Several countries have patronage tax regimes aimed at encouraging donations to certain entities that carry out certain non-profit activities (social, cultural, environmental, sporting, educational, among others).
As a rule, these regimes allow the donations’ deductibility and, in some cases, the increase of donations as a deductible expense at the donor's level. States encourage donations for philanthropic purposes, particularly for reasons of promoting social justice, equal opportunities, and the correction of inequalities.
In 2011, in the Persche case, the Court of Justice of the European Union (CJEU) analysed the German tax legislation that rejected the deductibility of a donation made by a resident of Germany to a non-resident entity (established in Portugal). On the other hand, this legislation granted the same tax incentive if the beneficiary entity was resident in Germany. At issue was an institution of public interest status, which had to comply with very strict requirements laid down in national law. The German patronage tax regime made the residence of that institution in German territory a condition for access to the regime.
One of the arguments put forward by the German State for denying the deductibility of a donation in such cases was the need to guarantee the effectiveness of fiscal supervision (more specifically, supervision of the beneficiary entity and its activity).
Another argument was that states gave up a certain amount of their tax revenue by granting those tax incentives to entities which relieve those states in the pursuit of public-benefit purposes and of a predominantly social nature.
Although we are addressing the non-profit sector of states, which is based on the respective framework of social and cultural values of each state, the CJEU considered that the German tax rules violated the free movement of capital, as they discouraged donations to charitable bodies resident in other states.
The court clarified that if there is an exchange of information between states (within the EU context or, in the case of third countries, if there are tax treaties), the tax authorities, in cooperation with the taxpayers, may assess whether the assumptions of the national legislation are met. If so, resident and non-resident entities are in a comparable situation.
The key idea is that states cannot discriminate between beneficiary entities based on their residence. The difference in treatment will only be admissible by reason of the pursuit of objectives expressly acknowledged as excluding the illegality of the discrimination by the Treaty on the Functioning of the European Union, such as security.
10 years after Persche, the Portuguese Tax Authorities (PTA) released in 2021 a binding information (No. 17966) apparently contrary to that case law – donations made by residents (individuals or companies) to non-resident entities cannot be deducted and increased, when these entities do not carry out their main activity in Portuguese territory.
According to the PTA’s interpretation, the Portuguese patronage tax regime is designed for entities that necessarily carry out in Portugal “the essential core of the purposes inherent to the activities pursued”.
In our opinion, the Portuguese regime does not make its application conditional on residence of the donors and beneficiary entities, nor on the place where the activity of the beneficiaries is carried out. Probably in most cases, these entities are dependent on prior recognition by the competent minister and continuous monitoring of the compliance of their institutional non-profit purposes.
The PTA argues that, contrary to the Persche case, the Portuguese rules do not discriminate on grounds of residence of the beneficiary entities, but rather on the basis of the territory where those entities carry out their activities and achieve their purposes, with the exception of international organisations recognised by the Portuguese state.
Nonetheless, the PTA does not recommend or advocate any criteria for assessing the place where the main activities of the eligible beneficiaries are carried out. It is also fair to ask: in practice, which of these institutions, except for humanitarian organisations, carry out their activities in a state other than that of their residence?
The tax framework for donations to non-resident entities, which was thought to have been relatively well established since the Persche case, has thus been challenged by this position of the PTA, which will guide its inspection services in present and future inspections and issuing tax assessments.
However, we believe that if the CJEU case law criteria are met which will depend on a case-by-case analysis, it is highly likely that, when the matter eventually is referred to the CJEU the outcome will be the same as in Persche.
Mariana Morais Teixeira
Associate, Morais Leitão
