranteed tax relief at the marginal rate of 40% and the relief now varies between 20% and 50%. The rates of relief are as set out below:

Investments made directly to an investee company

The following amounts shall be allowable as a deduction from total income:

• 125% of the amount subscribed where the qualifying investment is made in a company which has not operated in any market – i.e. 50% deduction.
• 87.5% of the amount subscribed where the qualifying investment is made in a company which has been operating in any market for less than 10 years from its date of incorporation or less than 7 years after its first commercial sale – i.e. 35% deduction.
• 50% of the amount subscribed where the investment is made in relation to follow-on finance – i.e. 20% deduction.
• 50% of the amount subscribed where the investment is made in relation to a business expanding into new markets or regions – i.e. 20% deduction.

 Example 1: If you invest €120,000 in an investee company which is not operating in any market, you will get tax relief of 125% of €120,000, which is a tax saving of up to €60,000 (€150,000 x 40%).

Example 2: If you invest €120,000 in a recently incorporated investee company which has been operating in a market, you will get tax relief of 87.5% of €120,000, which is a tax saving of up to €42,000 (€105,000 x 40%)

The above restrictions have made the EIIS less attractive to investors, specifically investors making follow-on finance investments.

Investments made through a financial intermediary

• 75% of the amount subscribed where the qualifying investment is made through a qualifying investment company – i.e. 30% deduction.

Additional changes

Other updates introduced in the Finance Act include:

Positive updates

• The maximum amount which a company raising finance may raise through the issue of eligible shares has been increased from €5,000,000 to €5,500,000 in any 12-month period.
• The lifetime limit for companies raising finance has been increased from €15,000,000 to €16,500,000.
• The maximum amount an individual can claim in any one tax year has increased from €250,000 to €500,000.
• There has been a reduction in the level of investment required by a company seeking expansion risk finance from 50% to 30% of the company’s average turnover (in the proceeding five years) where the investment has a positive environmental impact.
• The minimum holding period has been reduced to four years for all shares.
• Expansion risk finance definition amended to include funding a ‘new economic activity’.

Negative updates

• Follow-on finance must be ‘provided for’ in the company’s initial business plan. This is a harder bar to meet as previously, follow-on finance only had to be ‘foreseen’ in the company’s initial business plan not actually provided for.  
• The definition of an eligible share has been narrowed to exclude shares which carry a right to preferential rights to a dividend or to a repayment of capital on a winding up of the company (except where the shares are issued to the managers of a qualifying investment fund).

EIIS V Angel Investor Scheme comparison

Finance Act 2023 also introduced a new Angel Investor Scheme (AIS) which reduces the Capital Gains Tax (CGT) rate payable by an individual investor from 33% to 16%. A more detailed discussion on the scheme is included in the article ‘New Angel Investor Scheme’. Whilst we are not comparing like with like, as the EIIS and AIS cannot be claimed on the same investment, we have compared the two schemes.

Example 1: €50,000 investment in a start-up company and dispose of the shares in four years’ time for €100,000.

EIIS

AIIS

Example 2: €20,000 investment in a start-up company and dispose of the shares in four years’ time for €100,000.

EIIS

AIS

*Applies to lower of: 

• Chargeable gain 
• Twice the amount of the investment 
• €3m threshold

There are obviously more factors to consider when making an investment such as length of the investment, potential managerial roles in an angel investment etc. However, as can be seen in both examples above, from a financial perspective, it is more beneficial to invest in an EIIS rather than an AIS.

The recent change to the rates of relief available is designed to encourage investment towards early-stage / start-up companies or those entering those markets. The tiered tax relief system which now applies to investments may impact the attractiveness of the scheme for investors. Companies raising finance through EIIS now only get one opportunity at either 50% or 35% investor tax relief. These are all factors which may impact the attractiveness of the scheme in 2024 and beyond.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Forvis Mazars corporate tax team below: