EU SME Relief Package

On 12 September 2023, the European Commission presented a series of initiatives to address the needs of Europe's small and medium-sized enterprises (SMEs). The Communication on the SME Relief Package proposes new measures that are intended to provide short-term relief, boost the long-term competitiveness of SMEs, and strengthen fairness in the business environment across the Single Market.

The SME Relief Package includes:

a proposal for a late payment regulation,

a proposal for a Directive on tax simplification for SMEs (or Head Office Tax System for SMEs),

measures to improve access to finance and skilled workforce, and to support SMEs throughout their business lifecycle.

We have provided more detail on the measures included in the SME Relief Package below.

Late Payment Regulation

On 12 September 2023, the Commission published a Proposal for a regulation of the European Parliament and of the Council on combating late payment in commercial transactions which is intended to combat the problem of late payments in commercial transactions in Europe. The Commission notes that late payments have a major impact on SMEs and states that one in four bankruptcies are due to invoices not being paid on time.

The Commission has highlighted that one of the root causes of late payments is asymmetries in bargaining power between a large or more powerful client (debtor) and a smaller supplier (creditor). This often results in suppliers having to accept unfair payment terms and conditions.

To address this problem, the Commission proposes a new regulation to combat late payments, which revises the existing 2011 Directive on combating late payment in commercial transactions. This revision aims to bring fairness in commercial transactions, increase the resilience of SMEs and supply chains, foster a more widespread use of digitalisation and improve the financial literacy of entrepreneurs.

The proposed regulation grants some flexibility to the Member States, for example the setting up of enforcement bodies, Alternative Dispute Resolution (ADR) mechanisms, provision of credit management training and financial digital literacy.

In addition, the proposal introduces the following:

Stricter and more streamlined measures to prevent late payment practices in the form of maximum payment terms: Streamline the current provisions and introduce a single maximum payment term of 30 days for all commercial transactions, including B2B and transactions between public authorities and businesses. This term would be the same across the EU.
Ensure that the payment of accrued interest and compensation fees is rendered automatic: Make the payment of interest automatic and compulsory until payment of the debt. Contrary to the current Directive, under the new proposal the creditor cannot waive its right to claim interest for late payment. The rate of late payment interest is +8% above the ECB reference rates. In addition, the new rules raise the flat fee compensation from €40 (or equivalent) to €50 (or equivalent) per commercial transaction paid late.
Lay down new enforcement and redress measures to protect creditors against bad payers: Under the new proposal, Member States would be required to set up enforcement authorities to monitor and ensure the application of the rules. These authorities would have the power to receive complaints, initiate investigations and issue sanctions against late payers that are effective, proportionate, and dissuasive. In addition, Member States should promote the voluntary use of Alternative Dispute Resolution (ADR) to preserve the contractual relationship between debtor and creditor, provide a quick resolution to the payment dispute between the parties, while ensuring the proper implementation of the rules. It also grants better protection of subcontractors in public construction works, which are particularly vulnerable to late payments, by ensuring public authorities have the power to verify that payments are effectively passed from the main contractor to the subcontractors.

The new proposal does not impose any new reporting requirements, neither on business nor on public authorities. Once adopted by the European Parliament and the Council, the new rules will become applicable one year after the entry into force of the regulation, to allow the public authorities and businesses to take the necessary steps to comply with the new rules.

Head Office Tax System for SMEs (HOT)

On 12 September 2023, the Commission published a Proposal for a Council Directive establishing a Head Office Tax system for micro, small and medium sized enterprises, and amending Directive 2011/16/EU (HOT) which is intended to give SMEs operating cross-border through permanent establishments the option to interact with only one tax administration instead of having to comply with multiple tax systems.

If adopted by the European Council, it is intended the HOT proposal would apply from 1 January 2026.

The Commission is aiming to increase tax certainty and fairness, reduce compliance costs and distortions in the market that influence business decisions, while minimising the risk of double and over taxation and tax disputes.

The Commission anticipates that the expected decrease in compliance costs should foster investment and cross-border expansion in the EU. HOT is intended to ensure that SMEs operating in different Member States would be able to fully maximise the freedom of establishment and the free movement of capital without being hindered by unnecessary tax related obstacles.

The Commission’s proposal would allow SMEs operating cross-border through permanent establishments to choose to interact with only one tax administration, that of the Head Office, instead of having to comply with multiple tax systems.

SMEs would 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 share it 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. If a SME reaches a degree of expansion that allows it to grow into a group, it will no longer be entitled to avail of the simplification framework. It would be permitted to continue to apply the simplification rules only up to the end of the five-year period of the option.

When a SME chooses to apply the new rules, it would have to remain under this system for five fiscal years, unless the Head Office changes residence in the meantime, or their foreign business activity grows exponentially in comparison to the business activity in the Member State of origin. In that case, the rules cease to apply.

SMEs would be able to renew their choice every five years without limit as long as they continue to meet the eligibility criteria. The eligibility and termination rules include provisions which are intended to discourage potential tax planning practices, such as the deliberate transfer of the Head Office to a low-tax country.

The Commission published a public consultation on the proposal for a Directive on 23 September 2023. The Institute responded to the consultation in December 2023.

Non-legislative measures to support SMEs

The Commission’s SME Relief Package also proposes several non-legislative measures to support SMEs and ensure their full economic potential is harnessed:

Improve the current regulatory environment for SMEs by building on the successful first full year of application of the ‘one in one out principle’, improving the application of the SME Test and consistently considering the needs of SMEs across future EU legislation, for example through longer transition periods for SMEs. The Commission will appoint an EU SME Envoy to provide guidance and advice to the Commission on SME issues, and advocate SME interests externally. The EU SME Envoy will report directly to the President of the European Commission (while also reporting to the Internal Market Commissioner on SME-related activities supported by his services), and will participate in Regulatory Scrutiny Board hearings with Directorates-General on initiatives that have a high potential impact on SMEs. The Commission will also promote the use of regulatory sandboxes to foster experimentation and innovation of SMEs.
Simplify administrative procedures and reporting requirements for SMEs by launching the Once-Only Technical System (part of the Single Digital Gateway) by the end of 2023, allowing SMEs to complete administrative procedures across the Single Market without the need to re-submit documents. The Commission will simplify and digitalise cumbersome procedures, such as declarations and certificates for the posting of workers (e.g. A1 document on social security rights). In addition, the Commission will build on the 25% reduction in reporting obligations announced in March 2023 with further proposals, as well as measures to systematically map such burdens and develop targeted rationalisation plans for future years.
Boost investments available for SMEs on top of more than €200 billion available to SMEs under the EU’s various funding programmes running until 2027. Build on the success of the SME window of InvestEU by encouraging Member State transfers to national compartments in that window and ensuring that part of the proposed €7.5 billion EU guarantee under a new dedicated Strategic Technologies for Europe Platform (STEP) window of InvestEU is also available for SMEs. A simple and standardised methodology will support SMEs in reporting on sustainability topics, thereby facilitating access to sustainable finance.
Enable a skilled workforce for SMEs to flourish by continuing to support training actions provided by the Large Skills Partnerships under the European Pact for Skills and other support initiatives to match skills with the needs of SMEs from the European labour market.
Support SMEs’ growth by reviewing the current SME definition thresholds and developing a harmonised definition by the end of 2023, and potentially adapting certain obligations for small mid-cap companies to unleash their full economic potential.