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Gifts to foreign charities are tax-deductible, ECJ rules

27 January 2009

Tax payers should be able to deduct gifts to charities established in other member states, the European Court of Justice held this morning (27 January 2009).

The court was ruling in a case brought by a German national who claimed that German legislation which only allowed such deductions for charities based in Germany was contrary to the principle of free movement of capital (Case C-318/07 Persche).

Hein Persche, who had made a gift in kind to the value of €18,180 to a Portuguese charity running a retirement home, nonetheless deducted the value of the gift from his 2003 tax return. This was refused by his local tax office.

Finding in favour of Mr Persche, the ECJ said such cross-border gifts, made to bodies established and recognised as charitable in another Member State, fell within the remit of the free movement of capital, even where the gifts were in kind.

And because “the possibility of obtaining a deduction for tax purposes can have a significant influence on the donor’s attitude,” the court continued, “the inability to deduct gifts to bodies recognised as charitable if they are established in other Member States is likely to affect the willingness of taxpayers to make gifts for their benefit.”

Therefore, the court concluded, such legislation was unlawful in EU law.

The Luxembourg judges also rejected arguments presented by five governments, including Britain, that the ruling would be unworkable in practice because the definition of charitable status varied between member states.

Determining what constitutes a charitable activity was a prerogative of individual member states as part of their power to encourage such activity in their territories but the existence of different rules from one member state to the next did not mean that charitable bodies across the EU were not in a “comparable situation”.

But, the court continued, tax authorities in the donor’s country would be entitled to check that the foreign charity met the prerequisites applicable to charities in their country.

The court emphasised however that where a body was recognised as a charity in its member state of origin and where its object was to promote the same interests of the general public, so that it would be likely to be recognised as having charitable status in another member state, “the authorities of that latter member state cannot deny that body the right to equal treatment solely on the ground that it is not established in its territory”.

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Company, Consumer, and Contract Trade Procedures Charities