The BES was introduced to allow individuals a tax deduction for the cost of investing in certain Irish companies. The purpose of the relief is to encourage investment and to create or maintain employment in such companies. It is well documented that Irish business are currently facing major difficulties in raising finance from banks. Given the current circumstances Irish companies would be extremely well advised to consider the BES as an alternative method of raising finance for the purposes of creating or maintaining employment, enlarging capacity, increasing sales, engaging in research and development, identifying new markets and developing existing markets.
Companies involved in the following activities can qualify for the BES:
(ii) Rendering services in the course of a service undertaking in respect of which an employment grant or its equivalent was made available by an industrial development agency.
(iii) Commercial research and development.
(iv) The cultivation of horticultural products in greenhouses.
(v) The cultivation of plants in the State by micro propagation or plant cloning.
(vi) The construction and leasing of an advance factory building.
(vii) Research and development activities undertaken with a view to the carrying on of trading operations referred to in (i), (ii) or (v).
(viii) The cultivation of mushrooms within the State.
(ix) The operation of one or more tourist traffic undertakings.
(x) The sale of export goods by a special trading house.
(xi) The production, publication, marketing and promotion of qualifying musical recordings.
There are, needless to say, various conditions that must be fulfilled for a company to be able to implement a BES scheme and for the investor to secure income tax relief. For example, the investor must normally hold the BES shares for 5 years.
The investor will receive income tax relief at the higher rate of income tax if applicable (subject possibly to the high earner’s restriction).
Broadly speaking the BES works as illustrated by the following example:
X Limited is a manufacturing company that qualifies for the BES. 10 individuals subscribe for 10,000 €1 Euro shares each i.e. an investment of €10,000 each. For argument’s sake let us presume each individual pays income tax at 41%. Therefore each individual secures income tax relief of €4,100 Euros. The company uses the money for 5 years and following that period the 100,000 shares are redeemed for €1 each. Therefore each individual gets his €10,000 investment back. It is as if the company had an interest free loan of €100,000 to use during the period.
Please contact Kieran Kennelly if you have any queries.