European charities seek to remove tax discrimination

This recent ECJ referral considers income tax discrimination of foreign non-profit foundations.

The Irish tax code contains several exemptions available only to bodies ‘established’ for charitable purposes. The courts have interpreted this as meaning that the charity must be established in Ireland. The latest case was that of the Revenue Commissioners v Sisters of Charity of the Incarnate Word [1998], ITR 65, where a foreign charity with activities based in Ireland was held to be entitled to the exemption available under Section 208 of the Taxes Consolidation Act, 1997. On the facts, the charity had sufficient presence in Ireland to be regarded as established in Ireland. It was not critical that the charity’s governing instrument was created overseas.

On 23 October 2004, the Official Journal of the European Commission reported that the case of Centro di Musicologia Walter Stauffer v Finanzamt Munchen fur Korperschaften (C-386/04) has been referred to the European Court of Justice (ECJ) by the German tax authorities. The case concerns whether or not a charitable foundation in receipt of rental income from a German investment property should be liable to German tax on the income in circumstances where a similar charitable foundation established in Germany would be entitled to an exemption from tax. The case is founded on freedom of establishment rules. The oral hearing took place on 13 October 2005 and submissions have been made by the Irish authorities in support of the German tax position.

The outcome of this case could have implications for charities established in the EU that are in receipt of Irish source income. It would appear that if this challenge is successful, non-Irish charities would be entitled to a repayment of any taxes deducted where an Irish charity in a similar situation would be exempt from tax. It is interesting to note that under the Ireland/UK double taxation agreement, certain exemptions from Irish withholding taxes are already granted to charities established in the UK. While charitable foundations established in other Member States might consider this unwarranted favouritism towards UK charities, the approach adopted by the Irish authorities was no doubt influenced by the fact that UK rules for granting charitable status are similar to Irish rules. Notwithstanding a positive outcome in the Stauffer case for the taxpayer, any charitable foundation established in another Member State will still have to overcome the not insignificant hurdle of demonstrating that it is a body that is sufficiently comparable to an Irish body with charitable status.

Also of relevance in this area is a European Commission press release (IP/05/936) of 14 July 2005, which indicated that the European Commission was referring Belgium to the ECJ over a Walloon inheritance tax law that discriminates against legacies and gifts made to charitable organisations in Member States where the donor neither worked nor lived. It is the Commission’s view that the conditions are in breach of Articles 12, 43 and 48 of the EC Treaty (discrimination on the grounds of nationality and freedom of establishment). It is understood that Flemish and Brussels laws of a similar nature were amended following the receipt of a reasoned opinion from the Commission in 2002. If the Commission’s views are well founded, many aspects of the Irish tax code pertaining to charities will almost certainly be considered to be in breach of European law.

While the Stauffer case concerns a charitable foundation, there would appear to be no material reason why any principles emerging from that case might not also apply to other types of tax exempt entities. For example, a favourable decision in the Stauffer case could have ramifications for tax exempt pension funds.

It is also worth noting that many tax exempt entities, such as pension funds, hold substantial cross-border investments. The principle arising out of the EFTA court decision in the Fokus Bank case, were it to be upheld by the ECJ, could result in substantial repayment claims for tax exempt entities with investments in those EU countries that treat non-resident investors less favourably than domestic investors. Investors have been advised to file protective claims in a number of jurisdictions.