ECJ Permits Tax Deduction For Cross-Border Donations

by Ulrika Lomas, for LawAndTax-News.com, Brussels

29 January 2009

A ruling by the European Court of Justice has opened up the way for taxpayers resident in the European Union to deduct gifts to charitable bodies established in a different member state to that of the donor.

It its ruling, published on Tuesday, the ECJ said that national legislation which prevented donors from deducting such gifts for tax purposes in the member state of their residence restricts the free movement of capital within the EU, a principle which is guaranteed by Community law.

A summary of the judgment in the Hein Persche v Finanzamt Lüdenscheid case stated that: "where a taxpayer claims, in a member state, the deduction for tax purposes of gifts to bodies established and recognised as charitable in another member state, such gifts come within the compass of the Treaty provisions on the free movement of capital, even if they are made in kind in the form of everyday consumer goods."

The ECJ was asked by the Bundesfinanzhof (the highest German court with jurisdiction in tax matters), to examine the case of Hein Persche, a German national, who claimed a tax deduction in respect of a gift in kind in his 2003 tax return, valued at about EUR 18,180, to the Centre Popular de Lagoa, in Portugal (a retirement home to which a children’s home is attached). The Finanzamt (District Tax Office) refused the deduction sought on the ground that the beneficiary of the gift was not established in Germany and that Mr Persche had not provided a donation certificate in proper form.

"In the Court’s view, that restriction is not justified," the ECJ's summary stated, adding:

"The Court observes that a member state may, as part of its legislation on the deduction for tax purposes of gifts, apply a difference in treatment between national bodies recognised as charitable and those established in other member states if the latter bodies pursue objectives other than those advocated by its own legislation. Indeed, Community law does not require the member states to provide that foreign bodies recognised as charitable in their member state of origin benefit automatically from the same recognition in their own territory."

"The fact remains that, where a body recognised as charitable in one member state satisfies the requirements imposed for that purpose by the law of another member state and where its object is the promotion of the very same general public interests, so that it would be likely to be recognised as charitable in the latter member state, the authorities of the latter member state cannot deny that body the right to equal treatment solely on the ground that it is not established in its territory."

The court also decided that the contested legislation is not justified by the need to safeguard the effectiveness of fiscal supervision.

"Nothing would prevent the tax authorities concerned from requiring the taxpayer to provide such proof as they may consider necessary to determine whether the conditions for deducting expenditure provided for in the legislation at issue have been met and, consequently, whether or not it is appropriate to allow the deduction claimed," the summary stated, concluding:

"Consequently, the Court rules that the free movement of capital precludes legislation of a member state by virtue of which, as regards gifts made to bodies recognised as having charitable status, the benefit of a deduction for tax purposes is allowed only in respect of gifts made to bodies established in that member state, without any possibility for the taxpayer to show that a gift made to a body established in another member state satisfies the requirements imposed by that legislation for the grant of such a benefit."

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