Formal requirements for tax exemption status of non profit entities

1. Formal requirements for tax exemption status of non profit entities Prof. Fabrizio Amatucci EATLP Congress 2012 Taxation of charities

2. Formal and material requirements for tax exempt status • Selection of criteria ( formal and material) • Analysis and evaluation of opposing interests in relation to formal and material requirements of non profit entities (NPEs) in National Tax Systems • Existence of mixed systems (formal and material) in most EU Member States • Difficulties of distinguishing formal and material conditions ( e.g final destination of revenue criteria )

3. Arguments in favour and against formal requirements • Formal requirements ( authorizations, registrations, formalities) define the prevailing purpose of a body as stated in its founding articles . • Certainty and simplification of assessment for the Tax Authorities • Formal requirements can be used to guarantee the existence of material conditions • Some requirements (registration and other formalities) can be unrealistic

4. Compatibility of formal requirements with EU Law • Difficulties in assessment of formal requirements of non resident NPEs and refusal of tax benefit. • The ECJ in Stauffer ruling considers difficulties of purely administrative nature not sufficient to justify a refusal. • The Proportionality principle ( ECJ Judg. Hein Persche – Paint Graphos p. 75) in the elaboration and application of formal criteria. • No presumption can exclude automatically non commercial activities on the basis of failure to comply with a specific formal condition

5. Difficulties concerning application of material conditions • Material requirements (nature of activities, effective purpose, size and absence of business activities, remuneration of activities etc) are complex for Tax Authorities to assess. • Absence of common characteristics to define business activity and supporting activities in different Member States makes it difficult to grant non profit tax status on the basis of material requirements. • Different ECJ notions of business activity: the influence on free competition ( France, The Netherlands and Finland are compliant )

6. Non relevance of purpose in State aid rule • State aid ( additional) requirements influence tax allowances systems including advantages to NPEs • The objective pursued ( public benefit too) by State measures is not sufficient to exclude those measures outright from classification as ‘aid’ for the purposes of Article 87 EC” (see, inter alia, Case C‑487/06 P British Aggregates v Commission [2008], Cassa di Risparmio di Firenze SpAjudgm. C-222/04 SpA of 2006, and Paint Graphos p. 67 • Tax exemptions which are the result of an objective that is unrelated to the tax system of which they form part must comply with the requirements under Article 87(1) EC ( Paint Graphos p. 70).

7. Extension of formal requirements to non resident non profit entities • To avoid discrimination additional conditions should not be required from non resident non profit entities • The ECJ (judgm. Stauffer p. 40 and Hein Persche p. 50, Huekelbach of 2011 p. 34) does not accept justification of differential treatment based on the difference between two entities

8. Conclusions • Requirements for tax exemption status of non profit entities and non profit activities in EU member States should still be predominantly formal • Difficulties to assess the effective nature of activity and the real purpose without reference to statutory clauses. • Formal conditions can be used to guarantee the existence of material conditions. • Harmonization of formal conditions ( as for Foundations) is desirable for all NPEs • Material requirements should be allowed only in exceptional cases in which there are difficulties with formal conditions.