ECJ Ruling Permits Cross Border Charitable Tax Deductions

by Ulrika Lomas, Tax-News.com, Brussels

16 October 2008

An Advocate General to the European Court of Justice has ruled that the German tax authorities were wrong to disallow a tax deduction for a charitable donation by a German citizen because the beneficiary organisation was located in another member state.

In his opinion, published on Tuesday, Advocate General Mengozzi argued that less favourable tax treatment for cross-border donations may discourage people from making such donations and found that the German legislation constitutes a restriction on the movement of capital within the single market.

The case in question concerned Hein Persche, a German national, who claimed a tax deduction on his 2003 tax return for a donation in kind, valued at approximately EUR18,180, made to a body established and recognised as charitable in Portugal (a nursing home to which a children’s home had been added). The German Finanzamt refused the deduction sought on the ground that the beneficiary of the donation is not established in Germany.

The Advocate General considered whether less favourable treatment for cross-border donations might be justified by the fact that the beneficiary bodies are in different situations. But according to the opinion, when bodies established abroad have as their mission the advancement of charitable interests identical to those set out in the German law which gives rise to the exemptions – in this case, assistance to children and to the elderly – and satisfy the requirements imposed by that law on domestic bodies, those situations are indeed comparable. It is for the national authorities, including the courts, to assess the issue of comparability, Mengozzi stated.

The Advocate General also concluded that there were insufficient grounds for the German authorities to disallow the deduction on the basis of maintaining fiscal supervision.

As a rule, under German law, if the beneficiary body is established in Germany, it is not for the donor to establish that that body manages its charitable activities in accordance with its statutes (Germany has, for example, introduced a donation certificate issued by beneficiaries and annexed by donors to their tax returns).

For a body established abroad, however, the Advocate General considers that donors should be allowed to provide supporting documents in order to enable the national tax authorities to check that the conditions relating to the statutes and actual management required for recognition as a charitable body under the national rules are satisfied. Those tax authorities would remain free to refuse a deduction if they are not provided with the relevant supporting documents or are unable to check the information provided by the donor.

Consequently, the absolute impossibility of being allowed to provide such evidence is, in the view of the Advocate General, "disproportionate to the objective of ensuring effective fiscal supervision."

In cases where the donor may find difficulties in obtaining evidence for his or her home tax authority, the Advocate General suggested that the authorities of a member state should attempt to obtain such evidence using the cooperation mechanisms in the area of direct taxation, or under the auspices of a bilateral tax agreement.

The opinions of Advocates General are not binding on the full Court of Justice. However, they tend to be followed by the ECJ in the majority of cases.

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