Supply chain due diligence legislation of the European Union: Scope of application
The Directive on Corporate Sustainability Due Diligence - CSDDD was adopted by the competent EU authorities on June 13, 2024, with effect from July 25, 2024.
1. Criteria for Identifying Regulated Companies
According to Article 2 of the Directive, the scope of application (i.e., regulated companies) covers large companies with significant business activities in the EU market, with different criteria for EU and non-EU companies.
1.1. EU Companies within the Scope of the Directive
An EU company falls within the scope of the Directive if it is incorporated under the laws of an EU Member State and meets one of the following conditions for two consecutive financial years:
- Employs more than 1,000 employees and has global net turnover exceeding EUR 450 million in the most recent financial year (including subsidiaries, if any); or
- Meets both of the following conditions simultaneously: (1) Participates in franchise or licensing agreements in the EU with another independent company forming a unified business purpose and approach, with royalty payments exceeding EUR 22.5 million in the financial year preceding the last financial year; and (2) Has global net turnover exceeding EUR 80 million in the financial year preceding the last financial year (including subsidiaries, if any).
1.2. Non-EU Companies within the Scope of the Directive
A non-EU company falls within the scope of the Directive if it is incorporated under the laws of a third country outside the EU and meets one of the following conditions for two consecutive financial years:
- Has net turnover in the EU exceeding EUR 450 million in the most recent financial year (including subsidiaries in the EU, if any); or
- Meets both of the following conditions simultaneously: (1) Participates in franchise or licensing agreements in the EU with another independent company forming a unified business purpose and approach, with royalty payments exceeding EUR 22.5 million in the most recent financial year; and (2) Has net turnover in the EU exceeding EUR 80 million in the most recent financial year (including subsidiaries, if any).
2. Implementation Timeline for Regulated Companies
Not all regulated companies are required to start implementing due diligence obligations at the same time. According to Article 37 of the Directive, due diligence obligations apply to different groups of regulated companies according to a staggered implementation schedule. Specifically:
Starting from 26 July 2027, national legislation of the EU Member States (transposing the Directive) will apply to companies operating in the territory of that Member State as follows:
- From July 26, 2027: The rules apply to (i) EU companies with more than 5,000 employees and global turnover of EUR 1.5 billion; and (ii) non-EU companies with turnover in the EU of EUR 1.5 billion.
- From July 26, 2028: The rules apply to EU companies with more than 3,000 employees and global turnover of EUR 900 million; and non-EU companies with turnover in the EU of EUR 900 million.
- From July 26, 2029: The rules will fully apply to all regulated companies (as defined above).
Note: According to the draft amendment of the CSDDD Directive published in February 2025, the application date for the first group of companies (July 26, 2027) would be removed.
Source: Compiled by the TTWTO-VCCI Research Group