Criteria to be considered a small company finally changed

Change in criteria

As a result of this legislative amendment, Article 1:24 of the Code on Companies and Associations Code (WVV) has been amended as follows:

Small companies are companies with legal personality that, on the balance sheet date of the most recently closed financial year, do not exceed more than one of the following criteria:

The threshold values for micro enterprises and groups of limited size have also been revised:

Entry into force

The new threshold values apply to financial years starting after 31 December 2023. For a company that runs its accounting on a calendar year basis, the new criteria will already apply to the current financial year (which started on 1 January 2024).

Delay effect?

According to the original legislative text, a delaying effect was to be considered when introducing new criteria (known as the consistency principle). Companies that were classified as large under the old criteria but would be classified as small under the new criteria were originally to be considered small only two years after the introduction of the new criteria.

To avoid this delaying effect, a recent amendment to the law was made. As a result, the consistency principle does not need to be applied here. For the first financial year starting after 31 December 2023, companies must determine whether they exceed more than one of the new, increased criteria on the balance sheet date of the most recently closed financial year. This means that a company considered large under the old criteria but classified as small under the new criteria is immediately considered a small company.

For the sake of completeness, it should be noted that there is still some legal debate regarding the application of the exclusion of the delaying effect, specifically regarding the moment when a company should be considered small. The example below is based on how we (and the majority in legal literature) believe the legislation should be interpreted. Further clarification is expected soon (including a new opinion from the CNC-CBN). We will keep you informed.

Update: The Commission for Accounting Standards (CNC-CBN) has since clarified and finalised its opinions on the entry into force of the delay effect. You can find the latest info here: CNC-CBN draft opinion on the amended size criteria for small companies.

Practical example

Suppose a company was considered large until 31 December 2023, as it exceeded two of the three (old) criteria each year, namely turnover and balance sheet total.

Financial year 2024?

For the first financial year starting after 31 December 2023, i.e., the financial year ending 31 December 2024, the new criteria must be applied. Due to the temporary suspension of the consistency principle, only the criteria that were exceeded in the most recently closed financial year need to be considered for the 2024 financial year.

Specifically, for the 2024 financial year, it must be determined whether more than one of the new criteria was exceeded as of 31 December 2023. Since the company only exceeded one criterion as of 31 December 2023 (namely turnover of EUR 12.4 million), it can be concluded that the company will immediately be classified as a small company in the 2024 financial year.

(*) The consistency principle does not apply in this instance: criteria are to be evaluated on the date of the most recently closed financial year. (**) The consistency principle applies again.

Subsequent financial years?

For subsequent financial years (i.e., 2025, 2026, and beyond), the consistency principle must be reapplied. This means that the company will only be classified as large if more than one criterion is exceeded for at least two consecutive years. In this example, only one criterion (turnover) is exceeded year after year, so the company remains small.

Consequences

This amendment not only impacts the eligibility for tax benefits available to small companies, but also affects the type of annual financial statement that must be filed and whether the company is required to appoint a statutory auditor.

If you have any questions regarding this matter, please do not hesitate to contact one of our experts using the contact form below.