State aid to entrepreneurs: De minimis and SME status

When applying for state or European Union (EU) funding, it is important for entrepreneurs to understand the rules for business support. State support is an essential tool for both business growth in general and a significant stepping stone for the further development of a specific company, such as developing new products, increasing exports, embarking on digitalization or improving energy efficiency. Knowing these rules will not only help you successfully apply for funding, but also avoid the risk of having to repay the support you received later.

When applying for state or European Union (EU) funding, it is important for entrepreneurs to understand the rules for business support. State support is an essential tool for both business growth in general and a significant stepping stone for the further development of a specific company, such as developing new products, increasing exports, initiating digitalization or improving energy efficiency. Knowing these rules will help not only to successfully apply for funding, but also to avoid the risk that the support received would have to be repaid later.

What is state support and when does it apply?

State support is any type of financial assistance – direct or indirect – provided to an economic operator from state, local government or EU funds. This includes not only subsidies (grants), but also loans on preferential terms, credit guarantees, support for training, introducing innovations, attracting investments, tax breaks, instruments for starting up or expanding operations in regions. In the sense of state aid, a commercial company can be various legal entities, such as a merchant, association, foundation, cooperative society, municipal enterprise, municipality. 

In order for financial assistance to be qualified as state aid, it must meet five characteristics:

1. the recipient is a performer of economic activity; 
2. the assistance is provided from public funds; 
3. the company obtains economic advantages that it would not otherwise obtain under free market conditions;
4. the aid is intended for specific enterprises based on their size, type of activity or location;
5. it affects competition and trade in the EU internal market.

When all of the above characteristics are met simultaneously, financial assistance is considered state aid for commercial activities. 

Not every public funding is automatically considered state aid, but the majority of programs available to entrepreneurs are qualified as state aid and are subject to specific EU regulations or national legal framework, such as Cabinet regulations, binding regulations of local governments, decisions, etc. etc., which determine the procedure for implementing the intended aid measure.

The essence, basic principles and limitations of de minimis aid

One of the most common ways to make state aid compatible with the EU market is to grant it in accordance with the de minimis regulation.

De minimis is small-scale state aid, which is considered to have no significant effect on trade between Member States and does not distort competition in the EU internal market. Consequently, it is a  simplified form of state aid, the conditions of which are determined by the European Commission regulation, as well as these conditions are included in the Cabinet of Ministers Regulation No. 715 of 21 November 2018 “Procedure for the Accounting and Granting of De Minimis Aid”. This type of support does not require prior approval by the European Commission for each project separately.

The main principles of the de minimis regulation:

• A limited amount of support may be granted to one company during a certain period (usually three fiscal years);
• The support is recorded in the State Revenue Service (SRS)  In the Electronic Declaration System (EDS) De minimis forms and the amount limit is assessed together for all received de minimis aid;
• before granting new aid, it is checked how much has already been received previously.

Main restrictions:

• there is a maximum aid threshold. The general limit for one single company is 300,000 EUR, which may not be exceeded  for a period of three years, calculated as a rolling period from the date of granting the new aid.
• In certain sectors of the economy, lower limits have been set, for example, in agriculture – EUR 50,000, in fisheries – EUR 40,000;
• If this support threshold is exceeded, the company can no longer receive de minimis aid, even if the programme would otherwise be available to it;
• In certain sectors, there may be special restrictions, for example, aid may not be provided to activities directly related to with exports to third countries or Member States. Similarly, aid may not be granted, for example, for the primary production of fishery and aquaculture products or for the primary production of agricultural products.

Principle of cumulation and affiliated undertakings

The principle of cumulation stipulates that when granting new aid, all previously received de minimis aid must be taken into account, regardless of which authority granted it or which instrument (grant, guarantee, etc.) was used. The issue of cumulation usually arises when several aid providers plan to grant aid to the same project or de minimis aid under several programmes. The conditions for cumulation must be respected in order to avoid that one project receives more aid than would be permitted under the rules. 

If cumulation with other State aid for the same eligible costs is planned, the maximum aid intensity (percentage of costs) set out in the relevant programme must not be exceeded. Furthermore, the established state aid limit is not assessed solely at the level of a single legal entity, but within the framework of "one single enterprise". This includes all related companies between which there is a controlling relationship, for example:

• a majority of voting rights in another company; 
• the right to appoint or dismiss a majority of the members of the management bodies; 
• a dominant influence under the contract or the articles of association;
• are joint owners with a controlling influence etc.

Therefore, if a business operator owns several companies or they are in a parent-subsidiary relationship, the state aid granted to them is summed up.

Determination of SME status

The status of micro, small and medium-sized enterprises (SMEs) is often a prerequisite for being able to qualify for support at all or receive a higher support intensity. When applying for support, a company must determine its size by assessing three main indicators:

• number of employees,
• annual turnover, 
• annual balance sheet total. 

SMEs are defined as companies whose number of employees and economic importance do not exceed certain thresholds:

• a medium-sized enterprise has up to 250 employees, its turnover does not exceed EUR 50 million or its balance sheet total does not exceed EUR 43 million;
• a small enterprise has up to 50 employees, and its turnover or balance sheet total does not exceed EUR 10 million;
• a micro-enterprise has up to 10 employees, and its turnover or balance sheet total does not exceed EUR 2 million.

When assessing these indicators, it is mandatory to also take into account affiliated companies and partner companies, because their indicators can be added together, thus changing the status from SME to large enterprise. This is important, because many programs are intended only for SMEs or offer them a higher support intensity.

Knowing their SME status and the remaining de minimis limit, an entrepreneur can plan investments more precisely and choose the appropriate state support programs. 

The most common mistakes that hinder the receipt of support

In practice, entrepreneurs make several mistakes that can delay the receipt of support or even prevent it from being granted. Elīna Alika, Director of the Support Granting Department of the Latvian Investment and Development Agency (LIAA), points out that one of the most common factors that prolongs the decision-making process on the granting of state support is an incompletely completed application by a merchant, as well as not all the required documentation being attached. In order not to reject the application, it is returned for clarification, but even then, often only partial information is provided or not all documents are returned. Therefore, she recommends that businesses carefully read what is required in each program. This information is often specified in the program guidelines and also in the application form descriptions.

It sometimes happens that the SME status is not determined correctly, namely, not all related or partner companies are specified, the de minimis form does not specify the natural person who owns 100% of the company's shares and therefore  is considered a separate company within the framework of the de minimis regulation.

In order to receive state or EU funding, aid providers must ensure that the most economically advantageous offer has been selected in the price survey, but often the price survey documents are not fully submitted, the price survey has been carried out incorrectly, for example, at least three applicants have not been surveyed, related companies have not been surveyed, a conflict of interest arises with the selected supplier or the company does not operate in the sector that can provide the relevant product or service, etc.

Often, an application for support is rejected because the merchant is not fully familiar with the conditions of the program,  represents a sector that is not eligible for support within the framework of the specific program,  has not fully understood what type of activities can be requested for support in the specific program. It is less common to find out information about affiliated companies abroad, or to identify the financial situation in order not to be recognized as a company in difficulty.

Why is this information important when applying for state and EU support programs?

Understanding the De minimis and SME status is crucial for a company to be able to qualify for funding at all. In addition, smaller companies often have a higher percentage of support available. By knowing the established program restrictions, an entrepreneur can avoid planning inappropriate projects. 

When applying for support, the entrepreneur is fully responsible for the truthfulness and completeness of the information on the form prepared in the system. In turn, errors made may prevent the company from receiving further state support or cause problems for the business operator in the future. If the conditions of the European Commission regulation are violated, the state support received may be considered illegal and the company is obliged to repay it with interest. 

By knowing the rules for business support, companies can better assess the benefits provided in the form of state support. Through it, various forms of assistance are available, tailored to both specific practical needs and strategic tasks, such as the purchase of new equipment, the creation of infrastructure or the training of employees. This directly contributes to the efficiency of the company  and helps to modernize, expand and achieve new goals by using public funds to stimulate its activities. 

The creation of the platform is being implemented within the framework of the European Union Recovery and Resilience Mechanism Investment 2.1.2.1. “Digital Services Platform business.gov.lv”, in close cooperation with state institutions and business representatives.
Its development is taking place gradually - by testing solutions, improving usability and adapting the platform to the real needs of entrepreneurs. Special attention has been paid to user experience in the development process – entrepreneurs are actively involved in testing and provide feedback on the ease of use of the platform.
The project “Digital Services Platform for Promoting Business Development” is implemented with funding from the European Union's Recovery and Resilience Mechanism (NextGenerationEU).