SMEs do not lose their status automatically | In Principle

Go to content
Subscribe to newsletter
In principle newsletter subscription form

SMEs do not lose their status automatically

In 2020, the EU’s General Court held in T-745/17, Kerkosand v Commission, that SME status is determined based on three criteria verifiable in two successive accounting periods (known as the “two accounting years rule”). It has been four years since the General Court issued this ruling, but the authorities acting as intermediate or managing institutions under EU programmes, as well as national administrative courts (albeit with commendable exceptions), continue to take the position that changes in a beneficiary’s corporate ownership structure (acquisition of a majority of its shares) result in automatic loss of SME status on the date of the change.

In the case of changes in corporate ownership, many beneficiaries of EU funds have been called upon to repay all or part of state aid, as it was deemed that the financial support, intended only for SMEs, was granted to an ineligible large enterprise. In turn, in completed projects, in the opinion of the public authorities, such ownership conversions violate the project’s durability period because the project has effectively undergone substantial modification. In that case, reimbursement of the grant is also ordered (pro rata to the period during which the beneficiary did not meet the eligibility criteria for SME status).

The administrative courts in Poland have recognised this approach as correct in a series of rulings. Additionally, they frequently cite the position of the Supreme Administrative Court stated in the judgment of 17 May 2017 (case no. II GSK 5186/16), i.e. three years before the Kerkosand ruling. That case from 2017 essentially established a line of jurisprudence holding that share purchase transactions can automatically result in the loss of SME status on the date of the transfer.

In light of the ruling in Kerkosand, the staying power of this line of jurisprudence is astonishing. Judgments of the Court of Justice of the European Union (of which the General Court is a part) are an important aspect of application of the law and are binding in terms of the general, abstract principles expressly formulated in the justifications of these judgments.

What about the two accounting years rule?

In the cited judgment of 17 May 2017, the Supreme Administrative Court of Poland held that the rule regarding the loss of SME status as a result of exceeding or falling below employment thresholds or financial ceilings required for SMEs within two consecutive accounting periods (the two accounting years rule) applies exclusively to the conduct of ordinary business. If such a deviation occurs as a result of ownership conversions, the two accounting years rule does not apply. This holding has since been followed by administrative authorities and administrative courts.

As a result, Polish courts find that the authorities are correct to demand that beneficiaries pay back the relevant portion of aid they have received, because they automatically lost SME status due to a change in ownership.

What does this mean in practice?

According to the administrative courts, in cases concerning repayment of all or part of state aid due to the beneficiary’s failure to meet the eligibility condition of SME status, an SME’s change to a large enterprise occurs at the time a majority of shares in the enterprise are acquired by another entity. This might happen for example when there is a transfer of shares in an enterprise benefitting from state aid reserved for SMEs, creating links between the acquirer and the beneficiary resulting in exceeding employment and financial ceilings foreseen for SMEs, thus changing its status. In the assessment of these courts, as a result of such transactions, the beneficiary’s status as an SME is automatically lost, since the change of ownership structure is considered “a case of sudden, one-off activities or processes in the enterprise.” The consequence of such transactions is the recognition by the authorities and the courts that the beneficiaries have obtained undue financial support (not intended for a large enterprise), which is subject to repayment.

It should be emphasised that beneficiaries are required to obtain the authority’s opinion on this matter before making such transactions, under pain of termination of the support agreement. Often these opinions oppose the transaction, finding that the planned ownership change will necessitate repayment of the aid with interest, since the SME status of the beneficiary will change on the date of the transaction.

Sometimes beneficiaries do not request such an opinion and do not notify the authorities of the ownership change. This often results from a cold calculation. Beneficiaries recognise that the risk of a demand for repayment of aid will be similar if they carry out the transaction contrary to the authority’s opinion, or without seeking its opinion. More than once I have heard beneficiaries state, quite logically, that since the intermediate or managing institution recognises that the transaction automatically causes the loss of SME status, it is pointless for the recipient to seek the institution’s opinion.

So the judgment of the General Court is invalid?

An analysis of administrative court rulings in Poland shows that beneficiaries who made changes in their ownership structure and were called upon to return all or part of the public funds they obtained have repeatedly invoked the clear and unambiguous position of the CJEU as presented in T-745/17, Kerkosand. In Kerkosand, the General Court considered a complaint against a decision of the European Commission regarding the compatibility with the internal market of aid for a project granted to an entity that, as a large enterprise, was not entitled to the aid (as 100% of the beneficiary’s shares were sold to a large enterprise).

In Kerkosand, the court held that Art. 4(2) of Annex I to the EU’s General Block Exemption Regulation (GBER), which defines the two accounting years rule, should have been applied: “Article 4 of Annex I to Regulation No 651/2014 lays down the method of calculation, related to the latest approved accounting period and on an annual basis, which is intended to determine the presence of the three criteria for being an SME, as referred to in Article 2(1) of that annex, namely a staff headcount of less than 250 persons, a maximum annual turnover of EUR 50 million and an annual balance sheet total not exceeding EUR 43 million” (par. 88).

And what about the “User guide to the SME definition”?

In Kerkosand, the European Commission questioned the application of Art. 4(2) of Annex I to the GBER when there is a change of ownership of a company, citing the “User guide to the SME definition” (as published by the Commission in 2015 and also in the revised 2019 version). The guide states that the purpose of the two accounting years rule “is to ensure that enterprises that experience growth are not penalised with loss of SME status unless they exceed the relevant thresholds for a sustained period,” but the rule “does not apply in the case of enterprises that exceed the relevant SME thresholds as a result of a change in ownership following a merger or acquisition, which is usually not considered temporary and not subject to volatility.” Consequently: “Enterprises that are subject to a change in ownership need to be assessed on the basis of their shareholder structure at the time of the transaction, not at the time of closure of the latest accounts. Therefore, the loss of SME status may be immediate.”

This passage from the guide is often cited by the authorities and administrative courts in state aid recovery proceedings, and wording to this effect is often carried over directly into the terms and conditions for project calls.

Two accounting years rule excluded solely for nuclear projects

In explaining the application of the two accounting years rule in Kerkosand, the General Court rejected the Commission’s reliance on the “User guide to the SME definition,” making a point that seems to elude national authorities and administrative courts.

The source of the exclusion of the rule stated in the SME guide is cited there, namely Commission Decision 2012/838/EU. But the General Court pointed out that the source is not of general applicability, but is a Euratom decision and applies only to nuclear research and training (where indeed the GBER is excluded in any event).

Nonetheless, this has not stopped the Polish administrative courts from invoking this section of the SME guide in the cases of beneficiaries whose activities are far removed from the nuclear arena.

Moreover, the General Court did not just interpret the cited Decision 2012/838/EU, but also quoted the Commission’s statement in the SME guide itself, that it:

  • Only serves as general guidelines for stakeholders
  • Does not have any legal force and does not bind the Commission in any way, and
  • Does not constitute a derogation from the binding rule cited in Art. 4(2) of Annex I of the GBER.

Is there hope for a change in the jurisprudence of the Polish courts?

On the misconceived notion that beneficiaries of state aid can automatically lose their SME status due by being acquired, some positive developments in the rulings of the administrative courts cannot be overlooked.

The Province Administrative Court in Warsaw pointed out in its judgment of 31 March 2022 (case no. VIII SA/Wa 185/22) that the authorities were wrong to regard Kerkosand as “an isolated judgment, issued in a specific case,” and that it was dubious to rely on a previous line of rulings from the administrative courts inconsistent with Kerkosand, without analysing that case and allowing for a potential change in the jurisprudence.

Citing the General Court in Kerkosand, the court in Warsaw correctly pointed out that the Commission’s SME user guide is not a source of law, and the terms and conditions of the call for proposals in the case did not allow for a derogation from Art. 4 of Annex I of the GBER. The holding in this case will be particularly relevant where the transaction in question does not cause a change in the ownership structure of the beneficiary itself because the acquisition involves the shares of its parent company.

This ruling by the Province Administrative Court in Warsaw found that the assessment of the share acquisition by the administrative authority was unlawful, and the ruling was upheld in the Supreme Administrative Court judgment of 12 July 2022 (case no. I GSK 1019/22).


Every set of facts requires an individual evaluation, but the General Court judgment and the recent ruling from the court in Warsaw persuasively call for rejection of the notion that changes in an SME’s shareholding structure due to a transfer of shares, merger or division can cause a beneficiary of state aid to automatically lose its SME status. The view that these changes constitute a sudden, one-off event resulting in an increase in the beneficiary’s market power is not a persuasive counterargument.

Nothing relieves the authorities of the obligation to determine pursuant to Art. 4(2) of Annex I to the GBER whether there has indeed been a change in the size of the company from an SME to a large enterprise. For this purpose, it is necessary to examine whether both of the following prerequisites exist:

  • On the date of closure of the accounts, the enterprise finds that it has exceeded the headcount or financial thresholds stated in Art. 2 of the annex, and
  • The thresholds are exceeded over two consecutive accounting periods.

The two accounting years rule can be excluded solely if the beneficiary is involved in nuclear research and training. This can clearly be ruled out for the vast majority of state aid beneficiaries.

Dr Anna Kulińska, Tax practice, Wardyński & Partners