Social Enterprises

Few years after the approval by the Council of Ministers of the draft law “On the development and maintenance of a registry of social enterprises” and its subsequent submission to the competent committee of the House of Representatives under the name “The Social Enterprises Law of 2020”, the long-outstanding proposed bill has passed into the much-awaited law and published to the official gazette of the Republic of Cyprus on 23/12/2020 (“the Social Enterprises Law”).

Prior to outlining the framework reflected in the Social Enterprises Law, it would be an oversight not to refer, even briefly, to the origin of the Social Enterprises Law.

Origin of Social Enterprises Law

As one might expect, the Social Enterprises Law derives its origin from a European action planning and in particular the social business initiative (“SBI”), which was communicated by the Commission to, amongst others, the European Parliament and the Council, aiming in promoting a highly competitive social market economy and innovation, with a view to develop and establish territorial cohesion, sustainable jobs, welcome new initiatives, protect the environment and fight poverty and social exclusion (“the Communication”).

The main objective of a social enterprise, as an operator and dominant element of the social economy, is to have a social impact rather than solely generate and distribute profit to its shareholders. The profits of a social enterprise are used primarily to pursue and achieve goals of social nature and to underpin the social foundations rather than augment the investment and wealth of the shareholder. The management of a social enterprise, whilst being carried out in an open and socially and environmentally responsible and conscious manner, must, in this context, encompass the employees, consumers and all stakeholders that are affected from the commercial activities of the enterprise.

Deriving from the rules of the Treaty on the functioning of the European Union and the case-law of the Court of Justice of the European Union, the term “social enterprise” used by the Commission, embraces the following types of businesses[1]:

  1. Those for which the social or societal objective of the “common good” is the reason for the commercial activity, often in the form of a high level of social innovation,
  2. those where profits are mainly reinvested with a view to achieving this social objective,
  3. and where the method of organisation or ownership system reflects their mission, using democratic or participatory principles or focusing on social justice.

Thus, by way of further elaboration and explanation, the term, as articulated by the European Commission, embraces:

(i)                  businesses providing social services and/or goods and services to vulnerable persons (access to housing, health care, assistance for elderly or disabled persons, inclusion of vulnerable groups, child-care, access to employment and training, dependency management, etc.); and/or

(ii)                businesses with a method of production of goods or services with a social objective (social and professional integration via access to employment for people disadvantaged in particular by insufficient qualifications or social or professional problems leading to exclusion and marginalisation) but whose activity may be outside the realm of the provision of social goods or services.

Examples of Social Enterprises

Reference to some examples of social enterprises, would provide the reader with a better understanding of the notion of the “social enterprise”, as outlined in the European Commission’s Communication:

  • In Italy, a medical centre provides high-level specialised assistance, including cultural mediation, particularly in areas poorly served by public services, with a particular emphasis on people in fragile socio-economic situations (such as immigrants).
  • In Romania, a company with 5 members of staff and 5 volunteers has been working to provide cultural services in the Romanian language to blind people by adapting media (especially audio books and adapted films) for an estimated 90 000 people.
  • In France, a business launched an innovative concept of water-free car washing services, using biodegradable products and employing unqualified or marginalised staff in order to reintegrate them in the labour market.
  • In Hungary, a foundation set up a restaurant employing disabled staff (40 employees) and provided training and childcare to ensure the transition to stable employment.
  • In the Netherlands, a company teaches reading using innovative digital tools and a method based on play. This method is particularly suitable for hyperactive or autistic children but can also be used for illiterate people and immigrants.
  • In Poland, a social cooperative comprising two associations employs long-term unemployed and disabled staff and provides a variety of services: catering and food services, small construction and handicraft jobs and employability training for disadvantaged people.

Cyprus Legal Framework on Social Enterprises

Until very recently, no definition of the term “social enterprise” could be found in either the company law or in any other legislative instrument of Cyprus law and, as a matter of fact, there has been no specific legislative framework governing the establishment, incorporation, constitution, synthesis or operations of social enterprises.

A body corporate having or combining as part of its operations or mission, elements of social nature or texture, would normally take the form either of a company limited by guarantee (incorporated under the Companies Law, Cap. 113), or of an association or foundation under the Associations and Foundations and other Ancillary Matters Law of 2017 (Law 104(I)/2017), or of a cooperative society under the Cooperative Societies Law of 1985 (Law 22/1985).

The eventual incorporation of the Social Enterprises Law in the legislative arsenal of Cyprus after few years of legislative drafting and discussions between the social partners, will definitely serve to the further development and promotion of the social entrepreneurship in Cyprus and has arrived at a very critical juncture, where the social sensitivity and care for the vulnerable groups and the environment is needed more than ever before.

The definition of the “social enterprise” in the Social Enterprises Law is two-fold and it’s distinguished into the social enterprises of:

(i)     general purpose, whose primary object of activity, which must be reflected in its memorandum and articles of association, is the mission to act for the interest and benefit of the society through the promotion of social, cultural and/or environmental actions and, in the context of its activities, invests at least 80% of its profits, after the taxes, for the realization of its foregoing main business purpose;

(ii)   social integration, whose primary object of activity, which must be reflected in its memorandum and articles of association, is the accomplishment of a social mission through the employment in its workforce of disable persons, at the minimum rate of 10%, and of persons belonging to vulnerable groups (as they defined in the Law), at the minimum rate of 30% and, in the context of its activities, invests at least 40% of its profits, after the taxes, for the realization of its foregoing main business purpose.

In addition to the above qualifications, a social enterprise may be registered in the Register of Social Enterprises which, in accordance with the Law, it shall be held by the Commissioner of Cooperative Companies Services, if:

(i)     it provides goods or services on the basis of a business model whereby more than 70% of its revenues emanate from a business activity,

(ii)   it applies predefined procedures and regulations in relation to the distribution of dividends, with a view to safeguard its economic viability;

(iii) it is managed in an entrepreneurial, responsible and transparent manner, especially with the participation of its members, employees and/or customers, accordingly, as well as with other interested parties who are affected by the business activities of the social enterprise;

(iv) it applies remuneration policies and practices, so that the highest remuneration paid to any employee in the company, is no more than four (4) times the remuneration received by the lowest-paid employee of the company.

Pursuant to the Social Enterprises Law, a social enterprise, being a legal entity with corporate personality, may take the form of a private company with limited liability by means of shares or guarantee registered pursuant to the provisions of the Companies Law or of a cooperative society registered under the provisions of the Cooperative Societies Law or of a partnership registered in accordance with the provisions of the Partnerships Law.

Although the Social Enterprises Law already contains the procedure and description of the requisite supportive documents which need to be submitted to the competent authority for the purpose of registering the social enterprise in the Register, no application is currently accepted by the Commissioner for the registration of a social enterprise, pending the approval and passing into law of the draft regulations which are now under the process of public consultation and are expected to be enforced very soon.

EU Commission priority measures and benefits for Social Enterprises

The European Commission in its Social Business Initiative identifies and projects the challenges that the social enterprises are facing, some of which are similarly faced by any SME and some others concern mainly the social enterprises, due to, amongst other factors, the nature of their business model and the low familiarity of the investors with this sector.

In the context of and towards the implementation of the social business initiative (SBI), the European Union, through the Commission, has set and constantly develops measures, policies and incentives in order to tackle these challenges and support the social enterprises and innovation. The policies and measures are briefly outlined below:

  1. In order to improve the access and make it easier for social enterprises to obtain funding, the Commission (1) has put forward a European regulatory framework for social investment funds, (2) encourages the development of microcredit in Europe by improving the related legal and institutional framework (Progress Microfinance Facility) and (3) has set up an EU programme for employment and social innovation which, essentially, is an EU financial instrument providing easier access to funding. (4) The EU has also made social enterprises an investment priority of the European Regional Development Fund and the European Social Fund.
  2. For increasing the visibility of social entrepreneurship, (5) the Union is developing a comprehensive map and an exhaustive register for social enterprises in Europe, so that the stakeholders to be able to identify the best practices and replicable models and specify the characteristics, business model, economic weight, cross-border growth potential, the tax regime and the legal framework in which they operate etc. (6) The Union also intends to create a public database of labels and certifications applicable to social enterprises in Europe, (7) it helps national and regional governments introduce measures to support, promote and finance social enterprises (the Guide to Social Innovation reflects a relevant attempt) and (8) has created a multilingual information and exchange platform for social entrepreneurs, business incubators and clusters, as well as social investors (Social Innovation Community).
  3. In order to make the legal environment friendlier for social enterprises, (9) the Commission works on the simplification of the rules and legal environment for social enterprises, (10) has rendered quality and working conditions more important criteria for the awarding of public procurement contracts, particularly for social and health services and (11) has simplified the rules for awarding public aid to social and local services, an action which benefits many social enterprises.

For detailed information about the foregoing eleven (11) measures, actions and/or initiatives of the Commission in relation to the furtherance of the policies aiming to support and promote the social entrepreneurship may be found in the official website of the European Commission, in the section of the Social Enterprises

[1] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee for the Regions – Social Business Initiative, Brussels 25.10.2011, COM(2011) 682 final.

  Author: Antonis J. Karitzis