Cross-border giving

Before the Finance Act 2010, HMRC did not allow reliefs for any charitable organisations that were established outside the UK, even if such organisations were charitable according to the laws of the UK.

The Finance Act 2010 extended UK charitable tax reliefs to certain organisations in the EU, Norway and Iceland that are equivalent to UK charities. In order to qualify, those entities need to meet the definitions of a charity in the law of England and Wales (not under the law of Scotland or of Northern Ireland even if based in those jurisdictions, because taxation is not – at the time of writing – a devolved matter) and must be established for charitable purposes only as set out in the Charities Act 2011. They must also be registered with any charity regulator in their home country with which the law requires them to register and be managed by ‘fit and proper persons’. The legal requirement initially applied only to Gift Aid but was extended from 1 April 2012 to all other tax reliefs.

By mid 2015, 142 organisations outside UK jurisdiction had applied for recognition as charities under the provisions of the Finance Act 2010. Of these, only 11 were successful in their application. Anecdotal evidence suggests that there can be difficulties with wording used in translated governing documents, so the quality of the translation could be significant.

The EU Treaties provide for the free movement of capital between Member States and freedom of establishment; and it is therefore a breach of those provisions for a Member State to refuse tax deductions on gifts to charitable bodies within other Member States simply on the basis that they are not established in the Member State in question.

In Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften [2006] EUECJ C-386/04, an Italian foundation claimed tax relief in Germany on rental income arising from property which it owned in Germany. It was held that the German tax authority was in breach for refusing to grant the tax exemption that would have been available to a domestic charity because the claimant charity was based abroad.

In Hein Persche v Finanzamt Lüdenscheid [2009] EUECJ C-318/07, a German donor claimed relief on a gift to a Portuguese charity and, as in Stauffer, the German tax authority refused to grant the tax relief that would have been available had the charity been German, because it was based abroad. As in Stauffer, the Grand Chamber of the CJEU declared this to be in breach of EU law.

In Missionswerk Werner Heukelbach eV v Etat Belge [2011] EUECJ C-25/10, a German foundation claimed relief on the excess succession duties that it had been required to pay on a legacy from a Belgian national, over and above what it would have paid had the foundation been based in Belgium. The CJEU confirmed that EU legislation precluded a Member State from creating legislation that reserves reliefs for non-profit making bodies operating in that Member State.

Following these CJEU cases, the burden is on the taxpayer to prove that the organisation would be charitable in the Member State in question but for its establishment elsewhere; and if the taxpayer can prove this the authority must consider the evidence presented.

The application of these rulings is slightly complicated in practice by the fact that they are not accepted by all EU countries, although some Member States have gradually been adopting the principles over the past couple of years. In addition, just because a charity is recognised as a charity in one Member State that does not mean that it must be accepted as such in each Member State. The charity must be deemed charitable under the rules of the country in which the tax relief is being sought; and the only element which is discounted is the actual establishment of the charity in another EU state.

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