We are Europe's largest site for RFID and pentesting hardware (lab401.com)

We are in the exactly the same situation.
PayPal has conducted a personalised, manually executed war of attrition against our company and shareholders.

Eight months ago, PayPal froze our account, seizing 15kEU.
They refused to give any justification for the action, despite discussions with C-level staff.

After the 180-day "withholding" period, we were informed that they would not release the funds, for undisclosed reasons.

We immediately engaged legal counsel. PayPal refused to interact with our counsel, and so a C&D was issued.
Within one week of the C&D, PayPal did the following:

- Froze the account of our sister company (in Hong Kong), seizing 35k EU

- Froze the personal accounts of all shareholders of the EU and HK corps (~1,5k EU)

- Froze the business accounts of all shareholders by name search (different corporate entities, different businesses) - 5kEU

- Froze the business accounts that the shareholders held (again, different corps, different businesses) - another 5kEU

Our policy is to empty accounts on the 28th of each month.
PayPal froze and seized funds in all accounts on the 27th of the month.
Based on the time-stamps of the emails, and the order in which the accounts we closed, it's obvious that it was a targeted, manual process (2 - 3 minutes between closing each personal account, 15 minutes to find the next company account, 3 - 5 to close the personal accounts, and then 10 - 15 minutes for the next company accounts).

We engaged secondary legal counsel in Luxembourg (PayPal's EU headquarters).
Again, PayPal refused to disclose any reason, justification or proof, replying with typo-ridden copy-pasted document from a low-level legal peon, concluding that no funds would be returned, the businesses and personal accounts were deemed 'illegal', and as such, PayPal would confiscate all funds.

All KYC was performed. All accounts had been "audited" by PayPal (when you reach the 5k, 50k, 100k+ processing tiers).

Needless to say, operationally - we have shipped 50kEU of hardware to customers, and face losses of the hardware, and costs of replacing stock.
I agree with the standpoint: this is purely racketeering - an online equivalent of Civil Forfeiture.

For extra context, as the points have been raised in other comments:

- In a perfect world, no merchant would use PayPal. In our experiments, disabling PayPal cuts revenue by ~30% in our industries.

- Pentesting products could include illegal products: keyloggers, etc. We sell no such products for obvious legal and compliance reasons. All the products we sell are sold by countless other resellers that use PayPal. We have processed Visa/MC with Stripe for over 6 years with no problems (legal, chargeback, etc)

- We empty accounts regularly, to minimize fallout. However, you have to keep a healthy minimum in accounts when dealing with large volume, or accounts get limited automatically (presumably to avoid merchants pulling cash to avoid chargebacks / refunds)

- We have already 'invested' over 20k in legal fees. I justify this cost in (perhaps falsely) believing that we could establish some case law that could benefit other merchants.

It's unfortunate that we cannot join the class action in the US, or we'd be into it.
With that said, if anyone merchant in the EU has similar issues, it could be interesting to investigate if a similar action can be mounted in the EU. Feel free to reach out: simon at sn dot cm (not a typo).