EU mulls legality of SME incentive

The EU is still scrutinising a competition ruling which may lead to it insisting the Government retrieve as much as €25m from potentially hundreds of business people who benefited from the country’s leading tax incentive business scheme which was designed to help SMEs.

Finance Minister Paschal Donohoe, late last year, was forced to rush through legislative amendments after taking the advice of the attorney general that parts of the Employment and Investment Incentive (EII) scheme had likely fallen foul of EU State aid rules.

According to some estimates, Revenue may have to retrieve as much as €25m, equivalent to the tax incentives investors had injected into SMEs over the last three years, if the EU’s competition division, led by Margrethe Vestager, rules the Government’s scheme has broken European rules.

Her directorate previously ruled Ireland should retrieve at least €13bn in back taxes from Apple, and referred the Government to the European court for failing to recover the illegal State aid.

A source said any adverse ruling over the EII scheme would “create a headache” for the Government over the ways to retrieve the money.

A European Commission spokeswoman said: “We are in close contact with the Irish authorities. The assessment is ongoing and we cannot prejudge its outcome nor when it will be finalised.”

The EU will likely examine the changes applied to the incentive approximately three years ago, which may have opened up the scheme to individuals who were “connected” to the SME.

A connected person could include an individual who owns shares, loan capital, or voting rights of the company involved, or any individual who might have a claim over assets on the winding-up of the company.

A spokesman for the Department of Finance said: “The commission is still looking at the situation and has not made any findings yet in relation to EII. We would not preempt any commission conclusions in the matter and so cannot speculate on the finding and any possible recovery amount.”

In November, the department had estimated the value of questionable incentives under the scheme cost the exchequer between €6m and €10m in 2016. That accounts for about 30% of the €32.5m total tax cost of the overall scheme in 2016.

The overall cost of the investments could rise as much as €25m when the cases from 2015 through this year are assessed.

In 2016, there were 1,768 qualifying investors involving 261 companies under the scheme, but not all these investors or companies will likely fall foul of the potential error.

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