This article was originally published in Accountancy Ireland, 43(4), August 2011.

The Finance Act 2011 introduces the Employment and Investment Incentive (EII) scheme, replacing the existing Business Expansion Scheme (BES) which was originally introduced in 1984. Implementation of the new scheme is subject to a Commencement Order from the Minister for Finance.

A taxpayer who invests in an EII scheme before 31 December 2013 can deduct thirty forty firsts (30/41) of the investment from his or her taxable income for the year of assessment in which the shares are issued. The investor is entitled to a tax refund if they have paid tax on the deductable portion of their income, which effectively means the taxpayer gets 30% of the investment back from the Revenue Commissioners.

Under the existing BES scheme the taxpayer is entitled to deduct the entire investment from his or her taxable income for the year of assessment in which the shares are issued which effectively means that the investor gets 41% of the investment back from the Revenue Commissioners. The reduction in tax relief in the new scheme is in recognition of the reduced required holding period of the shares from five years to three years. However a further 11% tax relief will be available to investors where it has been proved that employment levels have increased at the company at the end of the holding period or where evidence is provided that the investee company used the capital raised for expenditure on research and development.

The EII scheme allows an individual investor to obtain income tax relief on investments up to a maximum of €150,000 per annum in each tax year up to 2013 (subject to the application of the "high earners restriction"). Relief is available at the investor's highest rate of income tax. An investor who cannot obtain relief on all his/her investment in a year of assessment, either because his/her investment exceeds the maximum of €150,000 or his/her income in that year is insufficient to absorb all of it, can carry forward the unrelieved amount to following years up to and including 2013, subject to the normal limit of €150,000 on the amount of investment that can be relieved in any one year.

Individuals qualifying for relief

A qualifying investor is an individual who:

  • is resident in the State for the tax year in respect of which he/she makes the claim;
  • subscribes on his/her own behalf for eligible shares in a qualifying company; and
  • is not for the relevant period, as defined, connected with the company;

An individual is deemed to be connected with a company if:

  • he/she is a partner of the company;
  • he/she possesses, or is entitled to acquire, more than 30% of (a) the issued ordinary share capital of the company or (b) the loan capital and issued share capital of the company, or (c) the voting power in the company;
  • he/she controls the company (as defined in Section 11 of the Taxes Consolidation Act 1997); or
  • he/she is investing in the company as part of a deal whereby a person connected with the company in turn invests in a separate company with which the individual is connected;
  • The above conditions relating to connected parties as qualifying investors do not apply to an investor investing in his/her own company where the amounts subscribed for the issued share capital and the loan capital do not, in aggregate, exceed €500,000. Employees and directors of the investee company may invest in the company under the scheme but are subject to certain rules.

Qualifying Companies

In order to qualify for EII investment the investee company must be a "qualifying company" and must be:

  • incorporated in Ireland or in another EEA State;
  • its shares must be unquoted i.e. they must not be listed on the official list of a stock exchange or on an unlisted securities market of a stock exchange. Companies listed on Enterprise Securities Market of the Irish Stock Exchange do, however, qualify;
  • it must be tax resident in Ireland or in an EEA State and, in the latter case, carry on a business in Ireland through a branch or agency;
  • must exist for the purpose of carrying on trading activities where those activities are principally carried out in Ireland (ie at least 75 per cent of the total amount expended in the course of such activities in the relevant period is carried out in Ireland).

The certification requirements will be simplified under the EII scheme and will be handled in the main by the Revenue Commissioners. It is envisaged that companies will qualify where they meet the requirement for company size and are not on the list of excluded trades.

Qualifying Trades

EII will be available to the majority of small and medium sized enterprises ("SMEs") as the qualifying trade limitations contained in the BES scheme have been for the most part removed. However, there are certain specific trades which are excluded including the following:

  • adventures or concerns in the nature of trade;
  • dealing in commodities or futures or in shares, securities or other financial assets;
  • financing activities;
  • the provision of services, which would result in a close company that provides those services being treated as a service company;
  • dealing in or developing land;
  • the occupation of woodlands;
  • operating or managing hotels, guest houses, self catering accommodation or comparable establishments or managing property used as the same;
  • operating or managing nursing homes or residential care homes or managing property used as the same;
  • operations carried on in the coal industry or in the steel industry and ship building sectors;
  • the production of a film.

If the Company is not trading at the time the shares are issued it must commence trading within two years of the share issue or it must expend not less than thirty per cent of the money subscribed for the shares on research and development activities which are connected with the relevant trading activity.

In recognition of start up enterprises, organisations which have not yet commenced to trade but are engaged in research and development activities may be eligible under the EII scheme. In order for relief to be available such companies are required to expend at least thirty per cent of the investment proceeds on research and development activities. This represents a significant reduction from the 80 per cent required under the current BES legislation.

In recognition of "green" companies, the EII scheme contains welcome provisions for companies carrying on green energy activities (i.e. activities undertaken with a view to producing energy from renewable resources). Under the existing BES legislation, "green" companies have difficulty in obtaining investment funds as they are required to be trading for 4 months prior to relief being claimed by an investor. In a welcome change the EII legislation provides that "green" companies shall now be deemed to have commenced to trade when an application has been made for a grid connection agreement.

Amount of Capital Available

The EII scheme has raised both the annual and lifetime limit of the amount of capital a company can raise as illustrated in the table below:

Click here for table

The Shares

As with the BES scheme the EII scheme provides that the investment must be made for "ordinary shares" which is defined in the legislation as "shares forming part of the company's ordinary share capital".

The shares must be fully paid up on issue and must further qualify as "eligible shares" which are defined as:

"new ordinary shares which, throughout the period of 3 years beginning on the date on which they are issued, carry no present or future preferential right to dividends or to a company's assets on its winding up and no present or future preferential right to be redeemed"

The mandatory five year period that shares had to be held under the BES scheme has been reduced under the EII Scheme. An EII investor must now hold his shares for a period of three years from their date of issue. In the event that the shares are sold within that three year period it will result in a clawback of the EII relief for the EII investor.


Since its introduction in 1984, the BES scheme became quite a complicated piece of legislation. It is hoped that the EII scheme will stimulate greater investment in the SME sector. The widening of the trading activities that will be allowed to participate and the reduction in the holding period of the shares are particularly welcome changes. As can be seen from the above summary a lot of the requirements under the existing BES scheme have transferred over to the new EII scheme and it would be advisable for companies looking to raise funds through the new EII scheme to obtain professional advice before deciding to take the EII funding route.