Affiliated companies: a catalyst for funding or a stumbling block in the application?

Support programmes are designed to help companies implement innovations more quickly, make investments and enable growth. But anyone who has ever applied for funding knows that there are often many detailed questions between the idea and approval. One of these regularly causes discussion and sometimes even rejection: the question of affiliated companies.

What are ‘affiliated companies’?

In the context of funding law, the definition is generally based on the EU definition of SMEs (small and medium-sized enterprises). Accordingly, the following applies:

• Companies are connected if one controls the other or exercises a dominant influence.
• This can be achieved through direct or indirect majority shareholdings, voting rights or shareholder agreements.
• Family ties or interlocking shareholdings can also play a role.

The consequence: several legally independent companies may be considered as one company for the purposes of subsidy law.

Why is this important?

The classification has far-reaching implications for funding opportunities:

• Size category: Whether a company is classified as ‘small,’ “medium” or ‘large’ determines funding rates and access to programmes. Affiliated companies must add up their employee numbers, turnover and balance sheets.
• Eligibility: Some programmes exclude large companies. Those who exceed the SME limits due to interdependencies may suddenly no longer be eligible to apply.
• Transparency requirements: Funding agencies require detailed evidence of shareholder structures, shareholdings and relationships. This is an effort that is often underestimated.

Common pitfalls

1. Holding structures: Even if subsidiaries are operationally independent, the parent company often counts.
2. Start-ups with investors: Investments by venture capital companies can jeopardise SME status.
3. Family businesses: Several family-owned companies may be considered affiliated, even if they serve different markets.
4. International links: Investments abroad must also be taken into account, even if at first glance they appear to have nothing to do with the funding project.

Practical example: When a start-up suddenly becomes ‘too big’

A young technology company with 35 employees and annual sales of around €5 million wanted to apply for funding for an innovation project. At first glance, it was clearly an SME and therefore fully eligible for funding.

However, upon closer inspection, the funding agency discovered that a venture capital fund held over 30 per cent of the shares and was also involved in several large companies. Because of this connection, the employee and turnover figures for the entire group of companies had to be included in the calculation. The result: the SME threshold was exceeded.

The consequence: the start-up was considered a large company under funding law and was no longer eligible to apply for the desired programme.

This example shows how quickly good funding ideas can come to nothing if ownership structures are not checked in advance.

How can risks be avoided?

• Check early on: Before submitting the application, the ownership structure should be thoroughly analysed.
• Create transparency: An organisational chart of the group of companies helps to present complex structures in an understandable way.
• Seek legal advice: Tax and subsidy experts can assess whether a connection exists within the meaning of subsidy law.
• Communicate with the funding agency: Open questions can often be clarified in advance. This saves time and stress.

Our tip: Mitigate risks early on 

In subsidy law, ‘affiliated companies’ can either become a catalyst for subsidies if synergies and resources are pooled, or a stumbling block if applications fail to meet formal criteria. It is crucial to address this issue in good time and to present the company structure transparently. Ultimately, the clearer the circumstances are, the smoother the path to funding will be.

Text: Kristin Bube