EATLP Rotterdam Congress 2012Taxation of Charities

The impact of EU law and ECJ case law on cross-border non-

profit activities

Prof. Dr. Edoardo TraversaU.C. Louvain

Erasmus University, 1 June 2012

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Agenda

I. Preliminary question : do charities belong to the internal Market?

II. Applicability of EU Treaty freedoms to charities and donors

III. Justifications to discriminatory/restrictive tax treatment of foreign charities/donors

IV. Other sensitive issues

I. Preliminary question : do charities belong to the internal Market?

› Requirement of economic activity» Art. 3 TUE and former Art. 2, art. 3 and 14 EC» ECJ case-law :

- Concept of undertaking- Provision of goods and services for

consideration in a market » Applications in secondary law : Competition law,

State aid, Labour law, …» Same criteria used for EU Treaty freedoms

(except free movement of capital)

I. Preliminary question : do charities belong to the Internal Market?

1. EU Treaty more concerned with objectives and operations than with the legal nature of operators

2. EU law generally applies similarly to (economic) activities carried out by businesses and by NFP bodies => NPO usually not recognized as such

3. However, EU law acknowledges in some cases that favorable treatment may be granted by MS under a non-profit condition (if non discriminatory) – see Treaty freedoms, State aid and secondary VAT law

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II. Application of Treaty freedoms to charities and donors

- Freedom of establishment (Art.49 TFUE): despite wording, if stable economic activity (including active management of movable or immovable property)

- Free provision of services (art. 56 TFEU): importance of remuneration and economic activity (see art. 57 TFEU) – agreement provider-recipient – both parties covered

See ECJ, 14 September 2006, Walter Stauffer, C-386/04 (taxation of rental income in the hands of a non-resident charity)

See also ECJ, 10 January 2006, C-222/04, Cassa di Risparmio di Firenze SpA et alii, para. 111 and 152 and Opinion Adv.-Gen. Jacobs, para. 128-133.

II. Application of Treaty freedoms to charities and donors

- Free movement of capital (art. 63 TFEU)• Absence of economic requirement in the application of the

FMC • Applies to charities (even without active managment)

» As investors (real estate or capital)- ECJ, 14 September 2006, Stauffer, C-386/04

» As recipient of gifts and legacies- ECJ, 10 February 2011, Missionwerk Heukelbach, C-

25/10› Applies to donors

» ECJ, 27 January 2009, Persche, C‑318/07» ECJ, 16 June 2011, Commission v. Austria, C-10/10

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III. Justifications to discriminatory/restrictive tax treatment of foreign charities/donors

(includes absence of comparability between resident and non resident charities)

3 JustificationsA. Freedom of the MS to apply “different concepts of

benevolence as well as different requirements for recognition”

B. Effectiveness of fiscal supervision C. Cohesion of the national tax system, linked with

» Substitution for the public authorities in assuming certain responsibilities of general interest, leading to a reduction of public expenses

» Connexion with society 7

C. Cohesion of the national tax system Traditional concept of cohesion :“direct link must be established between the tax advantage

concerned and the offsetting of that advantage by a particular tax levy”

Broader notion proposed by some MS: - Link between the grant of a direct or indirect tax advantage to

foundations and the burden on the State through their domestic charitable objects on the basis of a domestic connection for their activities (see Opinion Adv.-Gen. Stix-Hackl in Persche, C-31/10, para. 100seq.)

- Restrictively accepted by the ECJ : “sufficiently close link between the bodies which that Member State recognises as pursuing some of its charitable purposes and the activities pursued by those bodies” (see, Walter Stauffer, para. 37, Missionswerk Heukelbach, para. 30)

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Connection to society?• “Furthermore, as regards the need for a connection

between the recipient of a benefit and the society of the Member State concerned, the Court has already held that, with regard to benefits that are not covered by European Union law, Member States enjoy a wide margin of appreciation in deciding which criteria are to be used when assessing the degree of connection to society (...)” (ECJ, 22 December 2010, Case C-287/10, Tankreederei I, para. 31)

• Justification based on the link with the community not excluded for charities by the ECJ, which nevertheless pointed out the inadequacy of the residence criteria (Missionswerk Heukelbach, para. 36)

Charities and EU Freedoms : unresolved problems

3 Need to leave Member States exercise their exclusive powers, even using tax incentives› Risk of mutual influence and spillover effects› Indirect funding other States’ national tax policies› Risk of disappearance of the tax incentives (comp. with

the credit for received dividends-Manninen)› Coherence with non tax policies (EU and national)

3 Need to avoid too formal distinctions› Tax incentive vs. direct subsidy› Direct vs. Indirect beneficiaries

3 Taxpayers’ role in the administration of evidence

IV. Other sensitive issues

A. Interaction between Treaty freedoms and State aid on territoriality requirement

See ECJ case-law and Commission’s practice in the area of tax incentives in favour of audiovisual works (“certain degree of territorialisation”)

B. Coherence between EU tax and EU non-tax policies

Commission initiatives on services of General Interest