Not such a clear question following a recent case at the Court of Justice of the European Union.

In a recent legal case in Germany, the Court of Justice of the European Union (CJEU) considered the implications of linked enterprises when assessing whether an entity is an SME. The case concludes that linkage can exist without formal relationships or contractual arrangements.

The EC recommendation stated that “linked enterprises” are enterprises which have any of the following relationships with each other:

  1. An enterprise has a majority of the shareholders’ or members’ voting rights in another enterprise.
  2. An enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise.
  3. An enterprise has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise or to a provision in its memorandum or articles of association.
  4. An enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant to an agreement with other shareholders in or members of that enterprise, a majority of shareholders’ or members’ voting rights in that enterprise.’

The CJEU also concluded that (d) above should be interpreted as follows.

“…enterprises may be regarded as ‘linked’ for the purposes of that article where it is clear from the analysis of the legal and economic relations between them that, through a natural person or a group of natural persons acting jointly, they constitute a single economic unit, even though they do not formally have any of the relationships referred to in the first [a] subparagraph of Article 3(3) of that annex. Natural persons who work together in order to exercise an influence over the commercial decisions of the enterprises concerned which precludes those enterprises from being regarded as economically independent from each other are to be regarded as acting jointly for the purposes of the fourth subparagraph of Article 3(3) of that annex. Whether that condition is satisfied depends on the circumstances of the case and is not necessarily conditional on the existence of contractual relations between those persons or a finding that they intended to circumvent the definition of a micro, small or medium sized enterprise within the meaning of that recommendation.”

So what are the implications of this case for SME’s?

SME’s very often enjoy lower overall corporate tax rates than non-SME businesses, however if the SME is already close to the parameters for classification as an SME, it should look closely at any relationships and links it has to other entities that may alter its status as an SME.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.