European Union: Cross-Border Legacies In The EU - Securing A Level Playing Field

The discriminatory tax treatment of legacies left to foreign charities under wills where estates are administered in certain EU countries has long been a contentious issue for many UK charities. Our charity legacy team continues to keep a close eye on developments in this area and on new opportunities for tax efficiency in cross-border philanthropy. We have acted in numerous cases to ensure that legacies are applied to the charitable purposes intended by testators, rather than being swallowed up by national tax authorities.

Over the last decade, the European Court of Justice ('ECJ') has developed a clear line of rulings which make clear that charities established in one Member State must be granted the same tax privileges as those in another Member State (provided that they would qualify but for the fact that they are established outside the relevant territory). We welcome this move towards the principle of equality of EU charitable tax treatment. Of course, our clients are more concerned with practical application than jurisprudence. Sadly, certain Member States appear slow to implement change in practice.

Although a general principle of 'non-discrimination' has been firmly established, in many cases it has yet to filter down to the national laws of EU Member States. Technically, existing laws of Member States must be interpreted in such a way as to comply with EU principles. They should therefore provide for the possibility of a comparability test to the effect that, where a foreign charity complies with the domestic charitable requirements of a Member State, it should benefit from the same tax treatment as domestic charities. However, in practice foreign charities are often unable to meet this test owing to differing, specific (sometimes arbitrary) charitable criteria set by each Member State. We expect this non-compliance to be addressed over time through court cases and infringement action initiated by the European Commission. Certain positive steps have recently been apparent in certain jurisdictions, although practical results at national legislative level can be agonisingly slow to follow.


In October 2014 the European Commission issued Germany with a request in the form of a 'Reasoned Opinion' to remove discriminatory tax treatment for legacies to EU-based charities. Currently, German charities are granted an exemption from inheritance tax, but similar charities established in other Member States may only qualify for the exemption if their State of residence grants an equivalent or reciprocal exemption to comparable German charities. Consequently, legacies to foreign charities are often taxed more heavily. Germany does not appear to have complied with the request to date and we therefore expect the Commission to refer Germany to the ECJ in due course (watch this space...).


As we reported in our February legacy E-alert, France has recently taken steps to comply with the 'non-discrimination' principle. However, we have been advised by French lawyers that although the new Finance Act opens up tax privileged status to certain foreign charities, notably those providing humanitarian aid to distressed populations, the majority may still be discriminated against, owing to a territoriality requirement not visible in the legislation but imposed in practice by the tax authorities by convention.

The change in French law will only apply to successions after 1 January 2015; unfortunately it will not therefore be of assistance for legacies vesting before that date.

Generally speaking, the relevant national tax authorities have discretion over whether a foreign charity is comparable to a domestic charity and whether it will therefore receive the same tax treatment. Accordingly, Withers continues to work closely with foreign lawyers to submit tax exemption applications to this effect, stressing compliance with EU law and lobbying for a consistency of approach.


Elsewhere outside the EU, there is of course no recourse to EU law on free movement of capital and non-discrimination. Swiss law, for example, does not provide for an automatic tax exemption for legacies bequeathed to foreign charities (or even charities established in different cantons). However, we recently obtained confirmation that, in the case of the Canton of Geneva, a full tax exemption may be given to a UK charity where the tax privileged status of the charity within the UK can be demonstrated by providing, for example, confirmation of registration with the Charities Commission, copies of the charity's statutes and annual accounts, a formal letter from a lawyer confirming the charity benefits from tax exemption in the UK, and, if possible, confirmation from HMRC.

It is worth bearing in mind that, while the battle for compliance with the 'non-discrimination' principle rumbles on at national legislative level, representations to national tax authorities may still be made persuasively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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