Can Tax Authorities Scrutinise the Ideas of Foreign Charities? The ECJ's Persche Judgment and Lessons from US Tax Law

Date01 July 2010
Published date01 July 2010
Can Tax Authorities Scrutinise the Ideas
of Foreign Charities? The ECJ’s Persche
Judgment and Lessons from US Tax Law
Theodore Georgopoulos*
Abstract: The European Court of Justice’s (ECJ’s) recent Persche judgment poses
important questions about the relationship between taxation of gifts and charitable pur-
poses in the light of EC law requirements. This article argues that by applying its
established case-law to the matter of donors to foreign recipient bodies, the ECJ takes a
position on the social role of both charities and tax deduction. Moreover, the position of
the ECJ clearly paves the way for tax authorities to check the objectives and the values
pursued by recipient bodies seeking tax-preferred status, a situation that recalls a similar
power recognised under specif‌ic circumstances of the US Internal Revenue Services.
Arguably, the ECJ case-law has more profound consequences on charitable action, since
it seems that the power accorded to tax authorities of the Member States to check the
purposes of charitable organisations leads to a cosmopolitan apprehension of charitable
action while it pushes charities to enhance transparency in their activities.
Fairness obliges taxation to turn a blind eye to the taxpayer’s beliefs and acts.1When-
ever a taxpayer’s behaviour provokes social contempt or is illegal, the state has a whole
arsenal of other administrative or criminal sanctions at its disposal.
This tax neutrality is questioned in the case of charities,2however, since they benef‌it
from a tax-preferred status because of their charitable purposes. The recognition of an
organisation’s purpose as ‘charitable’, ‘nonprof‌it’ or ‘public’, in order to grant tax-
preferred benef‌its expresses necessarily major political and philosophical choices on
behalf of state authorities. As Randall G. Holcombe observes, ‘[n]obody should object
* Maître de conférences, University of Reims Law School; Research Fellow, CERIC (Aix-en-Provence);
Attorney-at-Law (Athens); this article is partially the result of my research at the NYU Jean Monnet
Centre as an Emile Noël Fellow and EU Fulbright Scholar, in 2006. Many thanks to Joseph Weiler,
Norman Redlich, Georg W. Kof‌ler and Dimitrios Kyritsis for their comments on earlier drafts of the
article. The usual disclaimer applies.
1On the question of fairness in taxation, see L. Murphy and T. Nagel, The Myth of Ownership (Oxford
University Press, 2002), 12.
2Tax legislation among different countries uses the terms ‘tax-exempt organisations’, ‘nonprof‌it organi-
sations’, ‘charities...’.Sucha variety of terms is more than a simple matter of terminology. Whereas
‘tax-exempt organisation’ is neutral when referring to tax, ‘charities’ for instance—used by US tax
law—focuses on the charitable purpose of the organisation. ECJ case-law also uses the term ‘charities’, an
element that is not coincidental either, for the Court builds its analysis on the public interest purpose of
tax-exempt organisations.
European Law Journal, Vol. 16, No. 4, July 2010, pp. 458–476.
© 2010 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
if someone wanted to devote some money to the development and the dissemination of
ideas, but when the individual does so through a tax-exempt organization, that creates
a reason for the general public to scrutinise the activities of the organization to see if it
promotes some public purpose’.3
The ECJ’s recent Persche judgment4poses important questions about the relation-
ship between taxation of gifts and charitable purposes in the light of EU law require-
ments. It is not the f‌irst time that taxation of charities has been under the Court’s
control. In its Walter Stauffer case-law,5the ECJ condemned the German tax legis-
lation because it exempted from corporation tax rental income received in German
territory by charitable foundations established in Germany, while refusing to grant
the same exemption in respect of similar income to a charitable foundation estab-
lished in another Member State. The Walter Stauffer case-law gave clear answers
to two major questions on the taxation of charities. First, it conf‌irmed that funda-
mental economic freedoms of EC law apply to the case of charities.6Without being
qualif‌ied as businesses, charities are treated as economic entities that enjoy funda-
mental EC freedoms in the case of cross-border activities within the EU.7Second,
and as a result of the previous remark, free movement of capital demands that tax
treatment of foreign charities—including those established in third states—be not
While conf‌irming the obligation of Member States to confer equal treatment in the
f‌ield of charities’ taxation, the Persche decision was an occasion for the Court’s Grand
Chamber to extend its reasoning. In a case that also concerned German tax legislation,
the Court conf‌irmed that the scope of free movement of capital includes gifts to
charitable organisations, established abroad, according to Council Directive 88/361/
EEC.9Contrary, however, to the Walter Stauffer case, it was not the tax status of
charities that was at stake but rather the tax deduction granted for gifts given to
charities. In this sense, the movement of capital was apprehended here inversely, from
the standpoint of the donor rather than the recipient.10
What remains common in the two cases is the method of identifying the breach of
free movement of capital through tax treatment. According to its well-established
case-law,11 the Court underlines the potential deterrent effect that tax regulations may
have on the willingness of German residents to make cross-border gifts.12 The existence
of restrictive regulations may not be truly decisive for the limitation of these cross-
border operations as other reasons of an economic, social or purely psychological
3R.G. Holcombe, Writing Off Ideas—Taxation, Foundations and Philanthropy in America (The Indepen-
dant Institute, 2000), 90.
4Case C-318/07, Hein Persche v Finanzamt Lüdenscheid [2009] ECR I-00359.
5Case C-386/04, Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften [2006]
ECR 8203.
6M. Helios, ‘Taxation of non-prof‌it organizations and EC Law’, (2007) EC Tax Review 65, at 66; see also
Case C-70/95, Sodemare and Others [1997] ECR I-3395.
7K. Eicker, ‘Do the Basic Freedoms of the EC Treaty also Require an Amendment to the National Tax
Laws on Charities and Non-Prof‌it Organisations?’, (1995) EC Tax Review 140, at 140 ff.
8I.A. Koele, International Taxation of Philanthropy (IBFD, 2007).
9Council Directive 88/361/EEC of 24 June 1988 for the implementation of Art 67 of the Treaty (repealed
by the Treaty of Amsterdam), [1988] OJ L178/5.
10 Helios, op cit n6supra,at68.
11 See eg Case C-319/02, Manninen [2004] ECR I-7477, para 22.
12 ibid, at para 38.
July 2010 The ECJ’s Persche Judgment
© 2010 Blackwell Publishing Ltd.

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