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Tax exemptions for Church run schools do not breach state aid rules: EU Court

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Tax exemptions for Church run schools do not breach state aid rules: EU Court

Photo © Yanchenko - Fotolia

(LUXEMBOURG) - As a rule, tax exemptions for Church-run schools do not breach prohibitions on state aid, the EU Court's Advocate General stated Thursday in an Opinion on building work for a Catholic school in Spain.

In her Opinion, Advocate General Juliane Kokott stated that a tax exemption for the Catholic Church in Spain in respect of building work on a school building does not breach that prohibition where the Church uses the building for compulsory education and is thus using it in pursuance of its social, cultural and educational mission, but does breach it where it uses the building for providing education on a commercial basis.

An agreement between Spain and the Vatican dating from before Spain's accession to the EU provides for various tax exemptions for the Catholic Church.

Relying on that agreement, the Catholic Church, which runs a Church school near Madrid in this case, seeks repayment of municipal tax amounting to EUR 23,000 for building work on the school building it had to pay. The  premises are predominantly used for compulsory education - equivalent to state education and financed mainly through public funds. However it also uses the premises for voluntary education, for which it charges a fee.

The Spanish court asked the European Court of Justice whether the tax exemption should be regarded as unlawful State aid where that tax exemption is applied to school buildings.

This raised the question whether exemption from certain taxes granted by a Member State to a religious community, even where the activities have no strictly religious purpose, constitutes State aid.

In her Opinion, Advocate General Juliane Kokott concluded that a tax exemption such as this one does not contravene the prohibition on State aid where it affects a school building used by the Catholic Church for the provision of educational services in the context of its social, cultural and educational mission.

However, the Opinion states that the tax exemption would constitute State aid if the building concerned were used "for genuinely commercial objectives".

The EU Treaties require the EU to respect the status of churches in the Member States and not to prejudice that status. However, this does not mean that church activity is excluded from the scope of EU law generally. Rather that, in interpretation and application of EU law, the status of the Church has to be respected and may not be prejudiced.

To determine whether the prohibition on State aid is applicable to the tax exemption at issue, the Opinion states that distinction must be made between use of the building for compulsory education and use for voluntary education.

As the compulsory education provided is fully integrated into the public education system in Spain, and the school is pursuing a specific "social, cultural and educational mission" (the pursuit of a strictly religious objective is not required), it is assumed that, to that extent, the activity is a non-economic one.

EU competition law and thus the prohibition on State aid is not applicable to that situation.

On the other hand, the voluntary education offered does appear to be commercial in nature, so that this must be assumed to be an economic activity, to which the prohibition on State aid applies.

Only where it constitutes less than 10% and is thus entirely ancillary may an activity be regarded as a non-economic activity.

If there is an economic activity (which is a matter for the Spanish court to determine) and the prohibition on State aid is therefore applicable, then – according to the Advocate General - the tax exemption at issue does constitute State aid.

As the Spanish tax on constructions, installations and works in question was introduced only after the accession of Spain to the EU, the tax exemption at issue (for an economic activity) must, in Mrs Kokott's view, be regarded not as existing aid but as new aid.

She stresses that it must, accordingly, be notified to the Commission and may not be granted without the Commission's authorisation.

The particular circumstance that the tax exemption at issue arises from an international agreement with the Vatican dating from before the accession of Spain to the EU, however, allows a temporary derogation from the prohibition on State aid in EU law.

In so far as the agreement allows a margin of discretion to remove the economic activity of the Catholic Church from the scope of the tax exemption at issue it must be exercised. If there is not (yet) such a discretion Spain must seek an appropriate arrangement with the Vatican. If such an arrangement is not possible within a reasonable time, Spain must terminate the agreement.

Advocate General's Opinion in Case C-74/16 Congregacion de Escuelas Pias Provincia Betania v Ayuntamiento de Getafe


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