A decade after the Stauffer and Persche cases, how has cross-border philanthropy changed in Spain?

In 2014, following the ruling of the European Court of Justice, the European Commission initiated an infringement procedure against Spain (N. 20134086) aiming at clarifying whether Spanish legislation on tax treatment of charitable organisations based abroad complied with the non-discrimination and the free movement of capital principles. The legal action undertaken by the Commission was successfully completed in April 2022 after the amendment of the tax legislation for non-profit organisations (NPO) in Spain (Law 49/2002 of December 23).

Until the end of last year, under Spanish law, only a branch/subsidy of a foreign foundation that registered with the Registry of Foundations in Spain could be considered fully tax-exempted, although they already had their own legal personality and were registered in their country of origin. Also, the tax legislation for non-residents was not clear regarding the possibility of applying Spanish NPO tax legislation but non-resident taxpayers could however deduct donations made to Spanish NPOs.

In other words, Spanish law did not explicitly recognise the deductibility of donations made to foreign NPOs, either in the EU or in third countries, nor did it recognise the equal tax treatment of non-resident NPOs with income generated in Spain, except in the case of delegations registered in the Spanish Foundation Registry.

Moreover, regardless of tax law, the Spanish Foundation Law (Law 50/2002, of December 26) provides that foreign foundations wishing to operate in Spain on a regular basis must be registered in the Spanish Foundation Register. In addition, Spanish law provides that the permanent activity of a foreign foundation that wishes to register in Spain may not consist of fundraising.

However, now the NPO Tax Law (Law 49/2002), which regulates the tax regime applicable to tax-exempt NPOs – essentially public benefit associations and foundations, has been amended. The following are now included in the list of entities that can be considered as tax-exempt non-profit organisations and therefore can receive donations that entitle them to deductions:

• Entities that are not domiciled in Spain but have a permanent establishment within Spanish borders and are therefore “comparable” to Spanish foundations or associations.
• Entities established in a Member State of the European Union or in other Member States of the European Economic Area with which there are agreements for mutual administrative assistance in the exchange of tax information, with or without a permanent establishment in Spain. Entities established in a non-cooperative jurisdiction are excluded, unless it is a Member State of the European Union, and it is possible to demonstrate that their establishment and activity is for valid economic reasons.

Hence, according to the wording of the law, the key element to fully implement these changes will be under what conditions Spanish fiscal authorities consider entities as “comparable” in the words of European rulings.

During these years, some foreign foundations and non-profit associations, especially from France, Sweden and the United Kingdom, have sued in court to obtain the reimbursement of the taxes paid in Spain, and the courts have ruled favourably in various cases in 2011, 2013 and 2014.

And when they have done so, the following arguments were made:

• Non-residency cannot be a condition or fact that alone denies equal treatment to a foreign NPO
• Judges and courts must apply European law, which takes precedence in case of conflict with national law
• Registration in Spain is only required for those who wish to operate permanently in Spain
• The court notes that “comparability” does not mean “absolute identity.” You must be in an “objectively comparable” situation. And that comparability is based more on the comparability of principles. For example, it is not required that they reinvest at least 70% of their income in fulfilling the purposes set by Spanish law, but that they devote a “sufficiently high” percentage. They also point out that the remuneration of the members of the Board of Trustees under Spanish law is not “absolute” but contains some exceptions, so that it is not impossible to estimate this remuneration even in a Swedish foundation.

It is still unclear how the Spanish Tax Administration will implement the question of “comparability” and what requirements it will impose to recognise the non-profit status of foreign entities, but the criteria followed by the above-mentioned judgments of the Spanish courts should help by making it clear that “comparability” cannot mean “identity” by recognising that the rules for non-profit organisations cannot be identical in all countries.

In this sense, recommendations to implement the principle of non-discrimination, as discussed by Philea with the European Commission, can be a good path to follow together to create an ambitious common space for philanthropy in Europe.