Support for Small and Medium-Sized Enterprises Operating in the Single Market

25. 10. 2023

The European Commission has published on its website a press release on small and medium-sized enterprises (SMEs) operating in the Single Market.

A set of initiatives put forward by the European Commission in September this year aims to:

  • provide short-term assistance
  • strengthen fairness in the business environment
  • boost the long-term competitiveness and resilience of these enterprises.

There are 24 million European SMEs in the European Union, accounting for 99% of all businesses and two-thirds of private sector jobs in the EU. 

The European Commission mentions the following three main points of assistance

  • Regulation on combating late payments in commercial transactions

The new rules will repeal the 2011 Late Payment Directive and replace it with a Regulation. The proposal introduces a stricter maximum payment limit of 30 days, removes ambiguities and addresses legal loopholes in the existing Directive. The proposed text also provides for automatic payment of accrued interest and compensation fees and introduces new enforcement and redress measures to protect companies against bad payers.

  • Directive setting up a head office tax system for small and medium-sized enterprises

This Directive will give SMEs operating cross-border through permanent establishments the option to interact with only one tax administration, referred to as the 'head office', instead of having to comply with multiple tax systems. The European Commission hopes that this proposal will increase tax certainty and fairness, reduce compliance costs, while minimizing the risk of double and over taxation and tax disputes. 

  • strengthening the access of these enterprises to financing

The European Commission expects to make more than €200 billion available to small and medium-sized enterprises from the Cohesion Fund and the Resilience and Recovery Facility under various funding programmes running until 2027.

The main problem faced by SMEs in the Single Market is the high costs that companies incur when they operate across borders and establish a permanent establishment abroad. Then, of course, compliance with tax regulations is necessary, which can lead to the risk of double or over-taxation and time-consuming legal disputes. The cost related to corporate income tax is estimated at up to €54 billion a year. Moreover, 90% of this amount is incurred by very small businesses, with fewer than 10 employees. 

The Commission's proposal should allow SMEs operating cross-border through permanent establishments to calculate their taxes based only on the tax rules of the Member State of their Head Office. SMEs would file one single tax return with the tax administration of their Head Office, which would then share this return with the other Member States where the SME is operating. The Member State of the Head Office would also subsequently transfer any resulting tax revenues to the countries where the permanent establishments are located.

The scope of these rules would be limited to standalone SME entities with permanent establishments and would not be extended to SME groups with subsidiaries. Therefore, if an SME reaches a degree of expansion that allows it to grow into a group, it will no longer be entitled to the simplification framework. It would have the possibility to continue to apply the simplification rules, but only up to the end of the five-year period of the option. In fact, once an SME chooses to apply the new rules, it will have to remain under this system for five fiscal years and will be able to renew their choice every five years without limit as long as they continue to meet the eligibility requirements. The eligibility and termination provisions are designed to discourage potential tax planning practices, notably the deliberate transfer of the Head Office to a low-tax country.

 

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