Understanding the EU Late Payment Directive: Learnings from the proposed reform

By Emilio Della Bruna and Pasquale Lomonaco 

Late payments in commercial transactions have long plagued businesses, especially smaller ones, across the European Union. Changes to the EU Late Payment Directive were proposed in 2023 to tackle this issue but were scrapped due to opposition from corporates and concerns over economic impact. But, while the new Regulation didn’t pass, it highlighted the need to address the underlying problems that negatively impact both suppliers and their clients.

In this article, we’ll recap the provisions of the Directive and the proposed reforms, why businesses should take proactive steps to improve their payment practices, and what that might look like.

Understanding the current EU Late Payment Directive: A recap

The EU Late Payment Directive (Directive 2011/7/EU) was adopted on 16 February 2011, with the primary objective of tackling late payments in commercial transactions and expediting invoice payments in business-to-business transactions within the European Union. 

This Directive was a significant update to the earlier Directive 2000/35/EC, which also aimed to tackle late payments but had limited success in enforcing timely payments. The late payment culture in the EU was seen as a major barrier to business growth, particularly for small and medium-sized enterprises (SMEs), which are more vulnerable to cash flow issues. This Directive sought to protect small and medium enterprises from the negative cash flow impacts caused by delayed payments.

The Directive applies to all commercial transactions between businesses (B2B) and between businesses and public authorities (B2G) within the EU.

The main provisions of the current directive are as below:
 

1. Public authorities must pay for the goods and services they procure within 30 days or, in exceptional circumstances, within 60 days;
    
2. Enterprises must pay their invoices within 60 days, unless expressly agreed otherwise and provided it is not grossly unfair;
    
3. If payment is delayed, the creditor is entitled to interest on the outstanding amount, with a statutory interest of at least 8% above the European Central Bank’s reference rate;
    
4. Creditors are entitled to a fixed minimum compensation of €40 for recovery costs, with the possibility of claiming additional costs if this does not cover all expenses incurred;
    
5. EU countries can maintain or introduce laws and regulations which are more favourable to the creditor than the Directive’s provisions;
    
6. The Directive prohibits terms and practices that are grossly unfair to the creditor, such as denying the creditor the right to charge interest on late payments or recover costs incurred due to late payment.

The Directive's primary goal was to create a more predictable business environment, allowing companies, particularly SMEs, to rely on timely payments to maintain their cash flow and business operations. While the Directive has effected positive change in some areas, challenges remain, leading to discussions about potential reforms.

What was the proposed 2023 reform?

In 2023, the European Commission proposed a revision of the Late Payment Directive to address ongoing issues, such as the persistence of late payments.

A key aspect of the proposed Regulation was the reduction of the maximum payment period to 30 days for all commercial transactions, effectively eliminating the possibility of extending this, even by mutual agreement. The goal was to protect smaller businesses from the power imbalance that often allows larger companies to enforce extended payment terms. The proposed Regulation would also have:

• Maintained any existing shorter payment terms in individual countries’ regulations. 
   
• Specifically reduced the maximum payment term in the agri-food tech sector to 30 days to provide special protection against unfair trading practices. 
   
• Removed the longer payment terms for public entities engaged in healthcare services and for public authorities, enforcing a 30-day payment term across the board.

However, the proposed Regulation faced significant opposition from various stakeholders. Large corporations argued that the stricter rules would be difficult to implement and could disrupt existing supply chain agreements. There were also concerns that the reform could lead to unintended consequences, such as larger businesses passing the costs of shorter payment terms onto their suppliers or increasing the prices of their goods and services.

Ultimately, the European Commission scrapped the proposal in late 2023, recognising the need to find a more balanced approach that supports all businesses.