Congregación de Escuelas Pías Provincia de Betania (Congregación), A Tax Exemption for the Catholic Church in Spain Constitutes State Aid if it Concerns Education Services Provided on a Commercial Basis

Congregación de Escuelas Pías Provincia de Betania (Congregación), A Tax Exemption for the... Abstract The Court of Justice holds that a tax exemption for the Catholic Church in Spain constitutes state aid if it concerns education services provided on a commercial basis. I. Legal context Judgement of 27 June 2017, Congregación de Escuelas Pías Provincia Betania (C-74/16, EU: C: 2017:496) is probably the first case on the status of the Catholic Church vis-à-vis the application of EU law to reach the Court of Justice of the European Union (‘Court of Justice’ or the ‘Court’). The preliminary reference from a Spanish court concerned the question of whether a municipal tax exemption granted to Catholic institutions by Spain was complying with EU state aid law. Issues almost identical to this, prevalent in several other Member states, have been previously dealt with by only the European commission. In Decision 2013/284/EU, the Commission found that the legislation that exempted the Italian Catholic Church from the payment of municipal tax as being state aid. It however also considered that a reform in the law introduced by Italy that limited the exemption to specific activities carried on by non-commercial entities ‘on a non-commercial basis’ as not infringing Article 107(1). The Commission approach has been endorsed by the General Court in judgement of 15 September 2016, Ferracci v Commission (T-219/13, EU: T: 2016:485). II. Facts The facts of the judgement are rather straightforward: Congregación de Escuelas Pías Provincia de Betania was an establishment of the Catholic Church, which owned several properties in the Municipality of Getafe. It carried out some work to renovate and extend the conference hall of one of its schools, la Immaculada, with the view to host meetings, concerts, and conferences, in addition to regular school activities. Under Spanish law any undertaking has to pay a municipal tax on constructions, installations and works (CIW tax). The Congregación paid around EUR 24k of CIW tax with respect to the conference hall construction. It then asked for reimbursement under a different Spanish measure (Order No 144 of 16 June 2001), which would exempt the Church, regardless of the nature of the activities for which those buildings were used, from paying such a tax. The national authority refused, with the backing of EU state aid rules. As the exemption only applied to properties used for purely religious purposes, the granting of the exemption for other kind of activities would have amounted to a conferral of State aid. III. Analysis The analysis of the Court of Justice is divided in two main parts: the first part is devoted to the vexata question on how to distinguish an economic activity from a non-economic one, with specific reference to education; the second part is on whether the tax exemption could be classified as aid. The case has a third intriguing element, a sort of international dimension of state aid law. The ‘matrix’ of the tax exemption was to be found in the International Agreement signed by Spain with the Holy See in 1979, before Spain’s accession to the then EC. Thus, a final issue was whether the measure should have been considered as existing or new aid, and furthermore whether the fact that the source was to be found in an international agreement signed before accession had to be considered relevant. On the first issue, the Court relied on its settled case law (§ 41–62): first, the notion of undertaking does not depend on its legal status, its private or public dimension, or even from the fact that a certain activity is carried out by a religious community. The main question—to borrow the famous dicta by AG Jacobs in his Bronner Opinion (C-7/97, EU:C:1998:264)—is the function of such an activity: any activity consisting in offering goods or services on a given market is an economic activity (§ 41 and ss). The Congregación case then offered the Court the opportunity to further elaborate on whether education could be classified as an economic activity—an issue that the Court has mainly dealt from the perspective of free movement of services. Borrowing heavily from those precedents, the Court laid down a tri-partite classification: (a) An activity is economic when the courses provided by educational establishments are financed essentially by private funds (pupils or their parents or other private institution. (b) An activity is non-economic when courses provided by establishments are integrated into a system of public education and financed, entirely or mainly, by public funds. (c) Mixed activities when a single establishment may carry on a number of activities, some economic and some other non-economics. For instance, in the case at hand it was clear that the School hall could have been either used to give classes (funded by the State) but also other activities such as conferences or concerts mostly paid by private parties. As for (a) and (b) the Court relies entirely on the question of who pays rather than on the possible costs or remuneration for the provider. The extension to state aid of the free movement of services acquis sits slightly uneasily with those cases where the Court held that the mode of funding ‘is not relevant for the purpose of ascertaining whether a body carries out an economic activity’ judgement of 23 March 2006, Enirisorse, C-237/04, EU: C: 2006:197, § 33) Point (c) is interesting: the European Commission tends to use in its decisional practice as a rule of thumb 20 per cent of the total educational provision offered by an establishment to determine whether a certain economic activity could be deemed as a purely ancillary activity and of entirely secondary significance. Advocate General Kokott in her Opinion in the case offered a 10 per cent. The Court quite righty stayed silent and simply referred to the necessity of keeping separate accounts, leaving the decision on the case to the national court. The Court then moves on to the question of whether a tax exemption granted to the ‘economic’ educational activities carried on by the Congregación at ‘La Immaculada’ school could be considered as aid. The judgement focuses mostly on two conditions under Article 107 (1)—selectivity and the effect on trade and distortion of competition. On selectivity, the Court decision is svelte, as it simply notes that the tax normally payable by all taxpayers who carry out the construction confers a clear advantage to the Congregación and that clearly the Spanish legislation providing for a such an exemption had to be classified as ‘not a general measure applicable without distinction to all economic operators but is rather a measure that is prima facie selective’ (§ 69–70). It might appear surprising that the Court did not feel the need to apply the usual test on selectivity. As the Court held in judgement of 21 December 2016, Commission v World Duty Free Group and Others (C-20/15 P and C-21/15 P, EU: C: 2016:981) ‘a condition for the application or the receipt of tax aid may be grounds for a finding that that aid is selective, if that condition leads to a distinction being made between undertakings despite the fact that they are, in the light of the objective pursued by the tax system concerned, in a comparable factual and legal situation, and if, therefore, it represents discrimination against undertakings which are excluded from it (§ 60).’ Thus, the Court did not engage in a discussion on whether the specific nature of the functions carried out by the Church could have led to the conclusion that no comparison could have been made with other undertakings subject to the tax. In my view, such an assessment was not necessary as it was pre-empted by the discussion the nature of activity at stake. The selectivity test applied by the Court is based on a comparison between undertakings carrying out economic activities, thus the derogation from the general system of taxation must be considered as a selective measure. The selectivity ‘blow’ is softened by the assessment on the effect on trade and distortion of competition criterion. The Advocate General observed in her opinion, that the fact that the Catholic Church possessed ‘numerous properties’, which all were capable of enjoying the tax exemption should have been a factor to consider. The Court, instead, despite reiterating its consolidated approach that to satisfy the test it is enough to examine whether that aid is liable to affect such trade and distort competition, carefully directs the national court to verify a possible application in the case at stake of the De Minims Regulation No 1998/2006 and to seek the assistance of the European Commission if necessary (§ 82–85). The judgement is, finally, very trenchant on the question of the possible relevance of the 1979 Spain-Holy See agreement. Whilst the Advocate General devotes considerable space to the question, the Court takes a very simple approach: despite recognising that the original tax exemption was already provided in that Agreement predating to Spain accession, the Court set the clock at 2001 when the Order introduced some more specific rules (§ 86–89). IV. Practical significance This judgement is likely not to be the last word on one of the thorniest issues in EU law, that is to say the definition of ‘economic activity’. Still it attempts to provide more specific guidelines on education. On the notion of aid, it reaffirms the very robust stance adopted by the Court of Justice in dealing with national fiscal measures. However, Congregación cannot be interpreted as negating any specificity of the status of the Catholic Church; the Court is indeed very careful in stressing that EU state aid law applies to the Church economic activities only. In conclusion, a very interesting and balanced judgement and—considering the topic—one might be tempted to conclude with Saint Augustin: Diversa ergo intentio diversa facta fecit. Author notes Full reference. Judgement of 27 June 2017, Congregación de Escuelas Pías Provincia Betania, C 74/16, EU: C: 2017 :496 © The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Competition Law & Practice Oxford University Press

Congregación de Escuelas Pías Provincia de Betania (Congregación), A Tax Exemption for the Catholic Church in Spain Constitutes State Aid if it Concerns Education Services Provided on a Commercial Basis

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© The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com
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Abstract

Abstract The Court of Justice holds that a tax exemption for the Catholic Church in Spain constitutes state aid if it concerns education services provided on a commercial basis. I. Legal context Judgement of 27 June 2017, Congregación de Escuelas Pías Provincia Betania (C-74/16, EU: C: 2017:496) is probably the first case on the status of the Catholic Church vis-à-vis the application of EU law to reach the Court of Justice of the European Union (‘Court of Justice’ or the ‘Court’). The preliminary reference from a Spanish court concerned the question of whether a municipal tax exemption granted to Catholic institutions by Spain was complying with EU state aid law. Issues almost identical to this, prevalent in several other Member states, have been previously dealt with by only the European commission. In Decision 2013/284/EU, the Commission found that the legislation that exempted the Italian Catholic Church from the payment of municipal tax as being state aid. It however also considered that a reform in the law introduced by Italy that limited the exemption to specific activities carried on by non-commercial entities ‘on a non-commercial basis’ as not infringing Article 107(1). The Commission approach has been endorsed by the General Court in judgement of 15 September 2016, Ferracci v Commission (T-219/13, EU: T: 2016:485). II. Facts The facts of the judgement are rather straightforward: Congregación de Escuelas Pías Provincia de Betania was an establishment of the Catholic Church, which owned several properties in the Municipality of Getafe. It carried out some work to renovate and extend the conference hall of one of its schools, la Immaculada, with the view to host meetings, concerts, and conferences, in addition to regular school activities. Under Spanish law any undertaking has to pay a municipal tax on constructions, installations and works (CIW tax). The Congregación paid around EUR 24k of CIW tax with respect to the conference hall construction. It then asked for reimbursement under a different Spanish measure (Order No 144 of 16 June 2001), which would exempt the Church, regardless of the nature of the activities for which those buildings were used, from paying such a tax. The national authority refused, with the backing of EU state aid rules. As the exemption only applied to properties used for purely religious purposes, the granting of the exemption for other kind of activities would have amounted to a conferral of State aid. III. Analysis The analysis of the Court of Justice is divided in two main parts: the first part is devoted to the vexata question on how to distinguish an economic activity from a non-economic one, with specific reference to education; the second part is on whether the tax exemption could be classified as aid. The case has a third intriguing element, a sort of international dimension of state aid law. The ‘matrix’ of the tax exemption was to be found in the International Agreement signed by Spain with the Holy See in 1979, before Spain’s accession to the then EC. Thus, a final issue was whether the measure should have been considered as existing or new aid, and furthermore whether the fact that the source was to be found in an international agreement signed before accession had to be considered relevant. On the first issue, the Court relied on its settled case law (§ 41–62): first, the notion of undertaking does not depend on its legal status, its private or public dimension, or even from the fact that a certain activity is carried out by a religious community. The main question—to borrow the famous dicta by AG Jacobs in his Bronner Opinion (C-7/97, EU:C:1998:264)—is the function of such an activity: any activity consisting in offering goods or services on a given market is an economic activity (§ 41 and ss). The Congregación case then offered the Court the opportunity to further elaborate on whether education could be classified as an economic activity—an issue that the Court has mainly dealt from the perspective of free movement of services. Borrowing heavily from those precedents, the Court laid down a tri-partite classification: (a) An activity is economic when the courses provided by educational establishments are financed essentially by private funds (pupils or their parents or other private institution. (b) An activity is non-economic when courses provided by establishments are integrated into a system of public education and financed, entirely or mainly, by public funds. (c) Mixed activities when a single establishment may carry on a number of activities, some economic and some other non-economics. For instance, in the case at hand it was clear that the School hall could have been either used to give classes (funded by the State) but also other activities such as conferences or concerts mostly paid by private parties. As for (a) and (b) the Court relies entirely on the question of who pays rather than on the possible costs or remuneration for the provider. The extension to state aid of the free movement of services acquis sits slightly uneasily with those cases where the Court held that the mode of funding ‘is not relevant for the purpose of ascertaining whether a body carries out an economic activity’ judgement of 23 March 2006, Enirisorse, C-237/04, EU: C: 2006:197, § 33) Point (c) is interesting: the European Commission tends to use in its decisional practice as a rule of thumb 20 per cent of the total educational provision offered by an establishment to determine whether a certain economic activity could be deemed as a purely ancillary activity and of entirely secondary significance. Advocate General Kokott in her Opinion in the case offered a 10 per cent. The Court quite righty stayed silent and simply referred to the necessity of keeping separate accounts, leaving the decision on the case to the national court. The Court then moves on to the question of whether a tax exemption granted to the ‘economic’ educational activities carried on by the Congregación at ‘La Immaculada’ school could be considered as aid. The judgement focuses mostly on two conditions under Article 107 (1)—selectivity and the effect on trade and distortion of competition. On selectivity, the Court decision is svelte, as it simply notes that the tax normally payable by all taxpayers who carry out the construction confers a clear advantage to the Congregación and that clearly the Spanish legislation providing for a such an exemption had to be classified as ‘not a general measure applicable without distinction to all economic operators but is rather a measure that is prima facie selective’ (§ 69–70). It might appear surprising that the Court did not feel the need to apply the usual test on selectivity. As the Court held in judgement of 21 December 2016, Commission v World Duty Free Group and Others (C-20/15 P and C-21/15 P, EU: C: 2016:981) ‘a condition for the application or the receipt of tax aid may be grounds for a finding that that aid is selective, if that condition leads to a distinction being made between undertakings despite the fact that they are, in the light of the objective pursued by the tax system concerned, in a comparable factual and legal situation, and if, therefore, it represents discrimination against undertakings which are excluded from it (§ 60).’ Thus, the Court did not engage in a discussion on whether the specific nature of the functions carried out by the Church could have led to the conclusion that no comparison could have been made with other undertakings subject to the tax. In my view, such an assessment was not necessary as it was pre-empted by the discussion the nature of activity at stake. The selectivity test applied by the Court is based on a comparison between undertakings carrying out economic activities, thus the derogation from the general system of taxation must be considered as a selective measure. The selectivity ‘blow’ is softened by the assessment on the effect on trade and distortion of competition criterion. The Advocate General observed in her opinion, that the fact that the Catholic Church possessed ‘numerous properties’, which all were capable of enjoying the tax exemption should have been a factor to consider. The Court, instead, despite reiterating its consolidated approach that to satisfy the test it is enough to examine whether that aid is liable to affect such trade and distort competition, carefully directs the national court to verify a possible application in the case at stake of the De Minims Regulation No 1998/2006 and to seek the assistance of the European Commission if necessary (§ 82–85). The judgement is, finally, very trenchant on the question of the possible relevance of the 1979 Spain-Holy See agreement. Whilst the Advocate General devotes considerable space to the question, the Court takes a very simple approach: despite recognising that the original tax exemption was already provided in that Agreement predating to Spain accession, the Court set the clock at 2001 when the Order introduced some more specific rules (§ 86–89). IV. Practical significance This judgement is likely not to be the last word on one of the thorniest issues in EU law, that is to say the definition of ‘economic activity’. Still it attempts to provide more specific guidelines on education. On the notion of aid, it reaffirms the very robust stance adopted by the Court of Justice in dealing with national fiscal measures. However, Congregación cannot be interpreted as negating any specificity of the status of the Catholic Church; the Court is indeed very careful in stressing that EU state aid law applies to the Church economic activities only. In conclusion, a very interesting and balanced judgement and—considering the topic—one might be tempted to conclude with Saint Augustin: Diversa ergo intentio diversa facta fecit. Author notes Full reference. Judgement of 27 June 2017, Congregación de Escuelas Pías Provincia Betania, C 74/16, EU: C: 2017 :496 © The Author 2017. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

Journal

Journal of European Competition Law & PracticeOxford University Press

Published: Feb 1, 2018

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