EIIS tax relief – what you need to know as an investor
EIIS is an Irish tax relief available to individuals for investments in qualifying SME startup and growth companies.
The relief is only available where the company meets various conditions. On crowdfund platforms the companies will usually qualify but this status should be checked on their campaign page. Not all companies qualify and (for example) relief is not available for investments in construction or professional services companies.
How it works
An individual can claim a refund of up to 40% income tax back on an investment – so an investment of €10,000 can result in a tax refund of €4,000.
The EIIS is offsetable against an individual’s total income which can reduce (for example) rental income, salary and dividends. It can also reduce non routine income such as Share Options gains, termination payments and ARF distributions. It is one of the very few total income tax reliefs available.
The level of the refund depends on tax paid in a year and 40% is the maximum available, being the top rate of income tax. Personal circumstances vary and an investor should ensure they have enough taxable income in the year of investments.
The relief is only available against income tax and can not reduce USC or PRSI liabilities.
Example
Generally a single individual starts paying top rate 40% income tax at €35,300 annual income. This person would need to have annual income of at least €40,300 to receive 40% tax back on a €5,000 investment. In contrast, an individual on (say) €35,000 salary making the same €5,000 investment would receive a refund of 20% tax back.
Key conditions for an Investor
For investments made after 1 January 2021, then these are the key investor conditions:
- Investors will be taking on risk of investment failure. They should determine the suitability of EIIS based on their own personal circumstances. EIIS qualifying companies are, by their nature, high risk investments.
- An investor needs to keep the shares for at least 4 years - if they sell before the end then the relief is withdrawn. For investments above €250,000 then a 7 year holding period applies and relief is capped at €500,000 annual.
- The minimum investment is €250 but some companies can have a higher threshold for EIIS investors (generally €1,000).
- Each investor is responsible for submitting their own tax refund claim to the Irish Revenue. Details are below.
- The investor must not be connected (in accordance with a wide tax law definition) to the company. This condition can be complex and needs to be reviewed further if likely to be applicable.
- The investor needs to be resident in Ireland. In certain circumstances, a non Irish resident may qualify if they have Irish taxable income.
Making a claim for the relief
The tax refund is not automatic and needs to be claimed by the individual.
After subscribing for shares, an investor has to wait until the company sends them a formal “Statement of Qualification” (SOQ). This is a crucial document.
This can generally take a few months as the company needs to have spent 30% of the monies received. It is only at that point that they can submit formalities to Irish Revenue, which will ultimately enable them to issue the SOQ to each investor.
It is only when an individual receives the SOQ that they can make a claim to Revenue for the refund.
Accelerating the refund
Tax returns can only be submitted after the end of the calendar year but an individual can inform Revenue sooner of the EIIS investment. This can only be done once the SOQ is received. Once Revenue are informed and SOQ details submitted, they may accelerate a tax refund by (for example) adjusting an individual’s tax credits so they receive higher net take home pay.
For this facility, application should be made to Revenue directly here on Myenquiries facility on the Myaccount portal. Attached are the drop down menus to use.
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Submitting the SOQ via the mechanism above is not obligatory and the only advantage is that Revenue may issue the refund sooner that if you wait to submit a formal tax return.
Formal tax return
In all scenarios, an individual will still need to complete details of the EIIS investment in a formal annual income tax return. As noted, this can only be submitted after the end of the calendar year.
For most individuals in receipt of salary (PAYE) income, then the tax return obligation can be satisfied with a Form 12 which can be completed via the ‘myaccount’ portal on the Revenue website. Otherwise they need to file a formal Irish tax return (Form 11) via Revenue Online Service (ROS). If you don’t already have a Form 11 filing obligation then the EIIS investment should not, in itself, bring you within the scope of the “Form 11” process.
Generally the EIIS claim via the tax return should be made within two years of the end of year of investment.
Boxes to complete:
This is extract from the 2020 Form 12 tax return, showing the relevant panel box 66.
We have completed the boxes for an investment of €10,000 in a qualifying company, ABC Limited.
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Other points to watch
- The 40% tax relief is obtained in the year the shares issue so it should not matter when the SOQ issues. For example if the SOQ is sent to investors in 2022 in relation to shares which issued in 2021 then the tax relief would still be available in 2021.
- Loss relief is not available on EIIS shares. This means that a loss suffered would not be able to offset other capital gains.
The particular tax treatment contained herein is based on our understanding of law and current Revenue practice as at May 2021. 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.
This information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and / or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Written by Maura Ginty
For more information, contact Gintax tax advisers maura@gintax.ie for a consult.