Are You Certified for Angel Investor Relief?

A new tax relief, known as “Angel Investor Relief”, aims to help Irish tech start-ups attract investment and make Ireland a more attractive location for business angel investors. This new relief offers reduced rates of Capital Gains Tax (CGT) for individuals and qualifying partnerships who invest in innovative start-up SMEs. We discuss the key conditions and what companies and investors need to consider.

A new incentive to encourage Angel investment

Informally called “Angel Investor Relief”, a new tax relief has been introduced to help Irish tech start-ups attract investment from business angel investors. Specifically, this relief aims to incentive equity investment for significant minority shareholdings in early-stage innovative enterprises.

This new relief offers reduced rates of Capital Gains Tax (CGT) – being 16% for individual investors and 18% for qualifying partnerships – when the investment is sold. However, the relief is subject to some limitations and qualifications which may impact its effectiveness.

What should companies do?

Companies wishing to leverage this new relief as a tool to raise investment must make an application to the Revenue Commissioners.

A novel feature of this tax relief is that it is only available for investment in companies which hold two specific certificates issued by the Revenue Commissioners: a Certificate of Going Concern and a Certificate of Commercial Innovation.

The Certificate of Commercial Innovation may prove to be the more challenging certificate. It will only be issued to a company which can demonstrate that is an “innovative enterprise”. The legislation anticipates that the Revenue Commissioners will consult with Enterprise Ireland to determine whether a company is an innovative enterprise. It remains to be seen how this regime will operate in practice.

What do companies and angel investors need to know?

In addition to the requirement for certificates, some of the more notable features of Angel Investor Relief are that:

• The reduced rate of CGT is only available on gains up to twice the value of the investor’s initial investment.
• The investment must be for at least €20,000 (or €10,000 if an individual investor acquires 5% or more of the company).
• The investment must be held for a minimum of 3 years.
• The investor’s shares cannot have preferential rights to a dividend or on a winding up or any other arrangement which reduces the risk associated with the investor's shares.

Is the Employment Investment Incentive Scheme (EIIS) now obsolete?

In short, no.

Although Angel Investor Relief offers attractive rates of CGT, the scheme has a number of disadvantages when compared to the longstanding EIIS:

• EIIS operates on a self-assessment basis. While qualifying companies must still meet the conditions of the EIIS, they are not required to be pre-approved by the Revenue Commissioners. In contrast, companies looking to seek investment which benefits from Angel Investor Relief must hold the qualifying certificates from the Revenue Commissioners (which may include engagement with Enterprise Ireland).
• EIIS front-loads the tax benefit for investors. The majority of the relief from EIIS is given to investor in the year of investment. In contrast, investors who avail of Angel Investor Relief will only see a tax benefit at the future point of sale of the shares.

If your business is fundraising, speak to one of our Fast Growth Companies team to discuss how we can help you navigate the investment landscape and scale your business for success.

The content of this article is provided for information purposes only and does not constitute legal or other advice.