1.1.2. Theoretical and legal grounds for small and medium-sized enterprises in the European Union’s member states

Every member state can choose its own definition of SMEs. Therefore, let’s consider theoretical and legislative approaches.

In the some dictionaries there are the following theoretical notions of the SMEs.

1) A dictionary of law defines SMEs as «small and medium enterprises: businesses having fewer than 500 employees and a share capital or business capital of less than 75M euros. SMEs are encouraged by the European Commission through various aid programmes» [85, p. 500].

2) Black’s law dictionary defines that “small entity» is «an independent, a non-profit organization, or a company with 500 or fewer employees. A small entity is usually charged a lower fee for patent applications and related expenses as long as the patent rights are not assigned or licensed to a large entity (a for-profit organization with more than 500 employees)” [87, p. 1516].

Here we can notice that such definitions don’t bring specific definitions and reflect only concrete state practice.

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In one article authors mention that in «Germany, SMEs are defined with a limit of 255 employees; in Belgium, a limit of 100 employees» [106, p. 128]. But actually information can distinguish and new version of definitions can be, that’s why we should find legal background for it. A problem of finding SMEs’ definitions complicated by a fact that «legislators, in most cases, have introduced these definitions in different areas of law such as tax laws, commercial laws, labour laws, rather than in a single law» [97, pp. 5-6]. Therefore, during the analysis of the definition of SMEs, it was not so clear where to find, because sometimes definitions of SMEs can be set for different purposes. This question will be considered detail in the subpart 1.2. «Types of small and medium-sized enterprises in the European Union and Ukraine».

Austria. As far as it is mentioned in a work devoted to a question of antitrust for small and middle size undertakings «SMEs are not legally defined in Austria in the Austrian legislation on the protection of competition … in accordance with practice in Austria» the definition of SME should be considered from the Commission Recommendation’s approach [97, p. 29].

At the same time as it is mentioned in Annex 1 «A — Austria» of «Study on Accounting requirements for SMEs» the Austrian Commercial Code (Unternehmensgesetzbuch, UGB), defines an entity «as medium if it meets two out of the following three criteria on two successive balance sheet dates:

Net turnover of not more than € 38.500.000;

Balance sheet total of not more than € 19.250.000;

Number of employees from 50 to 250 (average annual workforce)» [6]

An entity is small if it «meets at least two of the following three criteria on two successive balance sheet dates:

Net turnover up to € 9.680.000;

Balance sheet total up to € 4.840.000;

Number of employees up to 50 (average annual workforce).

Micro-sized enterprises are not defined in the Austrian legislation.» [6]

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Belgium. There are several definitions. In accordance with article 12 §2 of the Accounting Law, SMEs were defined through the following provision: «enterprises that do not exceed more than one of the following thresholds:

50 employees, on an annual average;

annual turnover (excluding VAT) of 6,250,000 €;

balance sheet total of 3,125,000 €;

except where the number of employees excesses 100 on an annual average.»[58], but now this article was changed in essence and now it doesn’t bring any definition of SMEs.

In accordance with is Article 2(1) of the Law for the Promotion of Independent Enterprise «S.M.E.: shall mean enterprises which:

do not employ more than 50 workers on an annual average;

do not have more than 25 % of their stocks or shares in the capital or related voting rights that

are owned by one or more enterprises others than SMEs;

and which have an annual turnover not exceeding ECU 7 million, and/or an annual balance sheet total not exceeding ECU 5 million.

The average number of employed workers on an annual basis is calculated in annual working units, i.e. the number of full-time workers employed during one year, with part-time workers and seasonal workers being counted in fractions of annual working units.

The reference year to take into account is, like for thresholds for annual turnover and balance sheet total, the latest complete approved accounting period.

An enterprise loses its status of S.M.E. when it does not meet the employment criterion, the annual turnover or the balance-sheet total during two successive accounting periods.

Unless the contrary is proved, evidence that the enterprise meets this definition is supposed to be brought by a sworn statement»[59].

Article 15 (§1 and 5) of the Code of Companies defines another definition:

«Small companies are companies with a legal personality which, during the last and second-to-last approved accounting periods, do not exceed one of the following thresholds:

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50 employees, on an annual average;

annual turnover (excluding VAT) of EUR 7,300,000;

balance-sheet total of EUR 3,650,000;

except where the number of employed workers, on an annual average, exceeds 100

… Where a company is linked to one or more others, in the meaning of Article 11, turnover and balance sheet total criterions, as set at §1, are determined on a consolidated basis. Regarding the employed workers criterion, the number of employed workers on an annual average is the addition of the workers employed by each linked company» [24]. Also as it is rightly mentioned «the Code only defines what small enterprises are but neglects medium ones» [97, p. 44] and «Micro-sized enterprises are not defined in the Belgian legislation» [7].

Therefore, we can see 2 articles which are in force which don’t provide single definition except the 50-worker threshold which is common to the two above-mentioned definitions.

Bulgaria. There is no «a special definition of SMEs to be applied specifically for tax purposes [88].

In article 22b of the Accountancy Act of Bulgaria it is stated that «… Small and Medium- sized Enterprises …» are «enterprises which, for at least one of the two preceding years, do not exceed the indicators under two of the following criteria:

1. balance sheet assets as of 31 December: BGN 8 million (approximately 4,1 m. of EUR — A.K.);

2. net income from sales for the year: BGN 15 million (approximately 7,7 m. of EUR — A.K.);

3. average number of personnel for the year: 250 persons» [2]. This definition can be applied in relation to accounting and tax context [88].

Another definition of SMEs is provided in Art. 3 of the Law on SMEs [72]. This provision implements the definition under Commission Recommendation, but it uses Bulgarian national currency which cannot be always equal to EUR (for example, in the law medium-sized enterprise must fit the following criteria: annual turnover can’t exceed 97 500 000 BGN, which is actually a bit less than EUR 50 m).

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Croatia. There are also 2 definitions. The Croatian Act on Development Incentives for Small Economy defines that «an undertaking belongs to the “small economy” if the following criteria are met:

(1) the average annual number of employees is less than 250,

(2) the undertaking is independent (i.e., generally there is no single or joint shareholding exceeding 25% from the entities that do not meet the criteria for “small economy”), and

(3) its aggregate annual turnover is less than EUR 50,000,000.00 or the value of the aggregate assets is less than EUR 43,000,000.00» [5].

The Act on Development Incentives for Small Economy also clarifies the difference between (1) micro entities, (2) small entities, and (3) medium entities falling within the “small economy”. The criteria for the micro entities are as follows:

«(1) the average annual number of employees is less than ten and (2) the aggregate annual turnover is less than EUR 2,000,000.00 or the value of the aggregate assets is less than EUR 2,000,000.00.

Small entities are defined according to the following criteria: (1) the average annual number of employees is less than 50 and (2) the aggregate annual turnover is less than EUR 10,000,000.00 or the value of the aggregate assets is less than EUR 10,000,000.00.

The medium entities exceed criteria for small entities but are still within the general ambit of the “small economy» [5].

Article 3 of the Croatian Accountancy Act also distinguishes SMEs: «A “small” undertaking is a company that does not exceed two of the following thresholds: (1) aggregate assets of HRK 32,500,000.00 (approximately EUR 4.29 million), (2) gross income of HRK 65,000,000.00 (approximately EUR 8.59 million), and (3) average annual number of employees of 50. A “medium” undertaking is a company that exceeds two thresholds for the “small” undertaking but does not exceed two of the following thresholds: (1) aggregate assets of HRK 130,000,000.00 (approximately EUR 17.2 million), (2) gross income of HRK 260,000,000.00 (approximately EUR 34.35 million), and (3) average annual number of employees of 250» [3]

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It is rightly noticed that «the definitions from the Act on Development Incentives for Small Economy and from the Accountancy Act are not harmonised and may well serve only for application of the respective statutory rules» [97, p. 66]

Cyprus. There is concrete information concerning the legal definition of SMEs. Only on the web-site of Ministry of Energy, Commerce, Industry and Tourism it is written that «The Government Policy for SME’s is fully harmonized with that of the European Union» [113].

Czech Republic. There are 2 definitions of SMEs.

In Section 2 of Act No. 47/2002 Coll., on the support of small and medium-sized enterprises it is defined that «… an enterprise shall be considered a small or medium-sized enterprise provided that it fulfils the criteria laid down in the directly applicable regulation of the European Communities» [4]

Act No. 2/1969 Coll., on the establishment of ministries and other central institutions of state administration in the Czech Republic. as amended by Act 47/2002, which sets the following “For the purposes of this Act (Act 47/2002 — A.K.), an enterprise shall be considered small or medium-sized enterprise provided that it fulfils the criteria laid down in the directly applicable regulation of the European Communitie» [97, pp. 79-80]. Therefore, these 2 definitions are equal and actually just refer to the Commission Recommendation.

Denmark. As it is remarked «under Danish law, there is no special definition of which companies are considered to be SMEs» [97, p. 87]. At the same time in a final report «Study on Accounting requirements for SMEs», using Danish Bookkeeping Act (Consolidation Act no 648 of June 15, 2006) and Danish Financial Statements Act (Consolidation Act no 647 of June 15, 2006), authors write that: «Medium-sized companies are those not exceeding two of the following limits at the balance sheet date in two consecutive financial years:

net turnover up to DKK 286,000,000 (€ 38,438,000);

balance sheet up to DKK 143,000,000 (€ 19,219,000);

employees up to 250 (average annual workforce).

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Small-sized companies are those not exceeding two of the following limits at the balance sheet date in two consecutive financial years:

net turnover up to DKK 72,000,000 (€ 9,677,000);

balance sheet total up to 36,000,000 (€ 4,838,000);

employees up to 50 (average annual workforce).

Micro entities are not defined for accounting or financial reporting purposes» [47, pp. 28-29]

Estonia. SMEs are not defined in the Estonian legislation at least for accounting or financial reporting purposes [8]. Anyway, in some reports the Commission Recommendation’s approach is applied. For example, in report «Restructuring in SMEs: Estonia» [66].

Finland. The Commission Recommendation’s approach is applied [112; 124, p. 3]

France. In book «Antitrust for Small and Middle Size Undertakings and Image Protection from Non-Competitors» it is highlighted that «French legislation should adopt the definition of Recommendation 2003/361/EC of 6 May 2003, relating to the definition of micro, small and medium-sized companies» by French legislation [97, p. 105]. At the same time the authors of this book, considering Decree no. 2008-1354 of 18 December 2008, single out two subcategories. (1) The microenterprise category, which covers companies employing less than ten persons and with an annual turnover or balance sheet not exceeding EUR 2 million; and (2) the small and medium-sized enterprise category, which includes companies with fewer than 250 employees and an annual turnover not exceeding EUR 50 million or balance sheet total of under EUR 43 million. Also some aspects of SMEs in competition and labour context are considered.

In another research it is mentioned that small enterprises are enterprises that employees up to 50 people [130, c. 14].

In another research it is mentioned that SMEs in France have the following «criteria or country’s official definition»- «10-499 employees» [93, p.13]. In our opinion such a situation connected with different types of the definition of SMEs.

Therefore, we can conclude that SMEs’ definition reflect the Commission Recommendation for one type of purposes and can differ if they are the others.

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Germany. At the beginning of the consideration of this question we mentioned a citation that in «Germany, SMEs are defined with a limit of 255 employees» 106, p. 128]. In another research it is mentioned that the Commission Recommendation is applicable [130, c. 18], therefore in accordance with this approach this limit is 250 employees. In Deutsche Bank Research it is mentioned that a SME is an entity which has not more than 500 employees and its turnover is less than 50 EUR million [116].

The answer is located in the German Commercial Code (Handelsgesetzbuch) which defines that an entity is small if meets at least two of the following three criteria on two consecutive annual reporting dates (§ 267 «Umschreibung der Größenklassen» of Handelsgesetzbuch):

a total balance sheet must be not more than € 4,840,000;

net turnover must be not more than € 9,680,000;

the annual average number of employees must be not more than 50.

An entity is medium if it meets two out of the following three criteria on two consecutive s annual reporting dates (§ 267 «Umschreibung der Größenklassen» of Handelsgesetzbuch):

a total balance sheet of more than € 4,840,000 and not more than € 19,250,000;

net turnover of more than € 9,680,000 and not more than € 38,500,000;

the annual average of employees must be more than 50 and not more than 250 employees» [55]

In one source it is mentioned that micro-sized enterprises «are not defined in the German legislation» [9], but in 2012 § 267a «Kleinstkapitalgesellschaften» of Handelsgesetzbuch was adopted [104] and it defines that an entity is micro if it meets two out of the following three criteria on two consecutive s annual reporting dates

a total balance sheet of more than € 350,000;

net turnover of more than € 700,000;

the annual average of employees must be more than 10 [55].

Greece. SMEs are not defined at least «for accounting or financial reporting purposes» [10]. In one scientific article concerning SMEs in Greece the Commission Recommendation’s approach is applied [96, p. 161].

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Hungary. «Act XXXIV of 2004 on the Definition of, and Aids to, Small and Medium-sized Enterprises substantially transposes into the Hungarian legislation the principles set forth in Commission Recommendation 96/280 on the definition of small and medium-sized enterprisesand Commission Recommendation 2003/361 on the definition of micro, small, and medium-sized enterprises» [97, pp. 141-142]. Thus, there is the Commission Recommendation’s approach.

Ireland. Sections 835A(1) and 835E(2) of the Taxes Consolidation Act 1997 (as amended by subsequent Acts up to and including the Finance Act 2014) sets that «“Commission Recommendation” means Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises … An SME is defined for the purposes of the section (Transfer Pricing — A.K.). This definition is closely based on the definition of enterprises, which fall within the category of micro, small and medium-sized enterprises as defined in the EU Commission Recommendation of 6 May 2003. Broadly, this comprises groups of companies where the group employs less than 250 employees and either has a turnover of less than €50m or assets of less than €43m»[68]. At the website of the Irish Small and Medium Enterprises Association such an approach also is applicable [114].

Italy. As mentioned in «Both SMEs and Micro size entities are not defined in the Italian legislation for accounting or financial reporting purposes» [11]. Moreover, «the concept of “small-medium enterprise” does not figure, either at Constitutional level or under the Italian Civil Code»[97, p. 160]. Nevertheless, The Italian Civil Code provides a generic definition of “trader”, and another provision distinguishes between the “small” trader (“piccolo” imprenditore) and the “not (so) small” trader (“non piccolo”), whereas the aforesaid Civil Code does not distinguish between “medium” and “large” enterprises [97, p. 160].

Moreover, some provisions of Italian legislation provide some definitions and its basics. Law on Subcontracting in Manufacturing doesn’t provide the definition, but has some basics [56]. The Ministerial Decree of 18th April, 2005 singles out 2 definitions: «a generic definition of SMEs, wherein the general category of “small”, “medium”, and “micro” enterprises includes those enterprises that, first, have less than 250 employees

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and, second, have a total annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million», and «a specific definition of small 10 million, where microenterprises include those enterprises having (1) less than 10 employees and (2) an annual turnover or an annual balance sheet total not exceeding EUR 2 million» [39].

There is no single definition of SMEs for tax purposes. Nevertheless, one of the suitable definition «can be inferred from the legislation concerning the Sector studies applying to small-sized businesses (and professionals), that is to say those businesses with total turnover/operating value/(professional fees) below EUR 5,164,569. Sector studies aim at identifying the actual operating conditions of enterprises and at determining proceeds and fees which, with a reasonably probability, may be attributed to taxpayers by detecting the structural characteristic of each specific economic activity through a systematic collection of fiscal information and data which characterize the activity and the economic context in which that activity is carried on» [21, pp. 21-22]. Article 66 of the Italian Income Tax Consolidated Act (Presidential Decree no. 917 of 22 December 1986) [40] and Article 18 of Presidential Decree no. 600 of 29 September 1973 [41] provide for a simplified tax regime for “minor enterprises”, i.e. for those enterprises with revenues in the preceding year not exceeding EUR 400,000 if they carry on activities for the provision of services, or EUR 700,000 if they carry on different activities.

Latvia. There is no specific definition for transfer pricing purposes [21, p. 25] and «the national legislation of Latvia does not provide a definition of SME for direct tax purposes» [100]. Thus, the Commission Recommendation’s approach is applicable.

Lithuania. There are no specific definitions of SME for tax purposes and for transfer pricing purposes [21, p. 27]. Also «SMEs are not defined for accounting or financial reporting purposes» [12]. Nevertheless, article 3 of law on Small and Medium-Size Business Development provides the following:

«A medium sized-enterprise shall be an enterprise which employs fewer than 250 employees and the financial data meets one of the following conditions:

1) the annual income of the does not exceed LTL 138 million;

2) the balance sheet of the enterprise’s assets does not exceed LTL 93 million;

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A small enterprise shall be an enterprise which employs fewer than 50 employees and the financial data meets one of the following conditions:

1) the annual income of the does not exceed LTL 24 million;

2) the balance sheet of the enterprise’s assets does not exceed LTL 17 million;

A micro-enterprise shall be an enterprise which employs fewer than 10 employees and the financial data meets one of the following conditions:

1) the annual income of the does not exceed LTL 7 million;

2) the balance sheet of the enterprise’s assets does not exceed LTL 5 million» [67]. Euro in Lithuania from 1 January 2015 [101], thus all criteria should be recalculated soon, but this criteria fits the European Commission’s approach.

Luxembourg. Domestic competition law does not provide a definition for an SME, but other «Luxembourg rules (labour law and state aid legislation, for example) provide for a definition of SMEs».[97, p. 185]. There is no specific definition for «most direct tax purposes» and «transfer pricing purposes» [102]. At the same time, in article 3 of Grand-Ducal Regulation of 16 March 2005 containing the adapted definitions of micro, small and medium-sized enterprises defines the SMEs as they are defined in the Commission Recommendation [61].

Malta. «There is no definition of SME that applies to most direct tax purposes. The definition of SME found in the recommendation 2003/361/EC has occasionally been used in relation to tax purposes» [103]. Thus, the Commission Recommendation is applied.

The Netherlands. Public limited liability companies, Private limited liability companies and Cooperatives are small if they meet two out of the following three criteria on two successive balance sheet dates:

net sales up to € 8,800,000;

value of assets up to € 4,400,000;

number of employees up to 50 (average annual workforce).

These entities are medium if they meet at least two of the following three criteria on two successive balance sheet dates:

net sales of not more than € 35,000,000;

value of assets of not more than € 17,500,000;

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number of employees from 50 to 250 (average annual workforce).

Micro-sized entities are not defined in the Ducth legislation.

With regard to General partnerships, Limited partnerships and Sole proprietorship, small and medium-sized enterprises (“SMEs”) are not defined for accounting or financial reporting purposes [13]. Concerning most direct tax purposes there is no definition «in the Corporate Income Tax Act». Moreover, there is no SME definition for transfer pricing purposes, but «Article 8b of the Corporate Income Tax Act includes the arm’s length principle and the documentation requirements. Documentation requirements are proportionate with the complexity and size of the transactions» [105].

In Deutsche Bank Research SMEs’ definitions of the EU, the Netherlands and Germany are compared and the following information is relevant for SMEs in the Netherlands: to be a SME an entity has to have not more 100 employees and its turnover should be less than 23 EUR million [116].

Poland. SMEs are not defined for accounting or financial reporting purposes [14]. Polish tax law doesn’t have one common definition for SME, but for corporate income tax and personal income tax there is a specific definition for small taxpayer which takes into account the annual revenue value up to 1.200 000 EUR, including VAT in the previous tax year [107]. Anyway, the general definition of SMEs is applied.

Portugal. There is no definition of SMEs in the Portuguese legislation for accounting or financial reporting purposes [16]. There is no definition of SME in the corporate tax law and for purposes of applying tax incentives and the law refers to the EU definition. For transfer pricing purposes, the Ministerial Order № 1446-C/2001, 21 December in Article 13(3) sets out that the taxpayers with a turnover in the previous year below € 3 000 000 are not obliged to organize and keep a transfer pricing documentation file, as it is established by law. In any case, those taxpayers must have some kind of material evidence and documents in order to substantiate their transfer pricing practice [108]

Romania. SMEs are not defined in the Romanian legislation for accounting and financial reporting purposes [15]. Law no. 346/2004 for the encouragement of setting up and development of small and medium enterprises (modified), SMEs are defined as those entities fulfilling the following conditions:

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— have an average number of employees less than 250;

— achieve a net annual turnover of 50 million EUR, equivalent or total assets not exceeding the equivalent in RON of 43 million EUR, according to the latest approved financial statements. Total assets mean fixed assets plus current assets plus advance expenses [109]

Slovakia. SMEs are not defined for accounting or financial reporting purposes [17]. The Commission Recommendation’s approach is applicable [111].

Slovenia. Article 55 of Companies act (Zgd-1) sets that companies shall be classified as micro, small, medium-sized and large on the annual balance sheet cut-off date, in accordance with the following criteria:

— its average number employees in the financial year;

— its net proceeds from sales; and

— the value of its assets.

A company that satisfies any two of the following criteria shall be deemed a micro company:

— it has less than an average of 10 employees in a financial year;

— it has an annual turnover of less than EUR 2 000 000; and

— the value of its assets is less than EUR 2 000 000.

A small company shall be a company which shall meet any two of the following criteria:

— it has less than an average of 50 employees in a financial year;

— it has an annual turnover of less than EUR 8 800 000; and

— the value of its assets is less than EUR 4 400 000.

A medium-sized company shall be a company which shall meet two of the following criteria:

— it has less than an average of 250 employees in a financial year;

— it has an annual turnover of less than EUR 35 000 000; and

— the value of its assets is less than EUR 17500 000.

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A large company shall be a company which is neither a micro company, nor a small company, nor a medium-sized company. Banks, insurance companies, stock exchanges, companies obliged to prepare a consolidated annual report can’t be a SME at all [29].

Spain. A company is considered as a SME when its global turnover in the previous tax period is lower than 10 million EUR [118]. At the same time in another source it is defined that SMEs should be companies or individuals, which meet at least two of the following condition s at the close of two consecutive years:

net turnover not exceeding € 5,750,000;

balance sheet total not exceeding € 2,850,000;

average employees during the year not exceeding 50.

The enterprises or individuals that opted to apply the New General Chart of Accounts (NGCA) for SMEs, may apply specific criteria for Micro enterprises if meet at least two of the following conditions at the close of two consecutive financial years:

net turnover not exceeding € 2,000,000;

balance sheet total not exceeding € 1,000,000;

average employees during the year not exceeding 10[18].

Sweden. There is no specific legal definition of SMEs for competition purposes. The Swedish Competition Authority refers to the definition of SMEs provided by the Commission. Recommendation [97, p. 191]. At the same time, for the accounting purposes companies that reach more than one of the following criteria during the last two financial years are large companies:

Net turn over: more than SEK (Swedish Krona) 50,000,000 (more than € 5,000,000);

Balance sheet total: more than SEK 25,000,000 (more than € 2,500,000);

Number of employees (average): more than 50.

Sweden does not have any medium sized companies, because all companies are either small or large [19]

United Kingdom. There is no general definition of SMEs. The Competition Act 1998 does not contain a definition of SMEs for the purposes of applying the EU and/or UK competition rules.[97, p. 235].

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The Commission Recommendation is applied at least for tax and transfer pricing purposes [123].

Concerning accounting purposes there are different criteria. SMEs operating in the United Kingdom can be divided in those established under the Companies Act 2006 and other types of entities which are not established under the same Act [20].

Articles 382 «Companies qualifying as small: general» and 465 «Companies qualifying as medium-sized: general» of Companies Act 2006 defines that «[a] company qualifies as small in relation to its first financial year if the qualifying conditions are met in that year … The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —

1. Turnover — Not more than £5.6 million

2. Balance sheet total — Not more than £2.8 million

3. Number of employees — Not more than 50 …

A company qualifies as medium-sized in relation to its first financial year if the qualifying conditions are met in that year … The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —

1. Turnover — Not more than £22.8 million

2. Balance sheet total — Not more than £11.4 million

3. Number of employees — Not more than 250 [30].

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