10 April 2020 - Article
As we had anticipated, in its judgment released today, the European Court of Justice followed the opinion of the Advocate General (issued on 14 October 2008)1 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.
In brief the European Court of Justice held that:
1. Donations by individuals resident in one Member State to organisations based in and recognised as charitable by another Member State concern a movement of capital within the meaning of Article 56 of the EC Treaty;
2. For Member States (such as the UK) which give tax reliefs on donations to organisations recognised as charitable and located in their own Member State, it is contrary to Articles 56 and 58(3) 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
3. 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.
We believe that this is a very significant decision which should have ramifications for charities, donors and tax authorities across the EU; and in particular that:
- 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' tax treatment 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 recognise them as eligible for equivalent tax treatment to their own charities;
- The steps they should take in order to be recognised 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.
For donors wishing to support charities based in other EU states, the judgment should, ultimately, lead to a significant simplification in the steps they need to take to do so tax-efficiently.