But what happens to the grant if the size of the company changes in the meantime? For example, what if a small enterprise becomes a medium-sized enterprise, or a medium-sized enterprise becomes a large enterprise?
A change in company size does not automatically mean that the grant will be lost. However, the reason behind the change in the company’s SME status is crucial when determining the potential consequences.
For certain EU-funded programmes in Hungary in the 2021-2027 programming period, specific rules are laid down in Hungarian Government Decree No. 256/2021 (V. 18.) on the use of support from certain European Union funds.
What determines whether a company is a micro, small, medium-sized or large enterprise?
In Hungary, SME classification is primarily governed by Act XXXIV of 2004 on Small and Medium-Sized Enterprises and the Support Provided for Their Development, while at EU level the definition is based on Commission Recommendation 2003/361/EC.
Under the applicable SME definition, an enterprise qualifies as an SME if it:
- employs fewer than 250 persons, and
- has an annual net turnover not exceeding EUR 50 million, or
- has an annual balance sheet total not exceeding EUR 43 million.
Within the SME category, a small enterprise employs fewer than 50 persons and has an annual turnover or annual balance sheet total not exceeding EUR 10 million.
A microenterprise employs fewer than 10 persons and has an annual turnover or annual balance sheet total not exceeding EUR 2 million.
The EU thresholds are also set out in Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises.
Partner and linked enterprises also matter
When determining SME status, it is not always sufficient to examine the figures of the company itself.
If the enterprise has partner enterprises or linked enterprises, their data may also have to be taken into account when calculating the company’s SME status.
As a general rule, the data of partner enterprises are included proportionally according to the relevant participation, while the data of linked enterprises are generally included in full, provided that they are not already included in consolidated accounts.
As a result, a company with relatively low turnover and a small workforce may still fail to qualify as a small enterprise because of its ownership structure or its relationships with other companies.
These rules are laid down in Act XXXIV of 2004 and are consistent with the concepts of partner and linked enterprises used in Commission Recommendation 2003/361/EC.
One strong financial year does not necessarily change the company’s size immediately
An important element of SME classification is the so-called two-year rule.
If a company exceeds the staff or financial threshold of a particular size category in a single year, its classification does not necessarily change immediately.
Under Section 5(3) of the Hungarian SME Act, an enterprise generally loses or acquires its micro, small or medium-sized enterprise status only if it exceeds or falls below the relevant thresholds in two consecutive accounting or reporting periods.
The same principle appears in the EU SME definition. Article 4(2) of the Annex to Commission Recommendation 2003/361/EC provides that where an enterprise exceeds or falls below the relevant staff headcount or financial thresholds on the closing date of its accounts, this does not result in the loss or acquisition of SME status unless those thresholds are exceeded or fallen below over two consecutive accounting periods.
What happens if the company changes size simply because it grows?
From a grant perspective, this is one of the most important questions.
Section 138/A(2) of Hungarian Government Decree No. 256/2021 (V. 18.) specifically addresses situations where the SME status of a beneficiary changes as a result of a change in:
- turnover,
- balance sheet total, or
- number of employees.
According to the Decree, in such cases the change in SME status does not require action.
This is a very important distinction.
If a beneficiary grows successfully during the implementation of the project - for example, its turnover increases or it hires more employees - and this ultimately results in a change in its SME classification, the change in status does not in itself require action under Government Decree No. 256/2021, provided that the project falls within the scope of that Decree.
The specific rules and conditions applicable to the individual grant scheme and call for proposals must, however, always be taken into account.
A change in ownership may be a completely different situation
Different rules apply where the SME status changes not because of the company’s own organic growth, but because of a change in its ownership or corporate structure.
Government Decree No. 256/2021 specifically refers to cases such as:
- merger by absorption,
- merger,
- demerger,
- division, and
- other changes in the ownership structure.
If one of these changes results in a change in the beneficiary’s SME status after the grant award decision but before the end of the sustainability period, it must be examined whether the company continues to meet the conditions of the relevant call for proposals under its new status.
If the company still meets the conditions of the call
If the enterprise continues to satisfy the requirements of the call for proposals following the change, the Managing Authority enters into or amends the grant agreement in accordance with the changed circumstances.
If the company no longer meets the conditions
The situation is more serious where the SME status resulting from the ownership or corporate restructuring means that the beneficiary no longer meets the conditions set out in the call for proposals.
In this case, under Government Decree No. 256/2021, the Managing Authority may:
- withdraw the grant award decision, or
- withdraw from the grant agreement if it has already been concluded.
This means that such a change may affect not only administrative matters but also the continuation of the grant relationship itself.
Why can the entry of a new owner be particularly important?
A change in ownership is relevant for more than simply changing the name of the owner.
As a result of a new ownership relationship, other companies may become partner enterprises or linked enterprises of the beneficiary. Their financial and staff data may then have to be taken into account when determining the beneficiary’s SME classification.
Government Decree No. 256/2021 also requires partner and linked enterprises, as well as changes affecting them that have an impact on the beneficiary’s SME status, to be taken into account when assessing a change in SME status.
For example, a company employing only 40 people and having relatively modest turnover may nevertheless undergo a significant change in its SME classification if it becomes part of a corporate group whose other companies must be included in the SME calculation.
What happens to the two-year rule?
The two-year rule must also be considered under the current Hungarian regulatory framework.
Section 138/A(4) of Government Decree No. 256/2021 provides that the rules concerning changes in SME status must be applied in accordance with Section 5(3) of Act XXXIV of 2004, which contains the two-year rule.
Therefore, the consequences of a specific change in ownership, merger or other structural transaction should not be assessed solely on the basis of the new ownership percentage or the overall size of the corporate group.
It is necessary to determine:
- what partner or linked enterprise relationships have been created,
- which data must be added to the beneficiary’s own figures,
- whether the beneficiary’s SME status actually changes as a result, and
- whether the beneficiary continues to meet the requirements of the relevant call for proposals under its new status.
The Hungarian SME Act contains detailed rules governing the inclusion of data from partner and linked enterprises.
From a small enterprise to a medium-sized enterprise: is there reason to worry?
Not necessarily. If a grant scheme is open to micro, small and medium-sized enterprises, a company moving from the small-enterprise category to the medium-sized-enterprise category does not in itself mean that it falls outside the SME sector.
Furthermore, if the change is solely the result of an increase in turnover, balance sheet total or number of employees, Government Decree No. 256/2021 expressly provides that such a change in SME status does not require action.
The situation may be different, however, where the relevant call for proposals is open only to micro and small enterprises, or where the change in company size results from a change in ownership or corporate structure.
The eligibility requirements of the specific call for proposals must therefore always be compared with the company’s new status.
From a medium-sized enterprise to a large enterprise: does the grant automatically have to be repaid?
No. It is not correct to state as a general rule that if a supported medium-sized enterprise becomes a large enterprise during the implementation or sustainability period of a project, the grant must automatically be repaid.
If the loss of SME status is caused solely by an increase in turnover, balance sheet total or number of employees, Government Decree No. 256/2021 provides that the change in SME status does not require action.
However, if the SME status changes as a result of a merger, demerger or change in ownership, it must be examined whether the beneficiary continues to meet the conditions of the relevant call for proposals under its new status.
If it does not, the grant award decision may be withdrawn or the Managing Authority may withdraw from the grant agreement in accordance with Government Decree No. 256/2021.
When must a change be reported?
Under Government Decree No. 256/2021, a beneficiary must notify the Managing Authority of a change affecting:
- the technical or professional content of the project,
- the project budget, or
- another eligibility criterion or condition for receiving support,
within eight days of becoming aware of the change.
This can be particularly relevant in the case of changes in ownership or corporate structure where the change may affect the beneficiary’s eligibility or compliance with the conditions of the grant.
In summary: the reason for the change in company size matters
The key issue is not simply whether a company has moved from one size category to another, but why the change occurred.
- If the company has grown: where the SME status changes because of turnover, balance sheet total or employee numbers, Government Decree No. 256/2021 provides that the status change does not require action.
- If the ownership or corporate structure has changed: the new SME status must be assessed, together with whether the beneficiary continues to meet the requirements of the relevant call for proposals.
- If the beneficiary continues to meet the requirements under the new structure: the grant agreement may be concluded or amended in accordance with the change.
- If the beneficiary no longer meets the requirements: the grant award decision may be withdrawn or the Managing Authority may withdraw from the grant agreement.
A change in company size during a grant-funded project should therefore not be assessed solely in terms of whether the company has moved “from small to medium-sized” or “from medium-sized to large”.
The cause of the change, the ownership relationships, partner and linked enterprises, and the specific conditions of the relevant call for proposals must all be considered together.
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