The EU recommended definition of small and medium sized enterprises (SMEs) is used in several places in UK tax law. In an important recent case from Germany, the Court of Justice of the European Union (CJEU) considered the extent of linkage to be applied in assessing whether an entity is an SME, concluding that linkage can exist without formal relationships or contractual arrangements. Linked enterprises can broadly be amalgamated with other linked enterprises in considering whether an enterprise is an SME.

The EC recommendation states that "linked enterprises" are enterprises which have any of the following relationships with each other.

a. An enterprise has a majority of the shareholders' or members' voting rights in another enterprise.

b. An enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise.

c. 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.

d. 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 has concluded that (d) above should be interpreted as follows.

" 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 mediumsized enterprise within the meaning of that recommendation."


This case may have significant implications for assessing whether an enterprise is an SME and entitled to associated tax benefits attributable to SME's. SME's which are close to the limits due to linked or partner enterprises should review their categorisation as an SME in the light of this further guidance to confirm whether in fact they do meet the conditions for being an SME.

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