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Doing Business with EU SMEs

About EU  |   Definition of EU SMEs  |   Doing Business with EU SMEs  |   Opportunities


Small and Medium Enterprises (SMEs) have been the backbone of the European economy for over a long time. Between 2002 and 2007, the number of SMEs has increased by over 2 million while the number of large enterprises by only 2000. Initially the performance of EU SMEs was affected mainly by structural difficulties such as lack of skills and labor market rigidities, market failures in research, training and innovation. Entrepreneurs and their willingness to take risks are fundamental in determining economic cycles, as they bring about innovation, create new companies and drive non-competitive ones aside in the process of ‘creative destruction’.

The new EU policy strategy looks very much to the regional innovation systems and clusters as the main factor of competitiveness. This is done with the aim to build world-class clusters with the necessary dimensional strength, since too many clusters were found to be too small to compete globally. This was done to solve the main problem of the cluster like lack of resources lack of infrastructure and lack of training for cluster managers.

In order to promote successful entrepreneurship and improve business environment for SMEs, European Commission works over broad policy issues affecting entrepreneurship and SMEs across Europe as well as on mechanisms delivering support to SMEs like networks and business support measures. Also in order to protect their economy, EU adopted single market economy in order to reduce the trade barriers between the member countries. This helped SMEs to increase the trade between EU member countries thus contributing positively to their growth.

With this level of support from the EU government, the SMEs have become highly innovative, technologically advanced and have heavily contributed to the economic growth of the region. This clearly shows the potential EU SMEs hold and with the right policies in place their future definitely looks great.

Rules and Procedure

Starting up

Business in EU

Starting the Business in EU
EU has taken steps to reduce the cost and time required to start in the business by introducing points of single contacts and one-stop shops. Since December 2009, it has been mandatory for all the EU member states to enable all companies and individuals complete all necessary formalities such as authorizations, notifications, environmental licenses etc. through a point of single contact. Also one-stop-shops have been set up in order to assist the entrepreneurs carry out all the required procedures like registration, tax, VAT, social security etc via single administrative contact point either through office or virtual or both. In 2010, the average time required for starting the private limited company in EU was 7 days and cost required was €399. There are few exceptions like Italy where the company can be started in 1 day and in Spain where the cost required to start the business is €115.


Takeovers or Acquisition
Taking over an existing company or entering into Joint Venture is a worthwhile alternative to setting up a new business. Entrepreneurs can benefit from an established reputation, production structure and customer network which in turn would help them to make their business debut and great success. In EU the business owners are ageing and one third of them represent some 690,000 businesses and 2.8 million jobs. This clearly shows the need for new owners to run businesses in EU.

Joint Ventures

Partnering or Joint Ventures
Joining forces with other businesses can prove to be an effective strategy for firms wanting to expand beyond their domestic markets in to the EU countries. This cooperation can take various forms – production agreements, joint ventures, franchises, technology transfer and joint research projects. It would also help businesses to save time and money to use intermediaries in other countries to sell their products for them.

For businesses wishing to have partners in more than one EU country, to reduce the complications of different intra-EU rules governing businesses, EU has formed various groups in order to promote cross-border cooperation. These include:
1. European Economic Interest Grouping: It helps their members pool resources, activities and skills. They can be formed by a) companies, firms and other legal entities-public or private- with the registered office in one of the EU countries. And b) by individuals engaged in industrial, commercial, craft or agricultural activities or providing professional or other services in the EU. The groupings must have companies in at least two different member countries.
2. European Company: Companies registered as European company is a way for firms incorporated in different EU countries to create a new European public limited liability company with share capital, to merge or form holding company or joint subsidiary and avoid legal and practical difficulties arising from differences between national laws.
3. European Cooperative Societies: It enables members-individuals or corporate entities- to carry out certain activities in common while preserving their independence. With a minimum capital requirement of €30,000 they can operate throughout the EU with a single legal identity and structure. They can expand and restructure cross-border operations without having to set-up networks of subsidiaries.
4. European Private Company: It is a new legal instrument specifically for creation of small businesses. This enables the businesses to set-up subsidiaries in other EU countries by keeping the same set of company laws throughout EU and keeping the same management structure wherever the businesses are located. This is most effective for saving time and money especially considering the legal costs that are involved in setting up the businesses in different counties of EU.


Businesses can set-up different types of secondary establishment like an office, an agency, a branch, a subsidiary.
In all EU countries:

  • Branches must register in companies’ registries, tax and VAT authorities and social security offices and also publish information on the controlling company and their activities.
  • Subsidiaries must go through the legal registration procedures in their primary country
  • The managers of office and agencies should register with chambers, obtain authorization and check their tax and social security obligations.

Owned Subsidiary

Wholly Owned Subsidiary
The business can form Wholly Owned Subsidiaries which would be registered or incorporated in EU in accordance with its laws and regulation and the entire capital is held by the Indian party.

To improve the conditions for transfer of ownership or to enter in JV, the European Commission has introduced different measures in EU countries:

Access to Finance

Ensuring access to Finance
Transferring of ownership or entering in to JV requires more financing than starting the business. Loans, guarantees and start-up facilities are being made available not only for starting new businesses but also for taking over existing businesses or entering into JV. A special awareness is being created for mezzanine finance, which involves combining of loans and equity, which is particularly beneficial for businesses transfer or JVs.

Managing Business

Keeping accounts, paying taxes, recruiting, and supervising qualified staff can all be decisive factors for success. It is also important to set the right wages, comply with social security rules and also match the right skills for the job. Businesses are also legally bound to submit statistics.

Accounts: Companies have to keep annual accounts, not only to comply with legal obligations but also to monitor the health of the business by keeping track of all receipts and expenses.

International Accounting Standards: In order to ensure greater quality, transparency and comparability of financial statements provided by the companies, EU has introduced an International Accounting Standards (IAS). This makes it mandatory of all companies on EU soil to prepare their consolidated accounts in accordance with a single set of global standards-the International Financial Reporting Standards (IFRS). Further, for small businesses, EU has made accounting rules easier in order to avoid unjustified reporting obligations e.g. medium-sized firms are exempted from the obligation to reveal unnecessary information in the notes to the annual account.

Taxes: Like India, even in EU taxes can be direct (borne by taxpayers) or indirect (collected by the intermediary)

Direct Taxes: In order to maintain the unanimity in direct taxes, EU has adopted certain legislative policies:

  • The Parent-Subsidiary directive ensures that cross-border payments of dividends within the same group of companies established in different EU countries do not suffer economic double taxation
  • The Merger directive aims at mitigating the negative tax consequences arising from cross-border business restructuring within the EU
  • The Interest-Royalties directive provides the elimination of double taxation of interest and royalties between associated companies which are resident in different EU countries by exempting from taxation in the state of source.

Indirect Taxes: EU has harmonized indirect tax including the tax base and rates in order to avoid the distortions in the EU market. EU has the common system for VAT. There is certain amount of flexibility on VAT rates so as to take account of specific national circumstances. EU also has harmonized structure and minimum rates for excise duties on the consumption or use of certain products – on alcohol, tobacco and energy.

Fair Competition

Since competition is decisive for economic growth and central objective of EU policy, EU has set rules to ensure free and fair competition in its markets.

Antitrust rules forbid companies from reaching agreements between themselves that restrict competition or from abusing dominant market position.

State Aid is available so long it is justified by a common interest. EU has drawn up block exemption regulations which clearly indicate when the support is considered justified and which allows EU countries to grant support. They cover small businesses, regional development, research, innovation, training, employment and risk capital, environment protection and the promotion of entrepreneurship

Setting Business

Complying with norms of setting the responsible business
Every company that intends to operate on the EU soil has legal obligations towards the environment and their employees.

Environment: Companies operating on the EU soil have to comply with their environmental norms. They have to play key role in curbing the environmental pollution and climate change by minimizing their greenhouse gas emissions, managing waste efficiently and using natural resources responsibly. The EU environmental policy adheres to two fundamental principles: 1) the precautionary principle – when an activity or policy carries a risk of harm to the environment and /or human health urgent measures are taken and 2) the polluter pay – the polluter is liable for preventing and remedying the environmental damage.

EU also has Emission Trading Scheme in order to reduce greenhouse gas emissions. Companies must also comply with legislation on avoiding recycling and re-using waste.

Employees: Every company operating in EU are legally required to prevent discrimination at workplace, ensure that all employees-men and women, local and foreigners-are treated equally and guarantee the safety and health of workers in all aspects related to work.

EU law prohibits employers from discriminating the workers on the basis of gender, racial or ethnic origin, religion or beliefs, disability, age or sexual orientation. EU law for minimum requirements regarding the protection of safety and health of workers include general principles concerning the prevention of occupational risks, elimination of risks and accidental factors and information and training of workers and their representatives.

EU also supports an active dialogue between employers and employees and associations representing them in order to resolve certain issues between them or to implement a new policy for the company.

Voluntary Actions: All businesses in EU must meet minimum law requirement, but the companies are also encouraged to develop their own environmental and social strategies that go beyond the minimum requirements.

Exit Strategy

A business may decide to stop its operations for a number of different reasons:

1. Selling off: Company at any given point can sell off its business and transfer ownership to other business. Transferring ownership is a very complicated process and must be planned with a due diligence. If the company has a strong market presence then it is a viable option for the business to hand it over its operations to other business as it preserves the achievements of the company especially skills and jobs.

2. Winding up: Businesses can simply decide to close their business operations and would have to follow the relevant national procedures. Winding up the business includes following steps:

  • Notifying the body that initially registered the business to cancel the business license or employers’ entry in the register.
  • Complying with social security and tax obligations
  • Selling of plant, stock, and office equipments
  • Paying off any outstanding business debts

Procedures for winding up a company fall within the authority of each EU country and vary from one country to the other.

3. Bankruptcy: Sometimes businesses are forced to stop their operations. It may be because they are not able to adapt to the continuous changes that take place in their business environment, increased global competition, new products in the market, new technologies or because of an unforeseen events such as the failure of a major customer. EU has put simpler and faster procedures for bankruptcy and encourages honest businesses by giving them second chance by placing them at an equal footing with new entrepreneurs. EU has the bankruptcy procedures that last for no more than one year.

The EU has established common rules for insolvency:

  • Jurisdiction to open cross-border insolvency proceedings and recognition of one country’s court rulings throughout the EU to prevent insolvent entrepreneurs from transferring their assets or avoiding legal proceedings in a given country.
  • Protection for employees in insolvency case
  • Government support to rescue and restructure firms in difficulty.

Schemes, Incentive and Policies

To facilitate small businesses growth and development, the EU has set out a comprehensive system of financial policies and instruments to support SMEs with the most appropriate sources and types of financing at each state of their development

  • Better borrowing environment : The European Commission has brought together the bankers and small business organizations in order to identify and reduce the barriers which the latter face while taking the finance.
  • More risk capital or equity funding : Innovative growth-oriented businesses need equity investments. The Commission in particular is taking actions to improve the functioning of the single market for equity investments.
  • CIP Financial Instruments : EU provides funding for small businesses via financial institutions in the Member States. The financial instruments of Competitiveness Innovation Program (CIP) help SMEs raise equity and debt finance. With a budget of 1 Billion Euros, these instruments plan to help about 300,000 to 400,000 SMEs to access funding by 2013.
  • Global Loans : The European Investment Bank and European Investment Fund also have lending and investment program that can benefit small businesses.
  • Structural Funds : At the regional level, JEREMIE initiative has been launched to provide financing from seeds capital funds and other types of investors. Where as JASMINE which is the European Commission initiative to reinforce development of micro-credit in Europe, seeks to improve small businesses’ access to finance and for socially excluded people and also ethnic minorities who want to become self employed.
  • Seventh Framework Program for Research and Development (FP7) : Innovative SMEs can participate in projects using the new Risk Sharing Finance Facility that can support applied research and commercialization of results


Sectors in which EU SMEs operate

  • Food Processing
  • Agricultural Inputs
  • Chemicals and Pharmaceuticals
  • Engineering
  • Textiles and Garments
  • Furniture
  • Leather and leather goods
  • Bio-engineering
  • Sports Goods
  • Plastic products
  • Computer Software
  • Auto-components


Precautions that Indian SMEs must take while expanding to EU

  • Europe faces labor market inefficiencies as rigidities prevent the appropriate allocation of the available skills of the unemployed.
  • Estimates show that EU member states will face the shortage of 2.7 million skilled workers in their IT, health and research sectors.
  • Gross Domestic expenditure on R&D is less that 2% of the GDP.
  • High market volatility, ageing population, increasing squeeze on the resources.

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