The European Court of Justice (Third Chamber) ruled that art. 73b of the EC Treaty, in conjunction with art. 73d, precluded a member state which exempted from corporation tax rental income received in its territory by charitable foundations which, in principle, had unlimited tax liability if they were established in that member state from refusing to grant the same exemption in respect of similar income to a charitable foundation established under private law solely on the ground that, as it was established in another member state, that foundation had only limited tax liability in it territory.

Facts

The taxpayer was a non-profit-making foundation pursuing exclusively cultural objects in the field of education and training, which was recognised as having charitable status under Italian law, and was the proprietor of commercial premises in Munich. The Tax Office assessed the income the foundation received from rental of that commercial property to corporation tax for the 1997 tax year. The foundation had no premises in Germany for the purposes of pursuing its activities and had no subsidiaries. The services ancillary to the rental of that commercial property were provided by a German property management agent.

The taxpayer was, in principle, exempt from corporation tax under German law for the relevant year and it was not liable to tax on its income since the letting of the property did not extend beyond asset management and did not constitute a commercial business activity. However, since the taxpayer's seat and management were in Italy, the rental income it received in Germany was subject to limited tax liability. Accordingly, the tax exemption, which applied, inter alia, to corporations pursuing exclusively and directly charitable objects, did not apply to taxable persons with limited tax liability. As a result, the taxpayer was assessed to corporation tax on the rental income it received in Germany from the letting of the commercial property.

The taxpayer appealed against that assessment and the Federal Finance Court made a reference to the ECJ for a preliminary ruling since it had doubts whether the exclusion of corporations from the tax exemption under the national law was compatible with the requirements of Community law.

Issue

Whether the provisions of the EC Treaty relating to the right of establishment, the freedom to provide services and/or the free movement of capital precluded a member state, which exempted from corporation tax rental income received in its territory by charitable foundations with, in principle, unlimited liability to tax if they were established in that member state, from refusing to grant the same exemption to a charitable foundation governed by private law in respect of similar income on the basis that, as it was established in another member state, it had only limited liability to tax in its territory.

Decision

The European Court of Justice (Third Chamber) (ruling accordingly) said that, in order for the provisions relating to freedom of establishment to apply, it was generally necessary to have secured a permanent presence in the host member state and, where immovable property was purchased and held, that property should be actively managed. It was clear that the taxpayer did not have any premises in Germany for the purposes of pursuing its activities and that the services ancillary to the letting of the property were provided by a German property management agent. Therefore the provisions governing freedom of establishment were not applicable.

It thus fell to be determined whether the taxpayer might rely on the provisions in art. 73b and 73g of the EC Treaty concerning the free movement of capital. It was not disputed that the foundation, whose seat was in Italy, had commercial property in Munich which it let. The free movement of capital covered both the ownership and administration of such property and it was not therefore necessary to consider whether the foundation acted as a provider of services.

Under art. 73b, any restriction on capital movements between member states was forbidden. The fact that tax exemption for rental income applied only to charitable foundations which, in principle, had unlimited tax liability in Germany placed foundations whose seats were in another member state at a disadvantage and might constitute an obstacle to the free movement of capital and payments. Thus the legislation in the present case constituted a restriction on the free movement of capital which was, in principle, prohibited by art. 73b of the EC Treaty. Nor was such a restriction justified in the light of the derogation from the fundamental principle of the free movement of capital in art. 73d. Unequal treatment permitted under art. 73d(1)(a) had to be distinguished from arbitrary discrimination or disguised restrictions prohibited under art. 73d(3). The difference in treatment had to be concerned with situations which were not objectively comparable or be justified by overriding reasons in the general interest, such as the need to safeguard the coherence of the tax system or effective fiscal supervision. Moreover, in order to be justified, the difference in treatment between charitable foundations with unlimited tax liability in Germany and foundations of the same kind established in other member states could not go beyond what was necessary to attain the objective of the relevant legislation.

Whilst member states were entitled to require a sufficiently close link between foundations upon which they conferred charitable status for the purposes of granting certain tax benefits and the activities pursued by those foundations, it was irrelevant, for the purposes of the decision in the present case, whether such a link existed. Further it was not a requirement under Community law for member states automatically to confer on foreign foundations recognised as having charitable status in their member state of origin the same status in their own territory. Member states had a discretion in that regard to be exercised in accordance with Community law and they were free to determine what the interests of the general public they wished to promote were by granting benefits to associations and foundations which pursued objects linked to such interests in a disinterested manner.

Nevertheless, where a foundation recognised as having charitable status in one member state also satisfied the requirements imposed for that purpose by the law of another member state and where its object was to promote the very same interests of the general public, which it was a matter for the national authorities of that other State, including its courts, to determine, the authorities of that member state could not deny that foundation the right to equal treatment solely on the ground that it was not established in its territory. Before granting a foundation a tax exemption, a member state was authorised to apply measures enabling it to ascertain in a clear and precise manner whether the foundation met the conditions imposed by national law in order to be entitled to the exemption and to monitor its effective management. There was nothing to prevent the tax authorities concerned from requiring a charitable foundation claiming exemption from tax to provide relevant supporting evidence to enable those authorities to carry out the necessary checks.

A restriction on the free movement of capital could not be justified by the need to ensure the cohesion of its tax system. A tax advantage consisting of exemption from tax of rental income did not correspond to a charge levied on foundations which, in principle, had unlimited tax liability. There was no direct tax link between that exemption and the offsetting of that advantage by a particular tax levy. Further, whilst recognition of the right to exemption from corporation tax for non-resident charitable foundations would entail a reduction in corporation tax receipts, reduction in tax revenue could not be regarded as an overriding reason in the public interest which might be relied on to justify a measure which was, in principle, contrary to a fundamental freedom. Finally, even if, by granting a tax exemption only to charitable foundations that were established in its territory, the authorities of a member state sought to combat crime, the fact remained that the fact that a foundation was established in another member state could not give rise to a general assumption of criminal activity. Moreover to preclude such foundations from entitlement to a tax exemption when a number of measures were available to monitor their accounts and activities might be considered to be a measure which went beyond what was necessary to combat crime.

European Court of Justice (Third Chamber). Judgment delivered
14 September 2006.