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Gifts made to charities

Towards a harmonization of tax regimes?

29/07/2021

Gifts and bequests made to organizations of public interest may, under certain conditions, trigger tax benefits for the donor and the donee.  Although restrictions related to the location of the organization tend to disappear, significant differences in the tax treatment of these gifts remain.

French taxpayers are granted an income tax or wealth tax reduction whenever they support public interest organizations by making gifts[1]. Accordingly, gifts to these organizations are exempted from gratuitous transfer taxes[2].

These tax advantages, initially only applicable to donations made to organizations located in France, have gradually been extended to those made to organizations located outside of France.

A progressive extension of the tax benefits to gifts made to organizations located in the European Union

An extension driven by the EU Court of Justice

Before 2009, donations made to organizations located outside of France could not benefit from any tax advantages, neither on the side of the donor nor on that of the recipient of the gift. 

A warning addressed to France by the European Commission in 2008[1] and a European Court of Justice (ECJ) decision[2], “Persche”, dated 27 January 2009, on the German gift tax system, lead the French Government to extend its tax reduction regime to gifts made to organizations located in the EU or in any State member of the European Economic Area (EEA) and having concluded an administrative assistance agreement with France to fight tax fraud and evasion.

In the case at stake, a tax reduction was refused to a German taxpayer who donated to a Portuguese charitable organization. According to the ECJ, this refusal constitutes a restriction to the free movement of capitals. The possibility of a tax reduction is likely to influence the donor and encourages taxpayers to make donations to charitable organizations. Not granting this advantage when the organization is located abroad, could deter taxpayers from making donations and is thus to be considered an impediment to the free movement of capital.

As a result, in 2009, the French legislation evolved. Tax reductions have been extended, under certain conditions, to donations made to organizations located within the EU or the EEA.

A controlled extension

By default, only donations made to organizations previously approved by the French tax authorities (FTA) qualify for tax reduction (income tax and wealth tax reductions). The approval is granted to organizations pursuing similar goals and having similar characteristics as entitled organizations located in France. However, the tax reduction may be obtained even without such approval. In this case, the FTA is entitled to ask the taxpayer for evidence that the non-approved organization meets the aforementioned criteria.

Regarding the legislation on transfer taxes, it was not until the Commission's referral in 2014[3], followed by France's condemnation by the CJEU[4], that donations made to organizations located in the EU or EEA member countries could be exempted from gratuitous transfer taxes. This exemption may only be granted to legal entities or organizations that are "of the same nature"[5], i.e. comparable to entitled French organizations. Also, the received goods must be allocated to activities similar to those carried out by French non-profit organizations. The comparability test is assessed by the FTA.

Whenever the foreign organization is not approved by the FTA, it is nevertheless possible for the donee to provide, within the time limit for filing the declaration of inheritance or donation, supporting evidence to prove that the above-mentioned criteria are met.

The necessity of a reciprocity regime for donations to organizations located in third countries

Prior approval is not required for donations made to organizations located in a third country. The FTA’s guidelines[6] specify that in terms of transfer taxes, an organization located outside the EU or the EEA may be exempted from transfer taxes if it is “objectively comparable” to a French organization and if a reciprocity regime exists between France and the State at stake. The existence of such a regime does only enable the transfer taxes exemption. It is not applicable to tax reductions.

The reciprocity regime must stem from an international tax treaty or a special agreement. To date, France has concluded seventeen such tax treaties, including with Germany and the United States. A recent agreement was concluded with Monaco to exempt donations and legacies made to non-profit organizations located in France or Monaco. To some extent, this agreement formalizes a pre-existing situation. Indeed, many cross-border donations made to these organizations were already exempted from transfer taxes by virtue of individual decisions by the authorities of both States. This agreement thus aims to provide legal certainty for taxpayers.

Could these differences be called into question on the basis of the principle free movement of capitals which, it should be remembered, can also cover relations with non-EU countries?

Practical difficulties remain

In our experience, the FTA is strict in granting approval to organizations located in the EU or EEA.

Case law sets out objective criteria for assessing whether the foreign organization in question can be considered comparable to French organizations.

In a recent decision, “Wellcome Trust”[7], the Conseil d'Etat applied the double criteria of the disinterested management and the nature of the Charity’s activity, both used under domestic law, to qualify the Charity as a non-profit organization. The judge shall assess the comparability and must also consider the foreign legislation, the organization must comply with. The fact that foreign rules differ from those applicable in France does not automatically exclude the comparability of the foreign organization. According to the Conseil d'Etat, the organization’s situation does not need to be “exactly identical” than that of a French organization.

The Administrative Court of Appeal of Versailles[10], ruled in another matter regarding the Wellcome Trust, that, in order to assess the objective comparability of the Trust with a French organization, only statutory provisions relating to the irrevocability of the allocation of the Trust assets, their devolution in the event of a dissolution, the extent of its accounting obligations and financial transparency, and the British authorities’ ability to ensure the compliance with those criteria, are relevant to assess the comparability. As a result, the tax reduction was granted to the Wellcome Trust, even though its articles of association were different from those defined by the French Government.

We however experienced a situation where the FTA refused to grant approval to a British Trust registered in the register of charities established by the British government, even though the purpose, characteristics and activities were objectively equivalent to those of a French Charity. The refusal was based solely on the composition of the Charity’s board. In accordance with British law, the management of the Charity was organized around a single college composed of four members and not three colleges as required under French domestic law.

Should the FTA not rely on the assessment of general interest such as approved by the State in which the organization is located, it could however rely on the examination of the Charity’s purpose, the non-profit activity and the disinterested management.

[1] Article 200 of the French Tax Code (FTC) for income tax reduction; 978 of the FTC for wealth tax reductions.

[2] Articles 794 and 795, 2° of the FTC.

[3] Formal notice dated 18 September 2008.

[4] ECJ, 27-1-2009, 318/07, Hein Persche.

[5] Referral to the European Commission of 10 July 2014.

[6] CJUE, 6th ch., 16 juill. 2015, 485/14.

[7] Article 795-0 A bis of the FTC.

[8] BOI-ENR-DMTG-10-20-20 n°680.

[9] CE, 22 May 2015, n°369820, 9e et 10e s.-s., Min. c/ Wellcome Trust.

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