ICISA has been at the forefront of public discussion in recent months about efforts within the EU to tackle late payments. Throughout this process, we have consistently described how late payments in both Business-to-Business (B2B) and Government-to-Business (G2B) transactions must be addressed 

This point has been underscored by research published by Allianz Trade last month which showed that payment terms have jumped significantly in just the last year. According to the report, the increase results in pressure on both working capital requirements and profitability for businesses.   

The European Commission put forward a proposed regulation in September 2023 to tackle this problem. This formed part of a wider suite of measures from the Commission to support SMEs in the face of various economic challenges. The regulation would supersede the existing Late Payment Directive, which sets out a broad framework on payment terms which member states have implemented in various ways into national legislation. 

The key measures contained in the proposal include a fixed payment period of 30 days for B2B and G2B transactions. Under the Directive, payment terms were generally held to be 60 days, but this could be negotiated further where this would not be “grossly unfair” to either party. This concept was removed as it was viewed as too loose and a way for larger companies to force longer terms on smaller ones.  

ICISA has highlighted that while the issue of payment terms is negatively impacting European businesses, the proposals are likely to fail at addressing the core reasons for this. We have also highlighted that fixing payment terms at 30 days ignores that certain sectors need to operate on longer periods due to the nature of their business. Contractual freedom such as this is a valuable commodity for many businesses and should be preserved. The proposals also incorrectly view late payment behaviour and longer payment terms as the same thing, and fail to acknowledge that SMEs act both as creditors and debtors in different circumstances.  

In particular, we noted that this abrupt shift in payment terms would result in a financing requirement for SMEs of c. EUR 2 trillion. Given market conditions and the already tight credit conditions for SMEs, that requirement is unlikely to be met by banks. Interest payments on the extra financing would also likely be inflationary at a time when the European economy is sensitive to such issues. 

The Commission’s text also included stricter penalties for late payment and the creation of enforcement bodies within member states. In line with the EU process for developing legislation, the text was then taken up by both the European Parliament and the European Council. Each is expected to review the text and produce a version which will then be taken to negotiations between the three parties to reach a combined, final text. 

The European Parliament has worked quickest on this topic. Despite significant disagreements on the proposal even within political groupings on issues, on 23 April the Parliament approved its version of the text. Some specific amendments have been made by the Parliament, however, the key feature of a fixed 30 day payment period has been kept. Some flexibility was included for so-called, “slow moving or seasonal goods” to negotiate terms up to 120 days if necessary. It is not yet clear which sectors would fall under this exception as this would fall to the Commission to define at a later date under the Parliament’s proposal.  

Focus now shifts to the European Council where member state governments will express their views on the topic. Early indications appear to be that a majority within the Council does not support the rigidity of the proposal. It is also understood that member states are concerned about the impact a regulation would have on existing mechanisms and judicial processes. As a result, it is not yet clear what the Council’s view will be to amend the proposal in a way that enables more flexibility in payment terms, or whether they push back entirely on the idea of a regulation itself.  

The European Council also does not appear likely to take up this issue quickly with other priorities on its agenda. Complicating the time frame further is upcoming European Parliament elections in the summer, as well as the end of the term of the current European Commission. Progress on the file is likely to depend on the outcome of both of these developments. ICISA continues to monitor developments and engage with key stakeholders to inform discussions. 

Daniel de Burca
Daniel de BurcaHead of Policy and Regulatory Affairs