The Financial Shield of the Polish Development Fund (PFR) is one of the most popular support instruments launched in relation to the coronavirus epidemic. Aid under the programme is differentiated and depends on the classification of the beneficiary as an SME (micro, small or medium-sized enterprise) or a large enterprise. So determining the size of the enterprise is crucial for assessing the potential benefits. Another difficulty is the change in eligibility conditions for SMEs introduced by the fund, which may affect the situation of entities considering applying for subsidies and those who have already received them. Some recipients may have to repay the aid.
PFR Financial Shield
For micro, small and medium-sized enterprises, the Financial Shield consists of granting a subsidy that can be non-refundable up to 75%. The aid for micro enterprises may be as high as PLN 324,000, but the amount depends on the number of employees and the extent of the decrease in revenue. Aid to small and medium-sized enterprises depends only on the extent of the drop in revenue, which must be at least 25%. The maximum amount of aid an enterprise in this category may receive is PLN 3.5 million.
The Financial Shield for large enterprises includes more diverse forms of support and is divided into three segments:
- Liquidity Shield—interest-bearing (WIBOR 1R + margin), non-dischargeable loan granted on or before 31 December 2020 for up to 4 years
- Financial Shield—interest-bearing (WIBOR 1R + margin) loan, dischargeable up to 75%, granted on or before 31 December 2020 for up to 4 years
- Capital Shield—subscription or acquisition of shares, subscription warrants, bonds or convertible loans.
The final amount of support for a large enterprise depends on a number of factors.
It is evident that the differences in support offered by PFR to large enterprises and SMEs are significant, and enterprises other than large ones are given preferential treatment.
Definition of SME for the purposes of the PFR Financial Shield
The initial version of the “Guide to the PFR Financial Shield for micro, small and medium-sized enterprises” adopted the definition of SMEs under Art. 7 of the Polish Business Law. Under that provision, the criteria for assessing the size of an enterprise (i.e. employment, turnover and balance sheet) are applied only to the beneficiary, without taking into account linked enterprises or partner enterprises.
But on 4 May 2020 a new guide was published on the PFR website, stating that the criteria for micro enterprises and SMEs are determined on the basis of the number of employees on 31 December 2019. In principle, the annual turnover or balance-sheet total should relate to 2019 and is to be determined in accordance with Commission Regulation (EU) 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty.
On 13 May 2020, PFR published amended terms and conditions for applying for participation in the PFR Financial Shield for SMEs, in which the above definition of SMEs was directly replaced by the definition from Annex I to Regulation 651/2014, which, when determining the size of an undertaking, also takes into account the level of employment and the turnover or balance-sheet total of “linked enterprises” and “partner enterprises.” The definition of micro enterprises and SMEs in these terms and conditions states, “The determination of SME status should take into account other conditions set out in these terms and conditions and Annex I to the Aid Regulation [651/2014].”
Doubts have emerged in relation to PFR’s change in the definition of SMEs.
First, according to point 16 of the decision of the European Commission approving the Financial Shield for SMEs, the beneficiaries of the Financial Shield for SMEs are SMEs within the meaning of the Business Law. This reference may be read as acceptance by the Commission of a definition of SME different from the EU definition. On the other hand, it is a general rule that for the purposes of state aid, to which the support offered by PFR is classified, the definition of an SME resulting from Annex I to Regulation 651/2014 applies (these provisions are also referred to in Art. 12 of the Development Institutions System Act, on the basis of which PFR provides aid to companies). Annex I to Regulation 651/2014, in turn, implements European Commission Recommendations of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, which states that they concern the definition of SMEs used in EU policies, applied within the EU and the European Economic Area. In Art. 1 of the recommendation, EU member states, the European Investment Bank and the European Investment Fund “are invited to comply with Title I of the Annex for their programmes directed towards medium-sized enterprises, small enterprises or microenterprises.” And under Art. 2 of the recommendation, “The ceilings shown in Article 2 of the Annex are to be regarded as maximum values. Member States, the EIB and the EIF may fix lower ceilings. In implementing certain of their policies, they may also choose to apply only the criterion of number of employees, except in fields governed by the various rules on State aid.”
However, apart from setting stricter ceilings for state aid purposes, a state cannot interfere with the EU definition of SMEs. Moreover, the Business Law itself (like its predecessor, the Business Freedom Act) does not define the concept of an enterprise specifically for the purposes of state aid. On the contrary, historically, in the field of state aid, Art. 110 of the Business Freedom Act contained an express cross-reference to the EU definition of an SME. The current Business Law does not contain such a provision, but the same conclusion is expressed in the justification for the bill introducing the Business Law: “The legal definitions of micro, small and medium-sized enterprises contained in the Business Law have no normative relevance for the understanding of these terms for purposes of European Union state aid law or purposes of Polish regulations on state aid or implementing EU law in this respect. As far as state aid law is concerned, the definition of micro, small and medium-sized enterprises contained in the relevant provisions of EU law should be applied” (8th Sejm paper no. 2051, pp. 24–25).
Second, the Communication from the Commission—Temporary Framework for State Aid Measures to Support the Economy in the Current COVID-19 Outbreak of 20 March 2020, which is the basis for the Financial Shield offered by the Polish Development Fund, does not condition aid granted under section 3.1 (which includes the PFR support) on the size of the enterprise. The absence of such a condition may be read as allowing the Financial Shield dedicated to SMEs to cover also entities not belonging to this group, especially since (in the initial phase of support for SMEs) PFR used the Polish definition of SMEs.
As state aid is, by design, assumed to be selective (does not apply equally to all), within the treaty limits a member state is free to determine the conditions for support, including the definition of the groups of enterprises to which the aid is directed, as long as the conditions for support are transparent and the system of reference can be precisely determined. Therefore, PFR is empowered to define the conditions for support distributed under the Financial Shield. Nevertheless, setting conditions for support, including subjective conditions, is not equivalent to the EU definition of SMEs.
In other words, the definition of SMEs under Annex I to Regulation 651/2014 should always apply, but in cases defined by the state, stricter criteria for access to aid may be introduced, or the state may differentiate between groups of beneficiaries (as is the case for the PFR aid). Adopting for this purpose the definition of SMEs under the Business Law could actually narrow the EU definition of SMEs, and lead to limiting or even excluding from aid enterprises that really need support.
It should also be pointed out by the way that other doubts concerning the assessment of an enterprise’s size have not been resolved, as the information posted on the PFR website (e.g. frequently asked questions and the updated terms and conditions for participation in the PFR Financial Shield for SMEs) does not explain what employment data should be taken into account. Both the current and previous versions of the terms and conditions for the programme indicate that detailed information on determination of the status of an enterprise is contained in Annex I to Regulation 651/2014, and at the same time, the FAQ and definitions included in the programme documentation contain information contradicting Annex I. In particular, this concerns the use of employment data from 31 December 2019 in the status assessment and the failure to count the owner in the number of staff.
Consequences of the change in definition of SMEs
Use of the EU definition of SMEs may have resulted in some companies classified (on their own) as SMEs under the Business Law being treated as large enterprises within the meaning of Annex I to Regulation 651/2014. In practice, this most frequently (but not exclusively) concerns entities belonging to capital groups or family businesses.
A consequence of the change in status of an enterprise is a change in the available support mechanism under the PFR Financial Shield, i.e. from the Financial Shield for SMEs to the Financial Shield for large enterprises. As is known, the funding from the Polish Development Fund foreseen for SMEs and large companies differs in the eligibility conditions and the maximum amount of support available. For example, a dischargeable subsidy for a medium-sized enterprise is available for up to a maximum PLN 3.5 million, while a preferential dischargeable loan for a large enterprise is available for a maximum PLN 750 million (with the need to meet additional conditions that do not apply to SMEs). The application procedure is also different.
But most importantly, the enterprise may be charged with the financial consequences of this change. In the area of state aid, which includes the support offered by PFR, the final financial consequences, including those resulting from misconduct by the provider of the aid (here, PFR) and not the beneficiary itself, are borne by the enterprise. The position of the EU courts in similar cases (e.g. the General Court in T-8/18, easyJet Airline) and the Polish courts (e.g. Supreme Administrative Court judgment of 27 September 2017, case no. II FSK 1824/17) is very strict and assumes that any diligent company can verify whether the authorities granting aid are complying with the requirements of EU law on state aid. Thus, in general, an erroneous determination of the size of an enterprise (if only as a result of a change in the criteria used by PFR) means that the initial criteria of the programme are not met, which should result in a refusal to grant the aid.
Finally, the declaration of the size of the company applying for aid from PFR is made under penalty of criminal liability. Therefore, any irregularities may give rise to a risk of personal (criminal) liability of the individuals making statements on behalf of the applicant for corporate support.
For these reasons, an unambiguous definition of the size of an enterprise interested in the PFR Financial Shield or currently benefiting from PFR support is crucial for safe use of this aid.
Situation of large enterprises that have received subsidies for SMEs
Enterprises that received a subsidy (intended for SMEs) based on the original terms and conditions for participation in the PFR Financial Shield for SMEs, but not meeting the EU definition of an SME, were faced with the obligation to return the funds received. (Pursuant to §11(13) of the terms and conditions, “If the Beneficiary received a Subsidy on the basis of false statements on which the granting of the Subsidy or the amount of the Subsidy depended, the Beneficiary is obliged to return the Subsidy immediately or a part thereof to a separate technical account of the Bank, no later than 14 Business Days from receipt of the Subsidy.”)
A similar answer was given by PFR to the question published in the FAQ on its website on how an enterprise that received a subsidy should proceed as a result of a mistake in the information provided in the subsidy application: “In a case where a beneficiary has received a subsidy on the basis of false declarations on which the granting of the subsidy or the amount of the subsidy depended, the beneficiary shall immediately contact the bank that paid the subsidy to obtain information on how to return it and the numbers of the bank accounts to which the subsidy or part thereof may be returned. Reimbursement shall be made within 14 business days from receipt of the subsidy, provided however that if the beneficiary received the subsidy before 28 May 2020, the 14-day time limit for reimbursement shall end on 18 June 2020.”
The obligation to repay subsidies granted by PFR is also pointed out by the Office of Competition and Consumer Protection (UOKiK) in its explanations of 25 June 2020, indicating that under Art. 16–17 of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, aid declared unlawful in a Commission decision shall be recovered, with interest from the date on which it was granted, and the powers of the Commission to recover aid shall be subject to a limitation period of 10 years. Literally, these provisions concern recovery of aid in the event of a decision by the European Commission, but they establish a general principle of the obligation to recover unduly granted aid. If aid in the form of subsidies does not meet the conditions for eligibility of aid laid down in the Commission Communication, the beneficiary cannot apply for such aid. But if such aid is nonetheless granted, it shall be recovered, with interest.
So, is repayment of a subsidy obtained by an entity that is an SME according to the Business Law but should be treated as a large enterprise under Annex I to Regulation 651/2014 the only solution to the situation? It does not seem that such enterprises are in a hopeless position. This conclusion is prompted, for example, by the answer given on the PFR website on whether it is possible to obtain support under the programme if an enterprise does not meet all the requirements provided for the programme: “In principle, no. However, taking into account the overall circumstances and the principle of economic rationality, including balancing the legitimate interests of the enterprise, all the enterprises participating in the Programme and the State Treasury, and the implementation of specific objectives set out in the Programme, PFR may waive some of the criteria foreseen in the Programme.” Unfortunately, PFR does not specify what criteria it has in mind.
This answer from PFR’s FAQ seems to express the desire to make a functional assessment of an enterprise’s status as an SME, which should reflect the overall characteristics of the enterprise as well as the circumstances in which it operates. As the comprehensive assessment of an enterprise’s size under Annex I of the EU regulation, by taking into account relationships of links and partnership, is intended to reflect its actual strength, in particular its access to capital and markets, it appears that, a contrario, other factors influencing the company’s actual economic position should also be taken into account. In other words, a functional analysis of the size of an enterprise should not be a one-way street, resulting only in shifting an enterprise from an SME to a large enterprise, but should also make it possible, taking into account the specific circumstances, to classify an apparently large enterprise as an SME.
It seems in this respect necessary to distinguish at least between sectors of the company’s activity and their possible labour consumption. For example, when calculating the employment rate, employment agencies must take into account persons then assigned to work for another company. If the number of such employees exceeds 250, regardless of the number of employees actually working for the agency itself, under Annex I the agency would automatically qualify as a large enterprise, even though the agency’s true market position may not be comparable to that of other large enterprises. The same is true in non-automated sectors requiring the work of many people, often unskilled and poorly paid (e.g. in the cultivation of fruit, vegetables, mushrooms and flowers, where manual harvesting is often necessary, without the use of machines), especially if the financial indicators (turnover or balance-sheet total) are disproportionately low in relation to the number of employees.
In view of the above, it should be expected that the company size qualifier (currently taking into account only the hard criteria resulting from Annex I) should be modified.
But for now, working out a solution to the problem of enterprises that obtained a subsidy intended for SMEs but under the new terms and conditions are deemed to be large enterprises will at the very least require cooperation with the Polish Development Fund.
Joanna Prokurat, tax adviser, Tax practice, Wardyński & Partners