Positive tax relief ruling on international giving

Positive tax relief ruling on international giving

News

The European Court of Justice (ECJ) has ruled in favour of tax relief on cross-border donations.

This ground-breaking decision means that UK donors should be able to benefit from tax relief on donations to charities in any EU country, as long as that organisation would be eligible for UK charitable status, according to the ECJ ruling in the case of Hein Persche v Finanzamt Lüdenscheid (C318/07).

The ECJ can rule on matters that concern the principle of free movement of capital between EU member states.  The Court ruled that Hein Persche, a German donor, was entitled to the same tax relief on a donation to a Portuguese charity as he would be to one within his own country.

“This is a very significant decision which should have ramifications for charities, donors and tax authorities across the EU,” said Clive Cutbill, head of international philanthropy at law firm Withers.

It was accepted in the ruling that authorities in the taxpayer’s state could require donors to provide proof that a foreign charity would qualify for charitable status in the taxpayer’s own state, before accepting that a cross-border donation is eligible for tax relief.

“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,” Cutbill added.

The ruling stated that donors were more likely to make a gift when they are able to obtain a tax deduction, if one is available. By preventing the tax deductibility of cross-border giving, member states were therefore restricting the movement of capital, according to the judgment.

The European Commission now requires the UK government to respond to this ruling and address the infringement of the EU Treaty. The judgement should lead to simplification in the steps needed for a UK donor to make a tax-efficient donation to a charity in another EU member state.

“The UK and other (EU) governments are under notice from the commission that they must comply with the law to respond. Previously, the UK government has been challenged and has been too slow to respond”, commented Jacob Rigg, head of policy at the Society of Trust and Estate Practitioners (STEP).

In the case of The Centre di Musicologia Walter Stauffer v Finanzamt Münchenen für Körpershcaften (C386/04) the ECJ ruled that a charity’s income was not taxable when it derived from investments in other member states. The UK has not yet complied with this ruling. It is not alone in this respect; the European Commission told a STEP philanthropy symposium in September 2008 that they had 18 cases pending against member states for not extending charitable tax reliefs outside of their borders.

“Member states who have ignored directions issued by the European Commission following the Stauffer case must now consider their position carefully,” Cutbill said.

If the UK government does not comply with the ruling, then the Commission can start formal proceedings through the ECJ against the UK Government to force it to change tax rules so that it does comply with the ruling.

More information is available on the ECJ website.