Update 2010: Discounts for the Church ― EU puts Italy on trial

 After stalling for two years European Union regulators are finally taking on the Vatican. On 12 October 2010, the European Commission opened a probe into Italian tax breaks on real estate granted to the Catholic Church, claiming that these may distort competition. The tax breaks may be an illegal state subsidy if church-run businesses “could be considered as commercial and may be in competition with commercial service providers,” the European Commission said.

Under Italian law, the Holy See doesn’t pay tax on its estimated 100,000 non-commercial properties and also receives a 50 percent reduction on a corporate tax charged on commercial real estate. The exemptions save the church 2 billion euros ($2.8 billion) a year, according to La Repubblica.

The inquiry is at least the third the Brussels-based commission has conducted into how member states treat former state religions. The EU regulator has also questioned subsidies for the Catholic Church in Spain and sales tax rules for churches in Belgium. In Italy, where citizens can send a portion of their taxes to religious groups, the church may be forced to return any funds deemed to be illegal government aid. [1]

When the EU began investigating this, the Vatican was briefly worried [2] enough to suggest revising the concordat, but after the end of August 2007 no more was heard until September 2010. For the beginning of the story in 2007, see from La Repubblica, “Property tax relief for the Church: EU takes Italy to court”.
  

Discounts for the Church ― EU puts Italy on trial

Exemptions for two billion € a year. Brussels puts it on the fast track: “This is state aid”. If Italy is sentenced, it must apply for reimbursement of unpaid taxes. The Church has assets of about 100,000 buildings.

Alberto D'Argenio
“Sconto Ici alla Chiesa: la Ue processa l'Italia”, La Repubblica, 24 September 2010.
 

BRUSSELS ― The tax exemptions granted to the Church from the Italian State have led to an official EU investigation of state aid incompatible with competition rules. After four years of exchanging information, two dismissals (of the court case) and a number of counterclaims, Brussels is putting in motion a “thorough investigation” of the tax privileges granted to the ecclesiastical authorities in areas where “the Church corporation” (it owns about 100,000 buildings) is a national leader: hospitals, private schools, hotels and other commercial facilities that enjoy total exemption from payment of local municipal property tax (ICI) and 50% exemption on corporate tax (IRES). [This gives the Church] annual savings of close to two billion euros and thus competitive advantages over secular competitors.

[The process has been initiated through an official report by the Competition Commissioner Joaquin Almunia, which will lead in 18 months to an EU verdict.] The process against the Italian state will be divided in three areas:  the immediate charges will include the non-payment of the property tax (ICI) and also Article 149 (§ 4) of the Consolidated Income Tax Regulation which gives to Church businesses the status of non-profit organisations (as not engaged in any kind of business activities, and therefore paying less tax). The third area concerns the 50% discount of the IRES tax granted to institutions of the Church that operate in health and education: this will take the form of a request for detailed information, since [the discount] dates back to the ‘50s, before the birth of the EEC.

The total exemption from the property tax (ICI) was introduced in December 2005, during the election campaign, by Berlusconi's government. It was then reviewed by Prodi's government (2006) which, under pressure from the EU, limited privileges to activities that were “not purely commercial”. This however was circumvented by hospitals or schools which contain a small chapel. [Questions about] the rules were brought to Brussels through a complaint by the Radical Party MP Maurizio Turco and the tax expert Carlo Pontesilli (Secretary of anticlericale.net), assisted by lawyer Alessandro Nucara.

The then Commissioner Neelie Kroes, however, had dismissed the case twice in Brussels amid much talk of tremendous pressure received from both banks of the Tiber [from both the Vatican and the Italian Government]. Facing another stop [to the case], the complainants appealed to the Court of Justice and lawyers in Brussels convinced Almunia [Neelie Kroes’ successor, the present European Commissioner for Competition] to start the inconvenient procedure (going against the Vatican and a founding country is never recommended) to avoid a conviction for inaction by judges in [the European Court of Justice in] Luxembourg.

According to the damning “preliminary conclusions” in Almunia’s report: the existence of state aid is made clear by the “loss of revenue to the exchequer” and the rule violates the competition, as recipients of the exemptions “seem” to be in competition with other operators in the tourism and hotel industry and in the health sector. In short, the conditions for the existence of state aid and its incompatibility with EU standards “appear to be satisfied”.  This analysis is curiously opposite to that contained in the two previous dismissals (2008 and 2010) when there were no fears of rejection by the Court. With the opening of the formal investigation the parties have one month to present their case. Then within 18 months Brussels will have to decide whether to condemn or absolve Italy, resulting in inevitable end to the privileges and the reimbursement to the [Italian] Treasury of the unpaid taxes by the ecclesiastical bodies. 
 

Notes

1. Aoife White, "Italy’s Tax Breaks for Catholic Church Probed by EU", Bloomberg, 12 October 2010. http://www.businessweek.com/news/2010-10-12/italy-s-tax-breaks-for-catholic-church-probed-by-eu.html

2. John Hooper, "Church ready to forgo tax breaks", Guardian, 28 August 2007. http://www.guardian.co.uk/world/2007/aug/28/italy.johnhooper