31994H0390

94/390/EC: Commission Recommendation of 25 May 1994 concerning the taxation of small and medium-sized enterprises (Text with EEA relevance)

Official Journal L 177 , 09/07/1994 P. 0001 - 0019

COMMISSION RECOMMENDATION of 25 May 1994 concerning the taxation of small and medium-sized enterprises (Text with EEA relevance) (94/390/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the second indent of Article 155 thereof,

Whereas on 28 July 1989 the Council adopted Decision 89/490/EEC (1) on the improvement of the business environment and the promotion of the development of enterprises, and in particular small and medium-sized enterprises, in the Community, as revised by Council Decision 91/319/EEC (2);

Whereas in its resolution of 17 June 1992 on Community action to support enterprises, in particular small medium-sized enterprises, including craft-industry enterprises (3), the Council confirmed its undertaking to support the consolidation of the action taken to help enterprises;

Whereas by its Decision 93/379/EEC (4), the Council adopted, from 1 July 1993, a programme to intensify the priority measures and to ensure the continuity of an enterprise policy; whereas the programme gives priority to improving the legal, fiscal and administrative environment of enterprises;

Whereas sole proprietorships and partnerships make up a large proportion of small and medium-sized enterprises, whose role in the creation of jobs has been emphasized on a number of occasions in different Commission communications, and, more particularly, in the White Paper on growth, competitiveness and employment; whereas it is necessary to promote the investment capacity of these enterprises;

Whereas the method of taxing sole proprietorships and partnerships, which are generally subject to personal income tax, a tax which is progressive in nature in particular by comparison with corporation tax, hampers the development of the self-financing capacity of such enterprises and, in an economic environment where access to external financing is becoming more difficult, consequently restricts their investment capacity;

Whereas the current structure of rates of personal income tax and rates of corporation tax distorts competition between enterprises, depending on their legal form, to the detriment of sole proprietorships and partnerships; whereas it is desirable to work for greater tax neutrality, at least at regards the implications which systems of taxation have for profits reinvested by enterprises and, hence for their self-financing capacity;

Whereas several Member States have already taken measures to limit the existing distortion between taxation systems, according to whether an enterprise's profits are charged to personal income tax or corporation tax, either by granting sole proprietorships and partnerships the right to opt for payment of corporation tax on reinvested profits, or by limiting the progressiveness of personal income tax by comparison with the rates of corporation tax to incorporated companies;

Whereas the incorporation of sole proprietorships or partnerships is likely to resolve, despite its impact on areas unrelated to taxation which affect the entrepreneur and the enterprise, the problem of the level of taxation of the non-distributed profits of these enterprises; whereas such an operation must be carried out whithout giving rise to a significant revenue cost,

HEREBY RECOMMENDS:

Article 1

Member States are invited to adopt those tax measures necessary to correct the deterrent effects of the progressive income tax payable by sole proprietorships and partnerships in respect of reinvested profits. In particular, they should consider the possibility of: