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Hein Persche v Finanzamt Ludenscheid [2009] EUECJ C-318/07

(Court of Justice of the European Communities, Grand Chamber, 27 January 2009)

On the 14th October, 2008, Mr. Advocate General Mengozzi delivered his opinion on this novel matter (see Hein Persche v Finanzamt Ludenscheid [2008] ECJ C-318/07 As that was a non-binding, advisory assessment, the definitive version was not delivered by the European Court of Justice until the 27th January, 2009.

Basically, the case revolved around a dispute between Mr.Persche and the Finanzamt Ludenscheid, the District Tax Office in Ludenscheid, Germany. In his 2003 tax return, he claimed as an income tax deduction approximately $34,285.00, the value of bed linen and bath towels plus some ambulatory assistance devices he had given to the Centro Popular de Lagoa, a Portuguese nursing home. Some toys for a children's home, incorporated later, were included as well. The Centre's receipt of the items was acknowledged in the tax return. Also attached to the return was a declaration from the director of the local social security office in Faro, Portugal, dated 21 March, 2001, asserting that the organization in question was tax-exempt under Portuguese law because its aims were charitable.

The deduction was disallowed by the Ludenscheid District Tax Office both initially and when Mr. Persche lodged an objection. His attempt to appeal to the District Tax Court in Munster also proved unsuccessful. Undeterred, he took his case to the Bundesfinanzhof ("the Federal Finance Court") in Munich which upheld the District Tax Office's decision since the gift involved a recipient with no presence in Germany and a donation certificate regarded as unacceptable. Other concerns, however, saw the matter referred to the Grand Chamber of the European Court of Justice.

In particular, the Federal Finance Court sought advice on whether donations of consumer goods, such as those in question, by a donor to a recipient in another Member State where the goods are legally considered as charitable, are caught by Article 56 of the European Convention (EC) dealing with the free movement of capital. If so, does this necessitate that Member States be treated equally and that a tax benefit does not require a charitable recipient to be situated in the donor's Member State, in this instance, Germany. Finally, should equal treatment be required, where does the burden of proving the underlying facts rest. Does Directive 77/799 insist on the taxation authorities in the affected Member States liaising with each other to corroborate the information or is it procedurally acceptable for the taxpayer concerned to be responsible for substantiating claims involving another Member State?

Does Article 56 EC apply?

Under Article 56(1) EC, restrictions on the movement of capital among member States are strictly prohibited. No precise definition of what constitutes "movement of capital" is provided. There was dissension among the Member States as to what was covered by the expression, with Germany, Spain, France and Ireland insisting that investment or financial assignment was essential, a view shared by the German Tax Office. Greece maintained that transfers of ordinary consumer goods not linked to payment fell within the ambit of free movement of goods, rather than capital, an argument the Court rejected in the light of the relevant legislation. The Commission of the European Communities and the European Free Trade Association Surveillance Authority argued that Articles 56 EC - 58 EC did encompass gifts in kind to charitable bodies outside the taxpayer's Member State.

To resolve the issue, recourse was had to other European Union law. Heading XI in Annex 1 to Directive 88/361 deals with how inheritances and legacies should be taxed under the free movement of capital. No distinction is drawn between financial transactions and those in kind. Therefore, the Court determined that monetary gifts, as well as gifts in kind like Mr. Persche's to organizations regarded as charities in other Member States, were movements of capital regulated by Article 56 EC.

Is equal treatment necessary?

Next, the Court had to decide whether limiting tax deductibility for donations to charitable organizations situated only in the donor's Member State was a violation of Article 56 EC. Not only the German Tax Office, but also the German Government along with the Governments of France, Spain, the United Kingdom and Ireland argued that unequal treatment was necessary for efficient fiscal monitoring. They also pointed out that what is perceived as charitable may vary among the various Member States. The Court was singularly unimpressed with the fiscal argument on the grounds that complaints about donations to other Member States making inroads into a particular Member State's level of public revenue and its resultant capacity to budget were not the responsibility of the Court.

Whilst the Court recognized that what constituted charitable status varied amongst the member States, where it could be demonstrated that the legislative requirements in one Member State were reflected in those of another Member State, Article 56 EC prohibited any taxation benefit being applied solely to a locally situated organization. Mr. Persche's Portuguese in-kind donation was clearly eligible for consideration as a tax deduction.

Where does the burden of proof lie?

Verifying the deductibility of a donation such as Mr. Persche's was viewed potentially as a joint undertaking. At the simplest level, it was obviously possible for the donor to request a receipt from the charitable recipient in another Member State as well as information about its charitable activities and status. Although not normally cognisant of the fit between this Member State's legislative requirements with respect to charities and those of the donor's Member State, Directive 77/799 allows the appropriate taxation officials from the donor's Member State to elicit the data essential to assess the extent of the tax benefit or otherwise from another Member State. Once it is proven that the elements for tax deductibility in one Member State mirror the criteria set down in the legislation of another Member State, the donor's taxation position should be similar.

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