Tuesday, August 11, 2009

The Hein Persche Decision

The immediate question arises as to the effect or impact of the decision in Hein Persche v. Finanzamt Lüdenscheid issued by the European Court of Justice in late January 2009. I think that we can agree that this decision is limited in its impact to the member states of the EU. But, the issue still arises as to the basic principles involved in insuring the transparency, accountability, and monitoring of charities in the context of cross-border fundraising.

With a limited exception, ICFO has been committed to the idea of encouraging the establishment and effectiveness of national charity monitoring organizations. Indeed, one of the strengths of ICFO has been to promote transparency and accountability of charitable activity across national borders through the dialogue enjoyed by the ICFO member organizations. The thrust, therefore, is to strengthen the national monitoring organizations rather than simply strengthening the overall presence and status of ICFO.

The exception to which I just referred relates to the international assessments which ICFO performs on large, international public benefit organizations. But, this is a topic for another day.

What the European Court of Justice did in Persche was to rule that, based on its interpretation of Articles 56 to 58 of the EC Treaty which deal with free movement of capital, a tax deduction for gifts to charitable bodies must not be restricted to bodies established in the national territory.

Here, Mr. Hein Persche, a German national tax adviser, claimed a deduction on his tax return for gifts-in-kind donated to a body in Portugal recognized as being a charity. The German tax authorities denied the deduction because under German Law on Income Tax, the recipient or beneficiary of the donation must be a body established in Germany and resident in Germany. Mr. Persche appealed the adverse rulings though the various court levels in Germany, until the Budesfinanzhof, the Supreme Court of the Federal Government for taxes and duties, sitting as the Court of final appeal, stayed its proceedings and referred the issue to the European Court of Justice.

The European Court of Justice ruled that legislation of a Member State which precludes the deduction for tax purposes of gifts to bodies established and recognized as charitable in another Member State, violates Article 56 EC, because it limits the free movement of capital, which Articles 56 to 60 EC addresses. This rule applied to claimed donations without regard to whether they were financial transactions or gifts-in-kind.

While I realize that the Persche decision is limited to the facts and specific national laws at issue there, and to the provisions of the European Commission Treaty, it does raise problems from our perspective in ICFO.

My personal bias is a preference for national sovereignty rights and responsibilities as distinguished from a regional or global approach to monitoring charities. The logic of the Persche decision is clear and makes a lot of sense in the context of the EU Treaty arrangements and policy goals. The Court of Justice did observe that the inability on the part of a taxpayer to deduct gifts to bodies recognized as charitable in other Member States could affect the willingness of that taxpayer to make gifts to such bodies. Perhaps.

However, I am not persuaded. The question I think raised by the Persche decision is whether this reflects the reality of building donor and public trust in the charity sector. Motivations are difficult to determine. However, with respect to the charitable giving, I am not sure that promoting free movement of capital consistent with regional agreements plays into the charitable motivations behind much of the giving. Perhaps, there may be more of that at play in institutional philanthropic motivations, but that may also be a stretch.

The Persche case has some unique factual elements. For example, Mr. Hein Persche owned a residence in Portugal in the area of the Portuguese charity which was a retirement home to which a children's home had been added. It appears from the proceedings that he had a relationship with this charity, and moreover, that he used his gifts-in-kind to test the tax law of Germany.

The Court's decision is silent as to whether the charity in Portugal met any standards other than those required for registration by Portuguese authorities for charitable recognition, and whether it was accountable for its governance, fundraising activities, and financial affairs. This raises a question of interest to ICFO and its member monitoring organization: Does the establishment of independently formulated standards and independent monitoring or self-regulation contribute to transparency and accountability of the charity sector and of specific charities, and thereby increase donor and public trust in that sector? Well, this discussion will have to wait for another day.

1 comment:

  1. What I think does need to be borne in mind in relation to the European cases (and which I thought was not quite clear from this posting) is that the ECJ has recognised (both in Stauffer and in Hein Persche) that the state which is being asked to give a tax concession to (or in respect of a donation to) a charity from a foreign member state is entitled to insist on being satisfied that the foreign charity satisfies its own requirements both as regards permitted objects and activities (what I describe as 'what it says on the tin') and so far as supervision goes in its home state (what I describe as 'making sure it does what it says on the tin'). In other words, whilst the UK (for example) could not reject a Ruritanian charity simply for being foreign (assuming Ruritania was an EU state!), it could reject it if the Ruritanian concept of charity was different from our concept of charity as a matter of law or if it did not believe Ruritania supervised its charities properly. Of course, one could argue that this will lead to pressure on those EU member states which do not supervise their charities properly to start doing so.