17 October 2008

Tax deductibility of gifts to non-UK, EC member state charities

Alison Paines
Partner | UK

The possibility that tax deductions will be available throughout the European Community to charities from other member states has come closer as a result of the recent publication of an opinion of the Advocate General of the European Court of Justice.

The background

Most countries currently provide some form of tax advantages both to charities and to taxpayers who make charitable gifts. However, these are generally limited to gifts to, or the income and gains of, charities which either provide a specified level of benefit to the population of the country concerned or which satisfy local ‘territoriality’ tests. Historically, most European states, including the United Kingdom, have adopted the latter approach.

Thus, for a UK taxpayer to obtain a UK tax deduction for a gift to a charitable vehicle, not only must it be established for purposes which the UK regards as charitable, it must also satisfy two further ‘territoriality’ tests: first, it must be subject to the control of the courts of the United Kingdom; and, secondly it must be governed by the law of one of the UK jurisdictions: England and Wales, Scotland or Northern Ireland. Similarly, it is only entities which meet those tests which enjoy the tax benefits the UK grants to charities in respect of their own income and gains. In consequence, foreign charities wishing to operate tax-efficiently in the UK, and donors wishing to support foreign charities, have traditionally had to operate through, or give to, a UK charity set up for the purpose.

2002: European law impacts Belgian gift and inheritance taxes

The concept of ‘territoriality’ has been subject to scrutiny within the European Community over recent years. In 2002, the European Commission issued a ‘reasoned opinion’ to the Belgian Government requiring it to change its legislation on gift and inheritance tax on the basis that applying a preferential rate to gifts or legacies to Belgian charities, but not to charities established in other EC states, was a discriminatory practice which contravened the EC Treaty.

2006: ECJ rules on tax treatment of income and gains of other member states’ charities

In 2006, the European Court of Justice decided the case of Centro di Musicologia Walter Stauffer v Finanzamt Mà¼nchen fà¼r Kà¶rperschaften (C386/04). Here, a German tax office had taxed income received by an Italian charity from German investment property. The Italian charity’s objects were recognised as charitable under German law, and an equivalent German charity would not have been similarly taxed; fundamentally, the Italian charity was taxed because it was not German. The ECJ followed the opinion given by its Advocate General and held that this was an obstacle to the free movement of capital between member states and thus contravened Article 56 of the EC Treaty.

2006 onwards: the European Commission issues directions to the UK and other member states to cease discrimination against other member states’ charities

Although, the impact of the Stauffer case was limited to the one issue of the taxation of a charity’s own income, the European Commission issued directions to a number of EC member states, including the UK, requiring them to remove all discriminatory tax practices in relation not just to the income and gains of charities based in other member states which would, had they been ‘indigenous’ have been treated more favourably, but also in respect of gifts made to them. While some member states have complied, others, including the UK, have resisted the directions, leading to the threat of proceedings.

 14 October 2008: Publication of Advocate General’s opinion on the tax-deductibility of donations to other member states’ charities

The Advocate General has now published his opinion in another German tax case which is before the ECJ, Hein Persche v Finanzamt Là¼denscheid (C318/07), which relates to the availability of tax deductions for donations to foreign charities. In this case, Mr Persche, a German tax advisor, sought a ruling on the deductibility for German tax purposes of a gift he had made to a retirement home and children’s centre in Portugal after the German tax authorities refused to grant him a tax deduction as the recipient was not a German charity.

In his opinion, the Advocate General’s has recommended to the ECJ that it should determine 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 which give tax reliefs on donations to organisations recognised as charitable and located in that Member State, it is contrary to Articles 56 and 58 not to allow a taxpayer the opportunity to prove that organisations based in and recognised as charitable in another Member State would fulfil the charitable requirements applying in the taxpayer’s Member State; and

3. Fiscal authorities should not be obliged to liaise directly with the Member State in which the recipient body is established in order to determine whether a tax deduction should be available, so that the burden of proof that a deduction should be given therefore lies with the donor taxpayer.

The practical applications

What will this mean in practice if the ECJ follows the Advocate General’s opinion in Persche, as it did in Stauffer ?

  • First, donors giving to charities in other EC States will have to consider how, easily, to prove to their fiscal authority that the recipient foreign charities’ activities satisfied the domestic meaning of ‘charitable’;
  • Second, charities wishing to receive such donations will wish to consider how they can help them do that; and
  • Finally, charities, while possibly considering fundraising throughout the EC, may also need to consider how to meet the threat of competing for donations at home from charities located in other EC states.

For there to be any certainty that tax-efficient gifts can be made to other EC member states’ charities, two further things must happen:

  • First, the ECJ must decide to follow the Advocate General’s opinion; and
  • Second, the UK (and the other member states currently retaining ‘territoriality’ rules limited solely to their own jurisdictions) must react.

In the meantime, however, charities and donors may wish to prepare for possible changes to the existing position.

Alison Paines Partner | London, Cambridge

Category: Article