European Commission asks Estonia to stop discriminating foreign-based foundations

The European Commission believes that this may be against the EC Treaty. The Commission’s letter takes the form of a reasoned opinion, the second step in the infringement procedure as outlined under Article 226 of the EC Treaty. If Estonia does not reply satisfactorily within two months, the Commission may take it to the European Court of Justice.[2]

The European Commission states that difference in treatment between donations made to charities in Estonia and charities in other Member States constitutes an obstacle to the free movement of capital. Cross-border donations are explicitly mentioned in Council Directive 88/361/EEC, which provides for a Community definition of capital movements. The Commission also considers the Estonian tax rules are contrary to the freedom of establishment, as foreign charities are forced to set up branches in Estonia in order to enable Estonian residents making donations to such charities to benefit from the favourable tax treatment. The Commission also highlights that Estonia may use the Mutual Assistance Directive (77/799/EEC) to ensure that charities established in other Member States use their assets and income only for charitable purposes.

On the same day the European Commission also announced that it is referring Spain and Portugal to the ECJ regarding rules under which dividend and/or interest payments to foreign pension funds (outbound payments) may be taxed more heavily than dividend and/or interest payments to domestic pension funds (domestic payments).[3] It also sent a reasoned opinion to the UK regarding its legislation which refuses the tax deductibility of pension contributions paid to pension funds established in other countries.[4] The Commission considers that these rules restrict the free movement of capital. Many countries levy withholding taxes on dividend and interest payments on foreign investment income. Domestic pension funds are exempt from corporate and income tax in most Member States. However, foreign pension funds may not qualify for the tax relief. Like pension funds, public benefit foundations receive preferential tax treatment for their investment income in most Member States. Currently foundations often have to pay foreign withholding tax on their foreign investment income without being able to recover this foreign dividend tax. The European Commission may ask Member States to review their legislation in this respect ensuring that dividends of domestic and foreign investments are taxed equally, which would improve the asset management prospects of foundations resulting in increased revenues from cross-border investments.

The Estonian case is the latest in a series of infringement procedures against EU Member States regarding the tax treatment of donations to foreign-based public-benefit foundations. The EFC has been informed that the European Commission recently sent a letter to Bulgaria in this regard. For more information about the Bulgarian case, please see the EFC briefing on the matter: http://www.efc.be/content/alert.asp?ContentID=1557. Poland recently brought its laws into line with the EC Treaty, by also allowing tax benefits to cross-border donations following infringement procedures by the European Commission and an intensive lobbying campaign by the Polish foundation sector. There are on-going infringement procedures regarding the taxation of foreign-based public-benefit foundations against the UK, Ireland and Belgium. More countries could join this list. The bulk of national tax laws do not provide tax incentives for donations going to foreign-based public-benefit organisations. But the overall trend is for governments to be willing to open up. Countries which have recently introduced tax-efficient cross-border giving inside the EU include Denmark, Finland, the Netherlands and Slovenia. For more information on the tax treatment of foundations and their donors, please consult the EFC legal and fiscal country profiles and comparative charts, which are available online at http://www.efc.be/projects/eu/legal/ . More information on cross-border giving can be found at the King Baudouin Foundation’s Giving in Europe website: http://www.givingineurope.org.

For many years, EFC has pressed for a better operating environment for foundations’ and donors’ cross-border work. It is hoped that national legislators will follow the example set by the countries mentioned above, and introduce equal tax incentives for giving to comparable EU-based foreign charities and cross-border donations within the EU.

Action Point

The EFC will continue to monitor and keep the membership informed regarding developments in the field of cross-border giving. Please contact us at legal@efc.be if you would like further information.

[1] European Commission press release IP/08/1818

[2] The European Commission case number is 2007/2103

[3] European Commission press release IP/08/1817

[4] European Commission press release IP/08/1816