How is the investor and company impacted by the EII Scheme? John Summers discusses.

The Employment and Investment Incentive Scheme (“EIIS” or “EII Scheme”) is a tax relief incentive scheme, whereby investors can avail of up to 40% tax relief on investments made into qualifying Irish SMEs.

How a party will be impacted by the scheme depends on what side of the transaction they sit.

Investor Perspective

An individual can invest up to €250,000 in any one tax year under the EII Scheme.

This investment can be either directly into a company (commonly known as a private placement) or through a Designated Investment Fund like the Goodbody EIIS Funds. These funds invest in an array of companies to diversify the risk of the investment.

Benefits

  • Eligible to claim tax relief of up to 40% on investment amount – for offset against income arising in year of qualifying investment.
  • One of the last remaining sources of total income relief – can be offset against rental income.
  • Potential for additional capital return on exit – subject to investment agreement.
  • An EIIS investment will benefit indigenous Irish companies.
  • Investing in a fund can provide access to invest in larger and more established companies, not normally accessible through the private placement market.

Drawbacks

  • EIIS investments are subject to a minimum four-year holding period.
  • Equity risk is being taken on by the investor, which ranks behind debt in the company.
  • Ideally requires a finance professional with significant experience and technical know-how to provide a safe investing environment.
  • A poorly structed transaction may result in loss of tax relief or may inadequately protect the rights of investors.
  • An EIIS investment is subject to investment risk. Return of investor funds is not guaranteed.

If an individual is interested in making an EIIS investment, it may be more prudent to do so through a Designated Investment Fund. A Fund will invest across a portfolio of investments thereby reducing the risk profile of the investment.

Additionally, Funds are regulated by the Central Bank of Ireland and are covered under the Investor Compensation Scheme against fraud.

Company Perspective

Irish companies looking to fundraise and grow can raise up to €15m in equity capital under the EII Scheme, subject to a limit of €5m in any 12-month rolling period. This money can be used for new products, or to expand into new markets, for the construction of a new warehouse or office facility and numerous other options.

There is a number of small restrictions on the type of trade a company can carry out to access the EII Scheme but most trades qualify. The most common trade that is non-qualifying would be professional services which can ascertain the qualification status of a company.

Something to consider when looking to raise money through the EII Scheme is the Companies RICT group. Any companies associated through common shareholdings and group companies are considered when assessing the qualification, and it is worth checking if any of these companies have utilised the EIIS/BES scheme in the past.

Benefits

  • Competitive cost of funding for equity.
  • Equity on balance sheet not debt – strengthens the company’s Net Asset Value.
  • Cashflow benefits versus traditional debt products.
  • Can act as mezzanine finance in addition to senior debt.
  • Defined exit mechanism – subject to investment agreement.
  • Accessible for earlier stage companies or ones struggling to gain traction with the pillar banks.

Drawbacks

  • EIIS Investments are typically prescribed through redeemable preference shares – placing EIIS investors ahead of ordinary shareholders.
  • EIIS investors could ask for full equity upside as opposed to a capped return to reflect the risk. This will dilute any existing shareholders.
  • EIIS investors may request voting rights – subject to investment agreement.
  • EIIS Investment Agreements are likely to have covenants attached, restricting the raising of future capital without approval of the EIIS shareholders.
  • Under the latest legislation, a Company is required to repay Revenue should it become non-qualifying. This can be a significant amount (40% of the investment amount). Emphasising the use of experienced professional during fundraises.

There are several sources of finance available to Companies of which the largest providers are the designated investment funds.

The Goodbody EIIS Fund’s raise €10m per annum to invest through the EII Scheme and Baker Tilly can help companies source finance and provide help with qualification eligibility.

We manage c. €50m of Investor’s Capital through 12+ companies. Ascertaining a company’s eligibility for the scheme can be convoluted and it’s recommended to discuss matters with an individual who has a high level of knowledge and expertise on EIIS legislation.

The Goodbody EIIS Funds and COVID-19

We couldn’t finish an article without mentioning the current pandemic and how EIIS is affected. Irish SMEs are highly exposed to the current uncertain economic environment, potentially more so than larger entities who have better access to funding. The EII scheme can be a beneficial source of funds   in helping Irish companies get back on track. For example:

  • EIIS is equity on the balance sheet rather than debt. This strengthens a company’s position and can help access further debt requirements.
  • EIIS can help with working capital problems, by delivering cash to the business without the pressure of large monthly repayments.
  • There are no security or personal guarantees required from promotors/shareholders.

The above and more are advantages of using the EII Scheme at this time. If you want to get in touch with our highly experienced management team please contact us – info@eiismanagement.ie.

You can learn more about EIIS here