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If you’re an angel investor then you have to look at the new tax relief in the Finance Bill

Tom Maguire discusses the newly proposed relief for Angel Investors recently announced at Committee Stage of Finance (No. 2) Bill 2023 in his latest Business Post column

13 November 2023

In my previous columns I mentioned the upcoming reveal of the new proposed relief for Angel Investors as part of the proposed Committee Stage amendments to the Finance Bill. This brings about an effective reduced rate of Capital Gains Tax (CGT) of 16%, or 18% if through a partnership, on a gain up to twice the value of their initial investment. There is a lifetime limit of €3 million for the relief to be available. The amendments have now been published and as I’ve always said in this column, the devil is in the detail. Tax partner Carmel Marnane and I chatted on this during the week.

As originally announced on Budget night, the investment by the individual was to be in the form of fully paid-up newly issued shares costing at least €10,000 and constituting between 5% and 49% of the ordinary issued share capital of the company. This 5% minimum ownership requirement caused concern with potential investors and has now been amended. The requirement will still apply for investments not less than €10,000 but it will not apply where the “qualifying investment” is not less than €20,000.

There are 16 pages of law behind this valuable relief which brings about certain Ts and Cs. As always with significant reliefs there is significant anti-avoidance legislation in place to protect the Exchequer and ensure the relief is used in the way it’s supposed to be used – With great power comes great responsibility. For me the key here is that cash gets into the entrepreneurial company to help it get to where it wants to be and if it becomes the next Goliath, then great.

There are Ts and Cs around “qualifying investment”, “qualifying investor” and “qualifying company” before the relief can apply. We’ll just look at “qualifying company” for this column as that’s where the investment’s cash must end up. To be within the legislation the company must be a “Qualifying company”. Some of the conditions to be within this are discussed below but some are of these requirements are based on the application of the EU’s General Block Exemption Regulation (GBER).

A company must obtain a “certificate of going concern” and a “certificate of commercial innovation” from Revenue before it can qualify. Enterprise Ireland may prepare a report or make recommendations to Revenue in connection with those certificates. However, before the company can apply for these certificates it has to tick a number of other boxes. In summary terms, the draft law says that a company “shall not” be a qualifying company unless, among other Ts and Cs, before application, the company:

  • is incorporated and is tax resident in Ireland, another EEA State or the UK
  • carries on, or intends to carry on, certain trading activities in Ireland
    holds a tax clearance certificate
  • which only controls certain types of subsidiaries and is not controlled by certain companies
  • exists wholly for the purpose of carrying on relevant trading activities or holding shares in certain subsidiaries
  • is an innovative enterprise
  • is a company that it is “reasonable to consider” intends to, and has sufficient expertise and experience to, implement the business plan

Further, each company that is a member of the relief group of which the company is a member is unlisted, and no arrangements are in existence in relation to the company becoming a listed company. In addition, the relief group of which the applicant company is a member must be an SME and not an undertaking in difficulty.

There are other conditions but some of the above are easier to tick than others. For example, an “Innovative enterprise” is defined as part of the GBER rules as meaning an enterprise that meets one of the following conditions:

  1. it can demonstrate, by means of an evaluation carried out by an external expert, that it will in the foreseeable future develop products, services or processes which are new or substantially improved compared to the state of the art in its industry, and which carry a risk of technological or industrial failure
  2. its R&D costs represent at least 10% of its total operating costs in at least one of the 3 years preceding the granting of the aid or, in the case of a start-up enterprise without any financial history, in the audit of its current fiscal period, as certified by an external auditor
  3. in the 3 years preceding the granting of the aid it has been awarded a Seal of Excellence quality label by the European Innovation Council or received certain investment by the European Innovation Council Fund
  4. in the 3 years preceding the granting of the aid it has had certain involvement in any action of the Commission’s space initiative ‘CASSINI’ or has been granted certain funding within that area

The last three conditions are factual, the company is either in or out, and if it doesn’t qualify under them then it is left with an external assessment of its commerciality.

Earlier I mentioned certain anti-avoidance provisions. One requirement is that the investor cannot be “connected” with the company; think greater than 50% ownership of the company but as always with tax, it’s not simple. So if you own your own company then the relief may not be available to you in that company based on your “connection”. Therefore, there is law reminiscent of Alfred Hitchcock’s “Strangers on a train” classic movie. In that movie two strangers, Farley Granger and Robert Walker, meet on a train; one of whom suggests that they "exchange" or “criss-cross” murders so that neither will be caught due to having no motive for the exchanged offing. And so it is with this law: If one company owner (Farley) arranges with another company’s owner (Robert) to invest similar amounts in each other’s companies such that both get the reduced CGT rate on their unconnected investments in those companies then neither Farley nor Robert will get the CGT relief.

Overall, this will be a welcome relief when the conditions are met. It may be further amended before it becomes law. The Finance Bill ain’t over until the President signs it.

Please note this article first featured in the Business Post on Sunday, 12 November 2023 and was re-published kindly with their permission on our website.