The Employment Investment Incentive (EII) aims to encourage individuals to provide equity-based finance to unquoted private trading companies to create employment.
EII is a tax relief incentive allowing investors who qualify (individuals not connected to the company) to deduct the cost of their investment in a company from their total income, for income tax purposes. Up to 40% tax relief (on the sum invested) is available provided the investor holds their investment for at least four years.
The EII Scheme offers one of the few remaining income tax reliefs and is one of the few sources of total income tax relief (which includes, for example, rental income, ARF distribution income).
Under the scheme, a taxpayer who puts money into an EII investment can reduce a substantial portion of their taxable income for the year in which the investment was made.
LIMITS
The maximum annual investment amount per investor is now €250,000 per annum (previously €150,000). In the event that an investor has insufficient funds to fully utilise the relief in the year the investment was made any excess amount subscribed may be carried forward and claimed as tax relief in subsequent tax periods.
A second maximum limit of €500,000 was introduced for those investors who are prepared to invest in a EIIS scheme for seven years or more.
Tax relief on EIIS investments are not subject to the High Earners Restrictions. A married couple can each obtain individual relief on an investment of €250,000/€500,000, provided each spouse has sufficient taxable income.
QUALIFYING COMPANY & INVESTMENT
For an investment to qualify under the EII scheme it must be an investment in shares in a qualifying company where the funds are used for qualifying purposes and contribute towards the creation and maintenance of employment. In addition, the investment must be based on a specific business plan.
There are restrictions on what qualifies a company to raise funds under an EII scheme. Certain trading activities are specifically excluded and professional opinion should be obtained.
EXAMPLES
Note that these examples are for illustrative purposes only. Before making any investment, you should check with your own tax advisor to determine how an investment in EIIS will impact on your own personal circumstances.
Example 1 – Pension Funds in Excess of Standard Fund Threshold (€2M)
Emer (58) is a hospital consultant and has a HSE pension payable at age 65. She also has significant personal pension funds from her private practice income. At her review last year, the capital value of her combined pension was in excess of €2M and it was decided that it was no longer tax efficient for her to make contributions to her private pension funds.
She has income of €250,000 from private practice and decided to invest €150,000 in an EII scheme in 2022. She will receive the following tax relief:
Investment €150,000
Tax relief given Year 1* €60,000
Return after Year 4 €150,000 plus or minus investor return.
The investor return is subject to Tax.
*Subject to investee company meeting certain criteria.
Example 2 – Rental Income as Only Source of Income
Tom has a considerable unencumbered property portfolio which generates rental income of €180,000 per annum. The full amount is liable to income tax, USC and PRSI. As these are not ‘Relevant Earnings’ he cannot reduce his tax liability by making a pension contribution.
Tom requires gross income of €100K per annum to fund his lifestyle and has €80K available to invest.
He invested €80,000 in EIIS investments in 2022 across a number of different companies and will receive the following tax relief:
Investment €80,000
Tax relief given Year 1* €32,000
Return after Year 4 €80,000 plus or minus investor return.
The investor return is subject to Tax.
*Subject to investee company meeting certain criteria.
CONCLUSION
There are specific restrictions relating to EIIS from both an investor and company point of view, and professional advice should be sought. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.
If you are an individual investor seeking EIIS opportunities or a company in need of advice on how to raise EIIS funding, and whether you qualify, please feel free to contact Mark Gibbs mgibbs@dhkn.ie or Pamela Wynne pwynne@dhkn.ie.
