‘Dominant influence’ in SME status verification

SME status verification

For the participation in some specific Horizon Europe projects, it is necessary to prove that your company qualifies as a small and medium enterprise (SME) according to the definition established by EC Recommendation 2003/361/EC. Therefore, the SME status verification is an important part of the validation process during the Grant Agreement Preparation stage and it can involve numerous exchanges with the Central Validation Service (CVS).
Are you interested in more details about the different procedures of the SME status verification? See here.

Autonomous vs. Linked enterprises

To qualify as an SME, an enterprise must employ fewer than 250 persons and have an annual turnover not exceeding EUR 50 million and/or an annual balance sheet not exceeding EUR 43 million (Article 2, EC Recommendation 2003/361/EC). When the potential beneficiary is an autonomous enterprise (i.e. totally independent or does not have any partners or linked entities), the previous criteria will be checked based solely on its own financial data. However, when there are Partner or Linked enterprises, their data will be also included in the calculation towards the SME thresholds. If more enterprises come into play, things get tricky.

Linked enterprises are those which have any of the following relationships with each other. A company may hold more than 50% of the capital or voting rights in another company or have the right to appoint or remove more than 50% of the administrative, management or supervisory body of that company. Furthermore, legal arrangements between the companies may indicate that one company has a dominant influence over the other. Lastly, a company may, by agreement, exercise sole control over more than 50% of the capital or voting rights in the other company (Article 3, EC Recommendation 2003/361/EC).

What exactly does ‘dominant influence’ mean?

This concept is strongly related to the identification of linked enterprises, and therefore to the SME status verification process.
Dominant influence refers to the ability of one enterprise to significantly affect the operating and financial policies or decisions of another enterprise, even if it does not own more than 50% of its capital or voting rights. This situation can result from a contract between the enterprises or from a provision in their articles of association.

Examples of relationships that could signify dominant influence include the following:

• A shareholder has ‘veto rights’ on strategic decisions related to the business/financial policy of the company. These veto rights typically include decisions on issues such as budget, business plan, major investments or appointment of senior management, and therefore go beyond those rights normally accorded to minority shareholders to protect their financial interests as investors.
• A minority shareholder with specific rights such as preferential shares to which special rights are attached allowing them to determine the strategic commercial behaviour of the enterprise, for example the power to appoint more than half of the members of the supervisory/administrative board.
• Control over management and resources of the company, obtained through a contract, similar to acquiring shares or assets, even though property rights or shares are not transferred.
• Very important long-term supply agreements or credits from suppliers or customers, combined with structural links, may also indicate a dominant influence.

We will be happy to help you sail through the verification process, just get in touch: hello@getpolite.eu