Planned increase in size criteria for corporations by the EU

The thresholds for the classification of corporations into the size classes microcorporation, small, medium-sized and large corporation are linked to numerous legal consequences with regard to the accounting and reporting obligations to be observed. These relate, among other things, to questions of compilation obligations in connection with annual financial statements and management reports, the question of mandatory audits, and questions of disclosure or publicity. Micro-entities and small and medium-sized enterprises will benefit from statutory relief in this context. Smaller companies are to be able to benefit from lower requirements and thus lower compliance costs, while larger companies are to benefit from greater transparency in the interests of stakeholders.

The thresholds set by the EU for the classification of companies are subject to a regular review process, in which the thresholds must be considered at least every five years and adjusted if necessary. For this purpose, the inflation data published in the Official Journal of the European Union must be taken into account. The last adjustment was made in 2013, and the previous review in 2021 had not yet identified any need for action. In view of the significant development of inflation in 2021 and 2022, the EU Commission has decided to review the threshold values again.

The objective of an adjustment is not to create additional relief, but merely to prevent inflation effects from causing smaller companies to grow into a higher size category without substantial change and to be confronted with the more extensive accounting, auditing and reporting requirements and the associated costs.

For the ten-year period from January 2013 to March 2023, a cumulative inflation rate of 24.3% was determined in the euro area and a cumulative inflation rate of 27.2% for the EU27 countries, so that the EU Commission considers it necessary to adjust the thresholds due to inflation developments. Against this background, the European Commission submitted a draft delegated act on September 13, 2023 to amend the thresholds in Article 3 of Directive (EU) 2013/34 (Accounting Directive) for determining the size class of corporations.

The proposal provides for the following future thresholds:

The proposed adjustments reflect the value of the cumulative inflation rate since the last increase. In principle, the EU Commission considers an increase in the size criteria by 25% in each case to be appropriate - prior to any meaningful (upward) rounding of the thresholds - with the ratio of twice the value for sales revenue compared to the threshold for total assets being retained. Taking into account the effects of rounding, the proposed increase amounts to 25% for all size categories with the exception of micro-corporations, for which the effect of rounding up results in an adjustment of 28.6%.

An adjustment of the thresholds with regard to the number of employees is consequently not envisaged, as the inflation trend has no influence on this.

In addition to the proposed higher size criteria, the EU member states are also to be permitted (as they have already been) to set thresholds for small companies that go beyond the above-mentioned values. However, these may not exceed EUR 7,500,000.00 for the balance sheet total and EUR 15,000,000.00 for sales revenues.

Not only the thresholds for individual companies, on which the subdivision into micro, small, medium and large companies is based, but also the corresponding values for small, medium and large groups are to be changed. These correspond in each case to the threshold values for small, medium-sized and large companies and are also to be adjusted in each case in a corresponding manner.

Even if the increase in the size criteria does not in principle create any relief compared to the status quo, the EU Commission points out that the increase in the threshold values will result in relief with regard to sustainability reporting, as the number of companies covered by the requirements of the CSRD and the corresponding taxonomy will be reduced. According to an estimate by the EU Commission, this reduction in the target group will result in savings of EUR 150 million in one-off costs and EUR 700 million in ongoing costs.

The very short comment period for the EU Commission's proposal was limited to three weeks and ended October 6, 2023. The European Commission intends to adopt the delegated act on the amended thresholds in the fourth quarter of 2023. According to the draft, the new size criteria are to be applied already for financial years beginning on or after 01.01.2024.

The delegated act must then be implemented by the EU member states. The thresholds codified in sections 267 and 267a of the German Commercial Code (HGB) for corporations and limited liability commercial partnerships as defined in section 264a HGB with their registered office in Germany are based on the requirements of the EU Directive. In the past, the German legislator has made use of the possibility of extending the thresholds to the maximum extent possible. Therefore, the thresholds currently applicable under Section 266 of the German Commercial Code (HGB) for small corporations with EUR 6 million in total assets and EUR 12 million in sales already exceed the size criteria now proposed by the EU Commission for this category.

It is not yet possible to predict when and to what extent the national regulations of the HGB will be adjusted against the background of the planned changes at EU level. This applies both with regard to the size criteria applicable to individual companies and with regard to the size criteria in section 293 of the HGB relevant for group accounting requirements, which are based on the thresholds for large groups.