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European ruling on cross-border donations may prompt UK tax review'

Finance | Ian Allsop | 28 Jan 2009

The European Court of Justice has confirmed that attempts by EU member states to deny tax breaks for cross-border gifts made to EU charities are contrary to the principle of free movement of capital.

Yesterday’s decision In Hein Persche v Finanzamt Lüdenscheid follows the opinion of the Advocate General in October 2008 who concluded that territorial restrictions on tax incentives for charitable giving contravene one of the fundamental provisions of the EU Treaty.

At present tax incentives for charitable giving are limited within many member states, including the UK, to gifts to domestic charitable organisations. When Hein Persche, a German citizen, attempted to claim a tax deduction for donations of various goods he made, worth 18,180 euros, to a retirement home in Portugal, he was told by the German tax authorities that he was not allowed relief as the institution was not established in Germany

However, despite the decision potentially being good news for charities, Edward Reed, partner at Macfarlanes, said there was widespread concern that although it may be accepted in theory, in practice national tax authorities may try to prevent tax breaks being granted extraterritorially by putting up evidential barriers to proving charitable status.

Charities 'must assist foreign donors'

“The court has tried to cut through attempts to stifle claims for tax relief with red tape, by holding that a member state cannot exclude tax advantages for gifts made to a body that is established in another member state on the sole ground that the tax authorities may not be able to verify that body’s charitable status as easily as it would if the body were established within the same member state,” Reed said.

“However, evidential requirements will still have to be met. Charities may find themselves presented with requests to provide translations of their constitutional documents, as the court has held that it will be up to the charitable organisation in question to assist foreign donors in establishing charitable status to their home tax authorities.”
Reed said it remains to be seen how quickly the change can be put into practice and how co-operative HMRC and other national tax authorities will be when donors claim relief in reliance on the case.

“How, for example, will they deal with an organisation only some of whose objects qualify locally as charitable? From a UK perspective, HMRC will have to start reviewing all of the deductions and incentives that UK charities (and donors to them) currently enjoy. This not only includes gift aid but also other income tax reliefs such as share relief and exemptions from stamp duty land tax and inheritance tax.”

HMRC has said that it is too soon to comment on its potential impact on the UK tax system.

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