Empowering Ireland’s SME sector through tax reform

Ireland’s SMEs are being held back by a tax system that stymies growth and ambition. Alan Bromell makes the case for a more cohesive and pragmatic pro-growth regime

Ireland’s small- and medium-sized enterprises (SMEs) do not lack ambition; they lack a tax system that can help them grow. If policymakers are serious about building enduring indigenous businesses, reform must move from rhetoric to practical action.

Prompt, targeted tax reform for business owners and investors could contribute towards radically improving the prospects of the SME sector.

Not only could it open access to finance options for businesses, it could also encourage business founders to remain at the helm rather than selling too early.

Unlocking investment

Consider the finance challenge: the Employment Investment Incentive Scheme (EIIS) is intended to boost investment in Irish businesses by offering tax relief to investors in high-risk start-ups. In practice, however, the scheme is complex and does not match the commercial realities of SMEs.

Fixing the EIIS could prompt a sea change in the nature and number of potential investors in Ireland.

According to the Central Bank, €167 billion is held on deposit in Irish banks. Mobilising even a portion of these funds for productive investment should be a national priority, and a revised EIIS could go a long way to making it happen.

Simplifying EIIS eligibility and providing upfront Revenue confirmation to companies that submit accurate information (similar to the UK’s Enterprise Investment Scheme) would be an important first step.

The Government could also extend relief to group subsidiaries, ease connected party rules and make capital gains tax (CGT) loss relief available under EIIS to further incentivise investment. This should not be controversial.

KPMG’s recent Enterprise Barometer found that just 35 percent of entrepreneurs feel the Government truly supports enterprise as a catalyst for economic growth.

Rewarding scale over sale

Most business owners want to keep building. KPMG’s Enterprise Barometer found that 83 percent of founders in Ireland want to lead enduring companies, rather than cash out or move on.

Founders and business owners are ambitious and motivated, but just 18 percent see Ireland’s tax environment as offering incentives to retain ownership, according to the survey.

To really foster a vibrant indigenous sector, Ireland needs meaningful tax reform.

Budget 2026 offered a step in the right direction by increasing the lifetime limit from €1 million to €1.5 million for the reduced 10 percent CGT rate for entrepreneurs. But this increase, although welcomed, does not meaningfully move the dial on this issue.

To compound this further, the reduced 10 percent rate applies only to capital events. This is another inhibitor.

On one hand, a founder can sell the business and pay CGT at 33 percent, or 10 percent if they qualify for entrepreneur relief.

Alternatively, the founder can try to scale their company while paying a marginal tax rate of over 55 percent on salary or dividends, once USC and PRSI are factored in.

The rationale to cash out is therefore more compelling. There is no tax incentive for owners to reinvest and grow their business.

Having invested personal savings and years of effort, and taken significant risk, growth-focused founders find there’s little reward. They must endure a tax environment that penalises success.

Two options emerge—sell or move the business, and we see that more often than we would like.

So, we need to level the playing field between income and capital events.

A flat 20 percent income tax rate on dividends from trading SMEs and a 10 percent rate for those who qualify for entrepreneur relief would reward founders and remove the pressure to sell early.

The discriminatory three percent USC surcharge on founders and the self-employed should also be addressed.

Growth and innovation

As it stands, both investors and founders face complexity and penalties blocking both the risk-taking and the capital investment businesses need to scale.

To enable ambition, Ireland needs a cohesive, pragmatic and pro-growth tax system. Tax policy should appropriately reward innovation and risk-taking.

Finally, the concept of “static modelling”, when costing tax expenditures, needs fresh thinking.

Static modelling considers how tax policy changes might affect revenue, budgets or distribution, while assuming that the overall economy—total income, employment and investment—remains unchanged.

Currently, when the Government assesses the cost of a tax rate reduction, for example, it applies the rate reduction to projected income or gains.

This approach has prevented meaningful progress by ignoring the benefits to the Exchequer of founders continuing to grow their businesses from Ireland.

Instead, we need to move towards a dynamic modelling approach that takes into account the greater gains, income levels and Exchequer returns these growing business contribute.

Without reform, Ireland’s SME sector will remain static. By being brave, we can encourage a dynamic environment in which Irish business, Government finances and wider society all stand to benefit.

Alan Bromell is Tax Partner at KPMG Ireland