On Review of SME Definition

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The definition of small and medium enterprises (SMEs) is an important issue, regarding not only a number of European policies that have been set up to ensure these SMEs benefit from financial support, fee reduction, reduced administrative burden, etc.

SME definition, with some changes made, is usually transposed to national laws, regarding business taxation. For example, Lithuanian Law on Corporate Income Tax states that taxable profits of entities (except for non-profit entities) whose average number of employees on the staff list does not exceed 10 and whose income during the tax period does not exceed EUR 300 000 shall be taxed at a rate of 5%, instead of standard 15 % rate. Even more favourable regime exists for such entities during their 1st year of operation.

They are entitled to pay 0 % CIT. Therefore, we can clearly see that part of the criteria (headcount) is taken from the current SME definition of micro-sized enterprise. Sadly, financial criteria are lowered, thus preventing a larger number of businesses from taking advantage of this favourable tax regime. Member States should be encouraged to apply SME criteria thoroughly and in favour of business.

On the contrary, Lithuanian Law on Small and Medium-Sized Business Development uses the exact same criteria, provided by the = EU.  According to this Law, the following forms of State aid may be applied to small and medium-sized business entities:

1) tax relieves (if provided by law), relieves on charges;

2) financial support: granting of loans on favourable terms, partial or full payment of interest, provision of guarantees, credit insurance, investment of risk capital in small and medium-sized enterprises, reimbursement of certain expenses (expenses related to fees on registration, research, guarantee fees, credit insurance premiums, acquisition of quality certificates, and other expenses), subsidies for job creation;

3) advisory, training, skills improvement or re-qualification services offered to enterprise owners, members of enterprise bodies and enterprise employees on favourable terms;

4) establishment of business incubators, business centres, technology parks and services provided by them;

5) other forms of assistance established by the Government, county governors or local authorities.

We believe, that in case of Lithuania, micro-sized enterprise headcount threshold of 10 employees very often forbids business from possibility to use the advantage of favourable tax regime & other forms of assistance. It is especially evident in situations where companies employ more than 10 employees (some of them may even work part-time) and their annual income does not exceed 300,000 or 2 mln. Euros.

Therefore, we believe that headcount threshold should be increased, especially in cases of micro-sized and small-sized enterprises.

Also, a part of a criteria of definition of SMEs is usually used when introducing business-friendly VAT cash-accounting systems around the Member States. Member States applying this accounting scheme set a threshold for taxable persons based on their annual turnover that may not exceed the maximum of EUR 2,000,000 or the equivalent in national currency, after consulting the VAT Committee.

Member States should be encouraged to apply business-friendly VAT cash-accounting systems for micro-sized and small-sized business, though this instrument helps to balance the cash-flow and mitigates the need to use expensive credit alternatives.

Also, it is very important to mention, that SME status is created to diminish the administrative burden on business. Treating enterprises in which a public authority controls 25% (or less) of the capital as SMEs, puts entirely privately owned companies into competitive disadvantage.

Therefore, SME status should not be given to companies, that are partially owned by the state, or the threshold should be lowered.

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