The AI Act defines SME by reference to Commission Recommendation 2003/361/EC. In outline, the SME category is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, or an annual balance sheet total not exceeding 43 million euro. Within that category, a small enterprise employs fewer than 50 persons and has turnover or balance sheet total not exceeding 10 million euro, and a microenterprise employs fewer than 10 persons and has turnover or balance sheet total not exceeding 2 million euro. The Recommendation also contains rules for partner enterprises, linked enterprises and public body control, and for the data to be used. Those rules can change the answer for a company in a group, and the Recommendation itself must be checked.
Where does the AI Act define SME?
Article 3 of Regulation (EU) 2024/1689, as amended by Regulation (EU) 2026/1744, defines SME by reference to Recommendation 2003/361/EC. That means the definition is not set out in full in the AI Act text, and a reader who looks only at the AI Act will not find the thresholds. The Recommendation must be read alongside the Act. The Recommendation defines an enterprise as any entity engaged in an economic activity, irrespective of its legal form, including self employed persons, family businesses, partnerships and associations regularly engaged in an economic activity. That broad enterprise concept matters for small teams, because a sole trader, a partnership or a small company can each be an enterprise for this purpose. The AI Act provisions that refer to SMEs, including Articles 62, 63 and 99, then apply by reference to that definition. A record that states a company is an SME should cite the Recommendation, the Article 3 definition and the evidence relied on, rather than stating the conclusion without a source. A record that relies on a general understanding of SME, without the Recommendation, will be difficult to test.
What are the headcount and financial ceilings?
The ceilings in Recommendation 2003/361/EC are, in outline, as follows. A medium sized enterprise employs fewer than 250 persons and has an annual turnover not exceeding 50 million euro or an annual balance sheet total not exceeding 43 million euro. A small enterprise employs fewer than 50 persons and has an annual turnover or an annual balance sheet total not exceeding 10 million euro. A microenterprise employs fewer than 10 persons and has an annual turnover or an annual balance sheet total not exceeding 2 million euro. The headcount criterion is the main criterion, and the financial criterion uses turnover or balance sheet total, not both together in the way the wording is sometimes misread. The Recommendation sets out how staff headcount is calculated, including full time, part time, seasonal and temporary staff, apprentices and persons on maternity or parental leave, and how turnover and balance sheet total are to be taken from accounts. Those calculation rules matter, because a headcount that counts only full time permanent staff, or a turnover figure taken from the wrong period, can produce the wrong category. The figures should be taken from the latest approved accounts and the relevant reference period in the Recommendation, with the source and date recorded.
For the broader regulatory framework, see SMEs, startups and open source overview.
Why do partner and linked enterprises matter?
The Recommendation does not look only at the individual company. It contains rules for autonomous enterprises, partner enterprises and linked enterprises, based on holdings of capital or voting rights, control and group relationships. A company that holds, or is held by, another enterprise at or above the thresholds in the Recommendation may need to add some or all of the other enterprise data to its own headcount, turnover and balance sheet figures. A company that is part of a larger group may therefore exceed the SME ceilings on aggregated data even though its own figures are below them. Conversely, a company with a minority investor that falls within the exceptions in the Recommendation may remain autonomous. The rules are detailed and fact sensitive, and they include provisions on public bodies, venture capital, business angels, universities and institutional investors. A small company with external investment, a joint venture, a franchise arrangement or a parent company should not assume SME status from its own figures alone. The group structure, the holdings and the control arrangements should be mapped, and the aggregation should be worked through with an accountant or legal adviser. The map should be kept with the SME record and updated when the structure changes.
How is the definition used in the AI Act?
The SME definition is used in the AI Act for support, proportionality and penalty purposes, not as a risk category. Article 62 requires Member State measures for SMEs including startups, including priority sandbox access, awareness and training, communication channels and standardisation participation, and requires conformity assessment fees to be proportionate. Article 63 allows microenterprises to meet quality management requirements in a simplified manner. Article 99 requires penalties to take account of the interests and economic viability of SMEs including startups, and sets a lower cap rule for SMEs in defined cases. Regulation (EU) 2026/1744 extends defined SME treatment to SMCs in the provisions it amends, but it does not change the SME definition itself. A company that qualifies as an SME for one measure does not necessarily qualify for every measure, because each provision has its own conditions, including registered office or branch in the Union, eligibility criteria for a sandbox, and the specific fee or penalty provision. The record should therefore state the measure relied on, the provision, and the evidence that the conditions for that measure are met, rather than stating a general SME status and assuming that it carries across all measures.
What evidence should a small company keep?
A small company should keep a short SME file that can be shown to an authority, a notified body or a customer without disclosing unnecessary commercial detail. The file should contain the legal form, the group structure diagram, the holdings and control arrangements, the staff headcount calculation with the method and reference period, the turnover and balance sheet figures with the accounts relied on, the aggregation calculation where partner or linked enterprises exist, and the conclusion for each AI Act measure relied on. It should be dated and signed by the person responsible, and updated when accounts are approved, when the group changes, or when a new measure is relied on. The file should not contain invented figures or estimates presented as accounts. Where figures are provisional, they should be labelled provisional with the date they will be replaced. A company that cannot produce the file when asked will find it difficult to obtain priority access, proportionate fees or penalty consideration, even where it genuinely meets the definition. The file is therefore a practical asset, not a formality.
Continue with proportionate duties and support for SMEs.
What does this guide not decide?
This guide does not decide whether any named company is an SME, a small enterprise or a microenterprise, and it does not reproduce the Recommendation in full. The calculation rules for headcount, turnover, balance sheet, partner and linked enterprises and public body control must be checked in the Recommendation itself, with the accounts and group documents for the specific company. A company near a threshold, in a group, or with complex investment arrangements should confirm its status with an accountant or legal adviser before relying on SME treatment for a sandbox application, a fee or a penalty matter. This guide explains the definition and the evidence, not the status of a particular company.
Frequently asked questions
Is a company with 240 staff always an SME?
Not necessarily. The SME category also requires the financial ceiling to be met, and the Recommendation aggregation rules for partner and linked enterprises can add the data of other enterprises. A company with fewer than 250 staff in its own accounts can exceed the SME ceilings on aggregated data. The headcount, financial figures and group structure must all be checked.
Does being a startup automatically make a company an SME?
No. Startup is not a separate legal category in the AI Act definition. A new company is an SME only if it meets the Recommendation criteria, including the aggregation rules. A startup that is part of a larger group, or that is controlled by a large enterprise, may not be an SME even though it is new and small in its own right.
Where is the SME definition written?
In Commission Recommendation 2003/361/EC, by reference from Article 3 of Regulation (EU) 2024/1689 as amended. The thresholds and calculation rules must be checked in the Recommendation, with the latest approved accounts and the group documents for the company concerned.
Does SME status exempt a company from high risk duties?
No. SME status brings support and proportionality in defined places, such as sandbox access, fees and simplified quality management for microenterprises, but the substantive high risk requirements still apply. SME status should be recorded measure by measure, with the provision and conditions cited.
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This article is an informational overview, not a legal determination. Check the current legal text and official implementation guidance for your system and role.
Consolidated Regulation (EU) 2024/1689 ↗AI Act Service Desk timeline ↗