EIIS: Helping Irish Firms to Grow
The recent budget provided some positive news in relation to the Employment Investment and Incentive Scheme (“EIIS”) with the Minister for Finance, Paschal Donohoe, announcing an extension of the scheme to December 2024. There were some further positive additions, specifically the removal of the rule requiring 30% of funds raised by an EIIS investee company to be spent before an investor can claim the tax relief and a relaxation of the rules around the “capital redemption window” for investors which will become clear in the upcoming Finance Bill.
These rule changes should be viewed as a step towards making the scheme more user friendly from both a qualifying investee company and investor perspective. In his budget speech, the Minister did say rules had been changed to make the scheme more user friendly, however, he also recognised that this had not resulted in a greater level of EIIS investment.
With an increased level of personal savings over the COVID pandemic and people now beginning to feel the real impact of negative interest rates on bank deposits we see a continued strong appetite for EIIS investment. The fact that it is also one of few remaining sources where an individual can avail of income tax relief makes it especially attractive to potential investors. An individual with income taxable at the 40% rate in the year that an EIIS investment is made can obtain tax relief on PAYE and self-employment earnings, ARF distribution income, as well as rental income from property held in a personal capacity and dividend income.
The relief is “provided to assist companies to raise finance to allow them to expand and create or retain jobs.” Given the lack of traditional credit for early-stage, high-growth companies coupled with post-pandemic industries returning to zero government support, the need for investment in early-stage growth companies will never be greater and the reform of EIIS never more compelling.
Despite the changes introduced in 2019 to the EIIS rules which sought to simplify the process, the overall level of investment has fallen in recent years. From our experience the decreased level of investment has probably been more driven by the introduction of the General Block Exemption Regulations (“GBER”) where companies seeking EIIS funding are required to comply with EU guidelines on state aid under the GBER. Of particular concern is the rule that companies cannot have been trading for more than seven years. There are many companies that have been trading for less than seven years that have ample capital available to them. Equally there are many companies trading for more than seven years that have difficulty accessing capital. Often it is companies that have gone through the initial start-up phase, and which are now seeking capital to grow and expand the business that have the greatest potential to survive and create new jobs. The seven-year rule should be abolished.
The other restriction which has been problematic is the requirement for the qualifying company to identify and set out in the original business plan any specific requirements for follow-on funding. Most businesses cannot foresee their exact funding requirements for future years. It should be sufficient for the company to outline its broad intention to raise future EIIS funding.
The removal of the requirement for the qualifying company to have spent the first 30% of capital raised before the tax relief becomes available to investors means the business can focus on using the EIIS capital in line with their business plan. Otherwise, they come under pressure to deploy it as quickly as possible.
It would also be a positive from an investor perspective, if they were eligible to claim their tax relief as soon as their investment was made.
We believe the EIIS remains an extremely important avenue of funding for early-stage, high-growth Irish companies, but unnecessary qualifying restrictions are limiting the scheme’s potential to help target firms.
As Ireland’s largest facilitator of EIIS, Cantor Fitzgerald has raised over €75m in EIIS capital for over 30 Irish companies in the renewable-energy, food-manufacturing, engineering, healthcare and technology sectors, out of which over €32m has been successfully returned to investors. We would like to do more. We would like to help many more companies to grow, but the current EIIS structures are holding us back.
Conor McKeon is Head of Corporate Finance at Cantor Fitzgerald Ireland.