Definition of SMEs

What is an SME?

According to EU legislation, "an enterprise is  any entity engaged in an economic activity, irrespective of its legal form”. Entities that engage in craft or light trade activities, or any other activity on an individual or family basis, as well as partnerships or associations that engage in an economic activity are also considered as enterprises". (Recommendation n. 2003/361/ EC, European Commission, 6 May 2003) In Italy, enterprises are classified as small, medium, or large according to provisions of the Decree issued by the Italian Minister of Economic Development on 18 April 2005 , in addition to those of European Commission Recommendation n. 2003/361/CE dated 6 May 2003. The said legislation provides definitions of certain categories of enterprises, such as micro, small, and medium-sized enterprises.

Micro-enterprises are defined as those that:  
- have a headcount of under 10;
- have an annual turnover or an annual balance sheet total below €2 million.

Small enterprises are defined as those that:
- have a headcount of under 50;
- have an annual turnover or an annual balance sheet total below €10 million.

Medium-sized enterprises are those that:
- have a headcount of under 250;
- have an annual turnover  below €50 million, or an annual balance sheet total below €43 million.

There are, therefore, three reference criteria used for the definition, but while the number of employees is an essential requisite for inclusion in the category, the turnover ceiling may be used as an alternative to the balance sheet ceiling.

The term SME refers to:
•   an autonomous enterprise, i.e. if the applicant enterprise is fully independent or has one or more minority shareholdings (each one holding less than 25) in other enterprise with other shareholders (see art. 3, section 2, Italian Ministerial Decree 18/04/2005);
•   an associated enterprise: if the applicant enterprise holds (alone or  jointly with other associated enterprise) a shareholding amounting to over  25% but less than or equal to 50% or voting rights in another company and/or another enterprise holds a share of over 25% and less than or equal to 50% in the applicant enterprise (see Art. 3 Ministerial Decree 18/04/2005).
The 25% share may be reached and exceeded without resulting in the status of associate if the categories of investors listed below are present, provided that these investors are not individually or jointly connected to the applicant enterprise:

1. public holding companies, venture capital companies, natural persons or groups of natural persons carrying out regular venture capital investment activities who invest their own funds in unlisted companies (provided that the total invested by such persons or groups of persons does not exceed €1,250,000 in the same company);
2. universities or public and private not-for-profit research centres; 
3. institutional investors, including regional development funds;
4. local public bodies, with an annual budget below €10 million in areas with less than 5,000 inhabitants

•   Associated enterprise: if the applicant enterprise has a majority shareholding (greater than 50%) or in any case the majority of voting rights at shareholders' meeting (resulting in control over the management of another enterprise) and/or another enterprise holds a shareholding as described above in the applicant enterprise (see art. 3 Italian Ministerial Decree dated 18/04/2005); The link between two enterprises can also be established through a individual or a group of individuals acting jointly, provided that the following conditions are met at the same time:

1. the individual or group of individuals acting jointly must own enough shareholdings in both enterprises (jointly in the case of more than one individual) to have control;
2. the activities carried out by the enterprises must be included in the same division of the ISTAT classification of economic activities (i.e. they must operate on the same market or on a market directly downstream or upstream of the applicant company), or one enterprise must have invoiced the other at least 25% of the total annual turnover (with reference to the last accounting year closed and approved before the date of signing the application for tax relief).

How employees are counted

As already mentioned, the number of employees is the essential initial criterion. 
The number of employees corresponds to the number of annual working units (AWUs), i.e. the average monthly number of full-time employees during a year, with part-time and seasonal employees counted as fractions of AWUs. The period to be taken into consideration for the calculation of the AWUs is the period to which the said data refers.
“Employees” means staff employed on a full-time, part-time, or seasonal basis, and therefore, in practice, the following categories:
-    owner/managers;
-    shareholders  who work in the company  and are paid for their work;
-    permanent and fixed term employees of the company, with the exception of those on furlough as a result of  extraordinary circumstances.
The following kinds of workers do not count as employees:
-    apprentices with an apprenticeship agreement and people  with a training or placement agreement;
-    staff on maternity or paternity leave.

What do we mean  by ‘annual Turnover’ and ‘Balance Sheet Total’?

The annual Turnover is the amount entered under item A.1 of the profit and loss statement  prepared in accordance with the current regulations of the Italian Civil Code, i.e. net revenues from sales of goods and services coming under the company’s core business minus discounts applied to sales, VAT, and other taxes directly connected with the turnover;
The Balance Sheet total, meanwhile, is the total assets stated on the balance sheet.
Both the turnover and the balance sheet total are those reported for  the last accounting year approved prior to the date the application for relief was signed.

Some regulatory references:
European Commission Recommendation 2003/361/EC of 6 May 2003,
Italian Ministerial Decree n. 18 April 2005, published in Official Gazzete, n. 238, dated  12 October 2005.
Compiled opinions of the Commission to define company size - Italian Ministry of Economic Development.