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The Minister for Finance and Public Expenditure & Reform, Mr. Paschal Donohoe T.D., on the advice of the Attorney General, is making significant changes to the operation of the Employment and Investment Incentive (EII). The changes are being effected by a Committee Stage amendment to the Finance Bill 2017 which would amend s.492 of the Taxes Consolidation Act 1997.
Officials recently became aware that the EII does not accord with Art 21(3) of the European Commission General Block Exemption Regulations (GBER), which require that risk finance aid schemes such as the EII should be restricted to independent private investors and do not provide relief to persons with close connections to the undertaking.
The amendment means 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 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 he or she has a right to any of the assets of the company on a winding up. An associate is a spouse or civil partner, an ancestor, lineal descendant or sibling. Relationships through partnerships and trusts are also included.
Individuals who invest in undertakings with which they are not connected are not affected by the amendment. The EII scheme 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.
The proposed changes are effective from 2 November 2017.
The Department of Finance made the European Commission aware of the issue last week (Friday 27 October).
The Minister 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.”

Notes for Editors
1. What is the Employment and Investment Incentive?
The Employment and Investment Incentive (EII), which is targeted at job creation and retention, provides tax relief for risk capital investments in qualifying SMEs. The majority of small and medium sized enterprises can qualify, providing they are under 7 years old. Some older companies, under certain conditions may qualify also.
The scheme allows an individual investor to obtain income tax relief on investments, up to a maximum of €150,000 per annum. Relief is available to an individual as a deduction from their taxable income. In the year of investment, the deduction is 30/40th of the amount invested.
A further deduction of 10/40th of amount invested is available where it has been proven that employment levels have increased at the company after 3 years or where evidence is provided that the company used the capital raised for expenditure on research and development.
The EII replaced the Business Expansion Scheme (BES) in 2011. The latter was a long-standing measure which had been in place since 1984.
Figures provided by Revenue show that the uptake of the reliefs under the EII have increased steadily over the years 2012 to 2016. For example, the amounts invested have increased year on year from €13.4M in 2012 to €108.5m in 2016, while the number of investors in the same period has increased from 352 to 1,768.
The table below highlights the cost and numbers of investors for the EII since 2015:

Year Amount Invested Tax Cost No of Companies Number of Investors
2015 €74.1 M €22.2 M 279 1530
2016 €108.5 M €32.5M 261 1,768

The estimated cost to the exchequer in 2016 of investment affected by the proposed change is between €6 million and €10 million. It is estimated that the number of individuals affected by the changes is very roughly in the region of 300 in a full year.

2. What is GBER?
The General Block Exemption Regulation (GBER) came into effect on 1 July 2014. It is a Commission regulation that allows Member States avoid state aid approval for schemes, in certain instances, which might otherwise need approval as compatible with the internal market.
The general requirements for a scheme to be considered compatible with the GBER[1] are as follows.
The aid must:
Serve a purpose of common interest;
Have a clear incentive effect (this is presumed to be the case for SMEs);
Is appropriate and proportionate;
Is granted in full transparency and subject to a control mechanism;
Is regularly evaluated; and
Does not adversely affect trading conditions.
Aid may not be granted to a firm in difficulty and maximum aid amounts must be specified. Details of aid recipients must be published in the usual manner with these details available for 10 years. The Commission must be notified of the existence of the scheme within 20 days of the commencement of the scheme and an annual report must be furnished to the Commission.

3. What changes are being made to the EII?
An amendment is being brought forward by the Minister for Finance to Finance Bill 2017 at Dáil Committee Stage in order to address a compliance issue with EU State Aid rules.
From 2 November 2017 individuals can no longer claim relief under EII for investments made in a company with which they are connected. There are two exceptions to this:
(i) The first exception is where the only shares a person holds in a company are a result of a previous EII investment. For example, an investor makes an EII investment in a company with which that investor has no other connection. That company then seeks to raise follow-on investment. The investor, whose only shares in the company are previous EII shares, may make a follow-on investment in the company.

(ii) The second exception is where the only shares issued are the founder shares, issued on the incorporation of the company and the company has not yet commenced to trade. For example, an individual incorporates a company with share capital of €100 (the founder shares). Prior to commencing any activities the company raises equity funding from the individual. The individual is eligible to claim EII relief as the founder shares are not taken into account.
The change ensures that the tax relief is only available to persons who are independent from the company.

4. Who is affected by these changes?
1. The EII scheme will continue to be available for eligible enterprises to raise investment from eligible investors.

2. Individuals who are investing in companies with which they are not connected are not impacted by this amendment. The EII scheme will continue to be available to independent investors who have already made an EII investment in a particular enterprise and only holds EII related shares; they may, provided they and their investment meet the other existing requirements of the scheme, make further EII investment(s) in that enterprise.

3. Persons who invest in companies in which they already own shares which were not acquired as part of an EII investment, will no longer be eligible for relief under EII. Equally, no relief will be available for investing in a company with which the individual is connected*.

* However, note that Art. 2 of GBER provides as follows:
“‘independent private investor’ means a private investor who is not a shareholder of the eligible undertaking in which it invests, including business angels and financial institutions, irrespective of their ownership, to the extent that they bear the full risk in respect of their investment. Upon the creation of a new company, private investors, including the founders, are considered to be independent from that company”.


[1]http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0651&from=EN