The Portuguese tax law, more precisely the Tax Benefits Code (EBF) – articles 61 to 66 – allows for a number of deductions, up to different limits, regarding donations delivered to bodies that promote different ends such as culture, sports, science, human rights, amongst other bodies or activities that under the Portuguese law can be considered as of “public utility”, or charitable.
This type of deduction can be found in several countries with similar designs, allowing for a deduction of the amount of the donation for the purpose of the person’s personal income tax or of a company’s corporate income tax. In the Portuguese case, curiously, often the amount of the donation can be deducted in more than 100% (e.g. a person or company can deduct 130% of the amount of the donation if it was delivered for scientific purposes) up to certain pre-established limits.
However, the deductibility of donations made to non-profit organisations does pose an interesting challenge from the perspective of the legislator, especially at the EU level, which the Persche decision[1] of the Court of Justice of the EU (CJEU) clearly evidenced.
In this case, very succinctly, a German citizen – Mr. Persche – who had made a donation to a Portuguese charitable institution, was denied the deduction of said donation in his personal income tax by the German Tax Administration, on the grounds that the deduction was only applicable to donations made by German taxpayers to German institutions, even if the foreign institution that received the donation qualifies as charitable in its State of residence.
Regarding the possibility of such prohibition being in violation of the free movement of capitals laid out in article 63 of the Treaty on the Functioning of the EU (TFEU), the CJEU, in the Persche case, decided that the donations made by citizens of a member state to an entity of another member state and considered charitable in that state, then those donations fall under the scope of article 63 of the TFEU.
Additionally, several governments expressed their opinion in the direction of the lack of comparability of national bodies recognised as charitable in different member states: different states can apply different requirements for the qualification of bodies and activities for this purpose, and it is not feasible for each state to monitor the compliance of the foreign recipient body with the domestic criteria).
Also, another argument was made based on the territorial scope of activity of the charitable bodies: these tax benefits exist because the activity of these bodies absolves the states from pursuing those very charitable tasks, and thus this supports the strictly domestic application of the benefits.
However, the CJEU decided that “a body which is established in one Member State but satisfies the requirements imposed for that purpose by another Member State for the grant of tax advantages, is (…) in a situation comparable to that of bodies recognised as having charitable purposes which are established in the latter Member State.”
This being said, the CJEU clearly stated that a discrimination in the fiscal treatment of these donation in reason of the residence of the recipient body violates the free movement of capitals. However, the decision also states that it must be the taxpayer to make proof that the body to which he/she made the donation meet the requirements to be considered charitable and also the requirements for the granting of the tax advantage in his/her home country.
The Portuguese Tax Administration (AT) has surprisingly issued an administrative decision (PIV n.º 17966, Process n.o 3094/2020) in which it denies a taxpayer the possibility of deducting donations made to a foreign European body. In the latter paragraphs of the decision, the AT concludes saying that such decision is not contrary to the Persche Case, as the CJEU only rule against discrimination in reason of the residence of the body, while the AT uses a criterion based on the territorial scope of action of the body. Essentially, in the AT’s opinion, if the body that receives the donations takes action in Portugal, irrespectively of its residence, then the donations can be deducted by Portuguese taxpayers.
This is clearly an artificial criterion: cases of charitable bodies (e.g. nursing homes, orphanages, cultural associations, sports associations, etc) based in a foreign member state that pursue their goals in Portugal are tremendously rare, to say the least. In the end, the criterion that will substantially prevail, even though it is not being expressly employed, is the residence criterion.
This is ultimately a matter of integration: is the EU at a stage where charitable purposes pursued by a member state must be taken as being pursued by all the other member states? I believe that the Persche decision sheds some light in this matter: the CJEU is not stating that if one body is deemed charitable by a member state (e. g. Hungary), then every other member state must accept automatically that a donation to that body is deductible for the purposes of income taxes. It is merely saying that national Tax Administrations must allow the taxpayer to make proof that the foreign recipient body meets the requirements for the granting of the tax advantage in his/her state of residence.
Thus, the taxpayer must be allowed by his/her home Tax Administration to make proof that the foreign body to which he/her made a donation pursues the same ends that the home country considers worthy of a tax incentive.
The social purposes pursued within the EU still vary from member state to member state. That is clear. However, the mandate for free movement of capitals means that domestic legislations are not allowed to restrict the flow of capitals to some entities in benefit of other entities, without a justifiable reason. Thus, it means that if taxpayers can prove that the same goals that the home country deems worthy of incentive are being pursued by another body in European territory, there is no justifiable reason for the flow of capitals (in this case, donations) to be restricted.
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[1] Case C-318/07, 27th January 2009