Gifts/donations to charities within the EU

Introduction

The ECJ case deals with laws of a Member State where a gift to a charity was only deductible where the charity was established in that Member State.

This case has relevance for Ireland as the Irish Tax Code also only allows the availability of tax relief for donations to Irish charities.

The Facts

The taxpayer, a German national, claimed a deduction in his tax return for 2003, as an exceptional deductible expense, of a gift of bed-linen and towels, and also zimmer-frames and toy cars for children, which he made to a Centre in Portugal which totalled €18,180. The centre was a retirement home to which a children's home had been added. The Centre was situated in an area where the taxpayer owned a house.

The taxpayer enclosed with his tax return a document dated 31 July 2003 whereby the Centre confirmed receipt of that donation, and a declaration dated 21 March 2001 that the Centre was registered as a private social solidarity body with the General Directorate of Social Services and that it was accordingly entitled to all exemptions and tax benefits conferred by Portuguese law on charitable bodies.

The German Tax Authority refused to allow the deduction claimed. The taxpayer objected, and this objection was rejected. Finally the taxpayer lodged an appeal on a point of law before the Bundesfinanzhof.

The Bundesfinanzhof decided to stay the proceedings and referred three questions to the ECJ for a preliminary ruling.

The Issue

The key issue in the decision was whether a Member State may make a deduction for tax purposes subject to the condition that the beneficiary was established in that State.

The Decision

The ECJ ruled that Member States are not allowed to have legislation which only allows deductions of donations to charities which are established in that Member State. The basis for this decision is that the free movement of capital precludes such legislation.

The judgment will be reviewed in accordance with the questions referred to the ECJ:

1. Do donations [in kind] of everyday [consumer] goods by a national of a Member State to bodies which have their seat in a different Member State and, under the law of that Member State, are recognised as charitable, fall within the scope of the principle of free movement of capital (Article 56 EC)?
2. If question 1 is answered in the affirmative:
   Having regard to the obligation of tax authorities to verify statements made by taxable persons and to the principle of proportionality (third paragraph of Article 5 EC), is it incompatible with the principle of free movement of capital (Article 56 EC) for the law of a Member State to confer a tax benefit on donations to charitable bodies only if the latter are resident in that Member State?
3. If question 2 is answered in the affirmative:
   Does Directive 77/799 … impose an obligation on the tax authorities of Member States to obtain assistance from the administrative authorities of another Member State in order to verify facts which have occurred in that other Member State, or can the procedural rules of a taxable person's home Member State require him to bear the burden of proof (objective burden of proof) in relation to facts which have occurred abroad?”

First Question

In summary this question deals with the freedom of movement of capital and whether charitable donations (of the kind outlined above) fall within that freedom.

It was decided that such donations come within the provisions in the Treaty which refer to the freedom of movement of capital.

As is usual in such cases, Governments of various Member States make observations on the issues in question. Interestingly, in addition to Germany, Spain and France, Ireland also made observations on this issue. They maintained that those provisions cover only capital movements made for the purposes of an economic activity and not gifts made for altruistic motives to bodies which are not managed to enrich themselves and whose activities must not be profit-making.

While there is no definition in the Treaty of ‘movement of capital’, the Court had previously recognised the nomenclature annexed to Council Directive 88/361/EEC. Gifts and endowments are listed under Heading XI, entitled ‘Personal capital movements’ in Annex I to that Directive. Hence the tax treatment of gifts in money or in kind therefore comes within the Treaty provisions on the movement of capital.

Second Question & Third Question

The Court proceeded to these questions as the first question had been answered in the affirmative.

In summary, this question deals with the restriction by the Member State of allowing deductions for donations to charities established in that Member State; and the incompatibility of such restrictions with the freedom of movement of capital. On the basis that there were differences in the establishment of charities according to the laws of the various Member States, the placing of the burden of proof was considered.

Once again various Governments, including Ireland made observations as follows: it was not contrary to the Treaty provisions on the free movement of capital that a Member State provided for the deduction for tax purposes of gifts only if they benefit bodies located in that State.

• National charitable bodies and those established abroad were not in a comparable situation for the purposes of art58.
• The restriction of tax advantages to gifts made to national charitable bodies was justified by the need to guarantee the effectiveness of fiscal supervision.

It was ruled that the German law disallowing a deduction to a charity established outside of Germany was incompatible with the free movement of capital. The key reason behind this decision was the possibility of obtaining a deduction for tax purposes could have a significant influence on the donor's attitude. An inability in Germany to deduct gifts to bodies recognised as charitable if they were established in other Member States was likely to affect the willingness of German taxpayers to make gifts to those charities.

The defence for using a different treatment for the deduction of gifts, between national bodies recognised as being charitable and those established in another Member State on the grounds that gifts made for the benefit of the non Member State bodies could not lead to budgetary compensation was insufficient. Indeed, it was settled case-law that the need to prevent the reduction of tax revenues could not be an overriding reason for justifying a restriction on a freedom.

However, it was permissible for a Member State to apply a difference in treatment between national bodies recognised as charitable and those established in other Member States if the other Member State bodies pursue objectives other than those advocated by its own legislation.

The final defence dealing with the difficulty, for the donor's Member State, of verifying whether non Member State bodies actually satisfy the statutory objectives for the purposes of its national legislation or by the necessity of monitoring the actual running of those bodies was not allowed. The German Government explained at the hearing that even in relation to national charitable bodies, an on-the-spot inspection was not usually required. In addition, even if it proved difficult to verify the information provided by the taxpayer, nothing prevented the tax authorities refusing the deduction if the evidence that they considered they need to effect a correct assessment of the tax was not supplied.

See Selected Judgments for the full judgment. Alternatively, the judgment is available online at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=C-318/07