- A natural person is not an undertaking if he/she only has a controlling interest [e.g. majority of capital or voting rights] in an enterprise that engages in economic activities [i.e. it is an undertaking].
- For a natural person to be considered to be an undertaking he/she must have both a controlling interest in an enterprise and be involved directly or indirectly in its management.
- Exercising shareholder rights through participating and voting in the annual general meeting of shareholders does not constitute direct or indirect management.
- A natural person who takes part in the economic activity of the company in which it holds a controlling interest by being, for example, involved in functions of the supervisory bodies or the board of directors, is directly or indirectly involved in the management of that company.
- All enterprises which are controlled and managed by a natural person are “linked enterprises” in the meaning of the SME definition.
Introduction
The annual reports of the European Court of Auditors regularly find that a frequent mistake committed by aid-granting authorities is to classify a large enterprise as an SME and award aid at a higher rate of intensity or award aid that is exclusively reserved for SMEs. However, as shown by the reply of the Court of Justice of the EU [CJEU] on 19 March 2026, to a request for a preliminary ruling in case C-870/24, Outletico, it is sometimes difficult to determine whether a group of companies together form a “single enterprise” which is larger than the constituent companies that may be SMEs. The judgment of 19 March 2026 provided valuable clarification of the concept of “single undertaking” as defined in the SME definition of Annex I of the General Block Exemption Regulation [Regulation 651/2014].1 An equally useful judgment was that delivered on 24 September 2020 in case C-516/19, NMI Technologietransfer.
The request for the ruling was submitted by a Latvian court that was adjudicating a dispute between the Latvian tax authorities and Outletico, a Latvian company, that had been ordered to repay state aid it had received unlawfully in the context of a covid-19 measure. That measure had been implemented in compliance with the Temporary Framework which had been adopted by the Commission in March 2020 and subsequently amended in January 2021.
Outletico applied for aid claiming to be an SME. Although the aid was granted, the Latvian authorities later contested that claim on the grounds that Outletico was not an SME because it was linked to other enterpises as follows. A natural person, denoted as “A” in the judgment, owned 100% of the capital of Esterkin Family Investments, 75% of the capital of IC Industries Holdings and 100% of the capital of RRE Tradecenters holding Ltd., a Cypriot company. In addition, RRE Tradecenters held 60% of the capital of Outletico. Furthermore, Outletico owned 100% of the capital of Business Park, another Latvian company.
The state aid to Outletico was granted in two tranches in April and May 2021. The aid amounts were EUR 45,598 and EUR 45,59. However, in December 2021, the tax authorities decided that Outletico was a large enterprise, as a result of its links with the enterprises mentioned above. Moreover, they considered that at the cutoff date of 31 December 2019, Outletico was an “undertaking in difficulty” because the group was in difficulty. Therefore, they ordered Outletico to repay the state aid that, in their view, had been granted unlawfully. Outletico contested that order.
The referring Latvian court adjudicating the dispute was uncertain whether the enterprises whose shares were held by the natural person “A” had to be taken into account. This is because in the landmark judgment C-222/04, Cassa di Risparmio di Firenze, the CJEU held that a natural person owning a company can be considered to be an enterprise itself when it is involved in the management of that company. Simply holding shares is not enough for their owner to be an undertaking. The Latvian court was uncertain how to interpret the role of “A” because it held controlling interest which it could exercise during the annual general meeting of the shareholders without actually participating in the day-to-day management of those companies.
In other words, through a number of question to the CJEU, the referring court wanted to know whether participation and voting in the annual general meeting – that undoubtedly affects management – could be regarded as involvement in the management of a company.
The questions put to the CJEU
The CJEU, first, reformulated the questions put to it by the Latvian court as follows: “(41) The referring court asks, in essence, whether Article 1 and the third subparagraph of Article 3(3) of Annex I to Regulation No 651/2014 must be interpreted as meaning that a natural person with a controlling interest conferring on him or her the majority of the shareholders’ voting rights in companies engaged in an economic activity must, on that basis alone, be regarded as being him or herself engaged in an economic activity and, therefore, as being an ‘enterprise’, within the meaning of Article 1 of Annex I, through which those companies indirectly have relationships capable of classifying them as ‘linked enterprises’, within the meaning of the third subparagraph of Article 3(3) of Annex I. In particular, that court is uncertain if the fact that, under national law, it is for the general meeting to adopt certain decisions connected with the management of the company is sufficient, in itself, to regard a natural person as taking part in the economic activity of that company, without it being necessary to assess whether that natural person actually takes part in the management of the company.”
The SME definition
Next, the CJEU observed that “(43) in accordance with Articles 2 and 3 of Annex I to Regulation No 651/2014, an enterprise may be classified as an SME, within the meaning of that regulation, if it satisfies three tests: number of persons employed, the financial test relating to the annual turnover or the annual balance sheet total, and an independence test”.
“(46) The concept of ‘SME’ within the meaning of Regulation No 651/2014, in that it leads to the granting of advantages to enterprises falling under it, most often through rules derogating to the general rules, must be interpreted strictly however”.
“(47) In accordance with point 2 of Article 2 of Regulation No 651/2014, read together with Article 2(1) of Annex I to that regulation, enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million and/or an annual balance sheet total not exceeding EUR 43 million are categorised as SMEs.”
Linked enterprises
“(48) For the purpose of calculating staff numbers and financial amounts of enterprises, Articles 3 and 6 of Annex I establish a distinction, inter alia, between ‘autonomous enterprises’ and ‘linked enterprises’. In accordance with Article 6(1) of Annex I, in the case of an autonomous enterprise, the data, including the number of staff, are determined exclusively on the basis of the accounts of that enterprise. By contrast, it follows from the first and third subparagraphs of Article 6(2) that, in the case of an enterprise having linked enterprises, the data of the enterprise in question must be summed to 100% of the data of any enterprise which may be linked directly or indirectly to it, where the data were not already included through consolidation in the accounts.”
“(49) According to point (a) of the first subparagraph of Article 3(3) of Annex I, two enterprises are deemed to be ‘linked’ when one has a majority of the shareholders’ or members’ voting rights in the other.”
“(50) Pursuant to the third subparagraph of that Article 3(3), enterprises having any of the relationships described in the first subparagraph thereof through ‘one or more other enterprises’ are also considered to be linked.”
“(51) In the present case, … Outletico has a relationship with, at least, Esterkin Family Investments and IC Industries Holdings, which corresponds to that described in point (a) of the first subparagraph of Article 3(3) of Annex I to Regulation No 651/2014, through, on the one hand, RRE Tradecenters holding, which holds 60% of Outletico’s capital and, therefore, the majority of voting rights of its members, and through, on the other hand, A, who fully owns RRE Tradecenters holding and Esterkin Family Investments and owns 75% of IC Industries Holdings and, hence, the majority of voting rights of the members of the latter three companies.”
Links via natural persons
Then the CJEU examined the role of natural persons.
“(52) As for the question whether it is enough for a natural person to have a controlling interest in an undertaking with the rights associated to it under national law in order to conclude that that person engages in an ‘economic activity’ and, therefore, to classify that natural person as an ‘enterprise’, within the meaning of Article 1 of Annex I to Regulation No 651/2014, it should be noted that, according to that Article 1, an enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity.”
“(53) The Court has repeatedly held that the concept of ‘enterprise’, within the meaning of that Article 1, covers any entity which engages in an activity consisting of offering products or services on a given market, regardless of its legal status or the profit-making nature of the goal it pursues”.
“(54) In that regard, it should be emphasised, in the first place, that a natural person can be regarded as being an ‘enterprise’ if he or she engages in an economic activity. The concept of ‘enterprise’, within the meaning of Article 1 of Annex I to Regulation No 651/2014, extends to ‘any entity …, irrespective of its legal form’ which engages in an economic activity. That interpretation is, moreover, borne out by the second sentence of that Article 1, according to which ‘self-employed persons and family businesses’ engaged in craft or other activities are regarded as being enterprises.”
“(55) In the second place, it should be borne in mind that an economic activity may be carried out both by an operator directly on the market, and, indirectly, by an entity controlling that operator as part of an economic unit which they together form”.
“(56) In that regard, the Court held that the mere fact of holding shares, even controlling shareholdings, is insufficient to characterise as economic an activity of the entity holding those shares, when that activity only consists in the exercise of the rights attached to the status of shareholder or member, as well as, if appropriate, in the receipt of dividends, which are merely the fruits of the ownership of an asset”.
“(57) By contrast, an entity which, owning controlling shareholdings in a company, actually exercises the control that those shareholdings confer on it by involving itself directly or indirectly in the management thereof must be regarded as taking part in the economic activity carried on by the controlled undertaking. It must therefore itself be regarded as an undertaking”.
Therefore, “(58) an entity, including a natural person, holding shares in a company, can be classified as an ‘enterprise’ only if two conditions are satisfied. First, the shares held must allow that entity to exercise control over a company. Second, that entity must actually exercise that control by involving itself directly or indirectly in the management of that company”.
“(59) It follows that the mere fact of holding a majority interest in such a company, or even fully owning its capital, does not, in itself, allow the inference that actual control is exercised. It must be established individually, in practical terms, whether that is indeed the case, on the basis of evidence capable of showing that the entity concerned involves itself, directly or indirectly, in the management of that company.”
But the CJEU cautioned that “(60) the holding of shares of the types described, in particular on the part of natural persons, in companies which engage in an economic activity often constitute a mere exercise of ownership rights over property, in particular, when they result from a simple placing of capital by an investor”.
Exercise of shareholder rights
Then the CJEU made an important statement. “(61) The fact that Latvian law confers on any entity holding shares in the capital of a company certain rights that attach to the status of shareholder, such as voting rights and rights to take part in the general meeting, which is responsible for adopting certain decisions pertaining to the management of the company, does not in itself imply that any entity holding shares exercises actual control on that company by involving itself, directly or indirectly, in the management thereof. Those rights, in fact, arise by operation of law from owning capital or being a shareholder and therefore are not sufficient, in themselves, to draw a distinction between a situation where a natural person engages in an economic activity, consisting in actually controlling a company by involving him or herself directly or indirectly in its management, and a situation where, by holding those shares, a natural person is merely exercising ownership rights over property, in particular when they result from a simple placing of capital by an investor.”
Also importantly, the CJEU clarified that “(62) by contrast, …, other evidence, such as whether the person with a controlling interest exercises functions within the company’s supervisory bodies or the board of directors, whether that person is an entrepreneur with a controlling interest in a number of companies acting in a coordinated manner or pursuing a common goal or whether that person has declared an intention to put in place a commercial strategy through the controlled company, can be taken into account in order to verify whether that person involves him or herself directly or indirectly in the management of an enterprise and, therefore, exercises actual control on its activity.”
Lastly, the CJEU applied the principles listed above to the case at hand. “(63) In the present case, it is evident that the referring court is called upon to verify the legality of the tax authority’s decision …, which is based, according to the order for reference, solely on the fact that A has a controlling interest in RRE Tradecenters holding, Esterkin Family Investments and IC Industries Holdings, which it is for the referring court to verify.”
Conclusions
The CJEU concluded that “(64) the mere fact that A has a controlling interest in those companies, with the rights arising from it under Latvian law, is not sufficient, in itself, to conclude that that natural person exercises actual control by involving himself, directly or indirectly, in the management of those companies and that that person, as a result, engages in an economic activity capable of classifying him as an ‘enterprise’ within the meaning of Article 1 of Annex I to Regulation No 651/2014. Therefore, it cannot be inferred from that alone that Outletico has indirect relationships, through A, with Esterkin Family Investments and IC Industries Holdings capable of classifying those three companies as ‘linked enterprises’ within the meaning of the third subparagraph of Article 3(3) of Annex I.”
Because the CJEU did not have sufficient evidence before it, it directed “(65) the referring court to verify whether, in the case in the main proceedings, evidence such as that indicated in paragraph 62 of the present judgment can be taken into account in order to determine whether A is involving himself, directly or indirectly, in the management of those companies and, therefore, exercises actual control over their activities. If so, A himself could be classified as an ‘enterprise’, within the meaning of Article 1 of Annex I to Regulation No 651/2014, through which Outletico indirectly has relationships with Esterkin Family Investments and IC Industries Holdings capable of classifying those companies as ‘linked enterprises’ within the meaning of the third subparagraph of Article 3(3) of Annex I.”
“(66) Should the referring court take the view that A cannot be classified as an ‘enterprise’ but must, for the purposes of applying the concept of ‘linked enterprises’, be regarded as being a natural person, it will be for that court to establish whether the conditions set out in the fourth subparagraph of Article 3(3) of Annex I to Regulation No 651/2014 are met, in particular the condition that the enterprises concerned must engage in their activity or in part of their activity in the same relevant market or in adjacent markets.”
