02 March 2009

Art & cultural assets news - Spring: Discriminatory tax treatment

Clive Cutbill
Consultant | UK

European Court of Justice outlaws discriminatory tax treatment of gifts to charities incorporated in other member states

The recent decision of the European Court of Justice in Hein Persche v Finanzamt Là¼denscheid (European Court of Justice, C318/07) has important ramifications for donors who intend to make charitable donations to public galleries and not-for profit art organisations within the European Union. The decision confirms that donors based in one Member State are entitled when making donations to charitable organisations based in another Member State to benefit from the same tax relief they would be entitled to had they made the donation to a charitable organisation based in the same Member State. The decision means, for example, that a donor based in France who decides to make a donation to a museum based in England may be entitled to the same tax relief in France on his gift to the English museum as if the gift had been made to a museum in France.

In his opinion issued on 14 October 2008, the Advocate General of the European Court of Justice recommended to the Court that it should conclude that: 

  • Donations by individuals resident in one territory to organisations based in and recognised as charitable by another Member State concern a movement of capital within the meaning under Article 56 of the EC Treaty;
  • For Member States (such as the UK) which give tax reliefs on donations to organisations recognised as charitable and located in their own territory, it is contrary to Articles 56 and 58(3) of the EC Treaty not to allow a taxpayer the opportunity to prove that charitable organisations based in other Member States also fulfil the requirements for tax relief; and
  • Fiscal authorities should not have to liaise directly with the authorities in the recipient body's Member State to determine whether the criteria for relief exist and may put the burden of proving that a deduction should be given onto the donor taxpayer.  

In its judgment released on 27 January 2009, the European Court of Justice followed the opinion of the Advocate General and built upon its 2006 decision in the case of Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften (C386/04) (which had outlawed the taxation of the income of other Member States' charities if that income would have been exempt had the charity been resident in the State charging the tax) by extending a similar ‘non-discriminatory' approach to the tax-deductibility of gifts to other EU Member States' charities.  

This is a very significant decision which should have ramifications for charities, donors and tax authorities across the EU: 

  • Those Member States, including the UK, to which directions were issued by the European Commission following the release of the Advocate General's opinion in the Stauffer case requiring them to remove all discriminatory tax practices in relation to the tax treatment of charities based in other Member States (and gifts to them), and which have to date ignored them, must now consider their positions carefully;
  • Despite suggestions to the contrary, the UK Government is unlikely to ‘level the playing field' by withdrawing tax reliefs for UK charities and gifts to them;
  • Instead, consideration must now be given to establishing mechanisms to prove to fiscal authorities that the activities of charities from other Member States satisfy the requirements for ‘charitable' status in the taxpayer's Member State; 
  • Charities will wish to consider:
    • Whether their activities and structure are such that other EU Member States should now recognize them as eligible for equivalent tax treatment to their own charities;
    • The steps they should take in order to be recognized in other EU Member States (whether that involves simply establishing that they satisfy other jurisdictions’ requirements or considering any constitutional amendments required to ensure that they do); and
    • How to meet the threat of competition for donations from charities located in other EC states which may now be able to raise funds tax-efficiently in the UK

Whilst it is clear that this decision will be of benefit to donors who are encouraged to ‘shop' amongst the public and not-for-profit arts organisations of Member States, how far the decision will benefit the public and not-for-profit arts organisations of particular Member States remains to be seen.

Clive Cutbill Consultant | London