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Tuesday, 11th August 2020
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FINEX Europe and the seed capital regime: an update Back  
While the operation of the FINEX seed capital scheme has been extended to December, it is still subject to EU approval, and although more Irish traders may now be able to avail of the scheme, the critical mass of FINEX traders that the FINEX seed capital scheme hoped to attract may not now be achieved writes Gary O’Mahony.
SSince 1994, FINEX Europe (FINEX), an open outcry derivatives exchange, has been operating from an exchange trading facility in the midst of the IFSC. It specialises in the trading of currency futures and options contracts and is ultimately a subsidiary of the New York Board of Trade. It was established as a complementary trading facility to the main exchange in New York.

Initially, quite a few traders and brokers relocated from the US to trade during European hours but it was recognised that a cluster of local traders and brokers was also required for sustainability. One measure to encourage such participation was introduced via Finance Act 1995 amendments to the seed capital regime. Adjusted and extended in the intervening period, it was due to expire on 31 December 2003 but is to be extended once more to 31 December 2004. As with the Finance Bill extensions to the main seed capital scheme and the BES (which are to be extended to 31 December 2006), this is subject to obtaining European Commission approval under State Aids provisions and thus the extension may not take effect with the passing of the Finance Act.

Under the scheme, assuming an individual in 2004 invests up to c.€182,200 in a company established to operate on FINEX, he/she can receive a tax refund of up to c.€79,700 over the previous six tax years (including the ‘short’ tax year in 2001). The scheme operates by granting a tax deduction of up to €31,750 against income in each of the preceding six tax years. In effect, therefore, someone who has had sufficient income taxed at the top income tax rate can get refunds of c.44 per cent of the initial capital injection.

Conditions must be met in order to qualify for the relief, the main ones being:
- The individual obtaining the tax refund must work full-time for the FINEX company for at least one year.
- The share capital must remain invested in the FINEX company for at least five years.
- The individual obtaining the refund must own at least 15 per cent of the issued share capital of the FINEX company.
- The individual obtaining the refund should not, subject to certain exceptions, own more than 15 per cent of another company.

The tax refund procedure is quite streamlined and set-up costs are not material (company incorporation costs; capital duty of 1 per cent on share issue; FINEX membership and space rental costs). A minimum deposit of US$25k must be placed with a clearing member who will act as guarantor for trades. Further details on the mechanics of establishing and trading on FINEX are available from FINEX personnel.

FINEX has not been as successful as had been hoped when it was established, not least because open outcry exchanges globally have been coming under increasing pressure from a strong trend to electronic trading. That said, a number of traders (less than 100), whether from a trading background or not, have availed of the scheme each year since its introduction and made a living from it. Some traders (like Rory O’Callaghan and Bryan Noble, the first traders to make an application under the scheme back in 1995) continue to trade from FINEX long after they are required to by the terms of the scheme. While more Irish traders may now be able to avail of the scheme, the critical mass of FINEX traders that the FINEX seed capital scheme hoped to attract may not now be achieved.

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