Historical archive

Section 6-50 of the Norwegian Tax Act – tax deduction rights limited to donations to non-profit organisations seated in Norway – infringement of Articles 4, 28 and 40 EEA

Historical archive

Published under: Bondevik's 2nd Government

Publisher Ministry of Finance

EFTA Surveillance Authority
Bernd Hammermann
Rue de Treves 74
B-1040 Brussels
Belgium

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Date

CFS 084.400.013

04/39 SL HJ/KR

16.04.2004

Section 6-50 of the Norwegian Tax Act – tax deduction rights limited to donations to non-profit organisations seated in Norway – infringement of Articles 4, 28 and 40 EEA

Dear Sir,

Reference is made to the Authority’s letter dated 18 December 2003. We also refer to our letter dated 10 March 2004 and the Authority’s reply of 12 March 2004, under which the time limit for the reply was extended to 16 >April 2004.

1. Norwegian legislation

Section 6-50 of the Norwegian Tax Act

According to section 6-50 of the Tax Act, deductions in the donor’s taxable income are granted for cash donations to non-profit organisations that pursue activities listed in subsection 1 of the provision. The maximum deductible amount is NOK 6000 per donor. As the tax rate applicable in this case is 28 per cent, the maximum reduction in tax is NOK 1680 for each taxpayer (donor). Any person or corporation subject to income taxation in Norway may be eligible for such a deduction, regardless of nationality/state of registration.

The right of deduction requires that the receiving non-profit organisation operates on a national basis and is seated in Norway. This means that the organisation must have an administration that is seated in Norway. International organisations with headquarters seated abroad fulfil the requirement if they have a branch seated in Norway. A tax deduction is given for donations to large international organisations seated in Norway such as the Red Cross and Save the Children even if the money is used by the organisations outside Norway.

Pursuant to section 6-50, subsection 6, Regulations of 19 November 1999 No. 1158 have been laid down which among other things lay down further requirements for the application of the provision. Section 6-50-3 of the regulations makes it mandatory for receiving organisations to keep accounts of the donations and to have them audited. In addition, the accounts must demonstrate that a sum equal to the donated amount has been used solely for activities that benefit the general public listed in Section 6-50 of the Tax Act. Furthermore, the organisations must provide the tax authorities with machine-readable information concerning the donation and the donor. This requirement reduces the amount of work for the donor, the recipient, and the tax authorities.

The financial effects of the system

If a taxpayer donates a sum of NOK 1000 that is eligible for tax deduction under the current system, a part of the donation, equivalent to NOK 280, is in reality a state subsidy to the beneficiary organisation. The donor in fact pays NOK 280 in advance on behalf of the State. This is reimbursed to the donor by the subsequent tax deduction. Thus, the donor’s actual gift/contribution is the net sum of NOK 720.

In financial terms, the system of tax-deductible donations can be seen as equivalent to a system of direct state subsidies to the beneficiary organisations, which is based on gifts from private donors that trigger a right for the organisations to receive direct state subsidies calculated as a percentage of the total value of the donations. A system interpreted as a right to tax deductions for donations has the same financial effects for the donor and the beneficiary as a system based on direct state subsidies. However, it should be noted that in formal terms, such state subsidies do not constitute State aid within the meaning of Article 61 EEA and are not a breach of Norway’s obligations according to Chapter 2 of the EEA Agreement.

2. EEA-legislation

a) Article 40 EEA and the Capital Movements Directive 88/361

Article 40 EEA provides that within the framework of the provisions of the EEA Agreement, there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in an EEA State.

According to the case law of the ECJ and the EFTA Court (e.g EFTA Court case E-1/2000 paragraphs 26-28), differential treatment that may dissuade donors from donating money to entities established in another EEA State is considered to constitute a restriction on capital movements. This applies even if no appreciable effect on the cross-border movement of capital can be demonstrated. The issue in question is whether the provisions of section 6-50 may dissuade donors from donating money to organisations seated in another EEA State.

The concept of movement of capital is not defined in Article 40 or in the Capital Movements Directive. However, the nomenclature of capital movement in Annex I to the Directive indicates the scope of capital movements for the purpose of applying Article 40 and Article 1 of the Directive. Gifts and endowments are one of the categories listed in the nomenclature.

In the view of the Norwegian Government, only the donor’s net gift is covered by Article 40 and the Directive. The remaining 28 per cent must be considered to be a subsidy by the State, which is granted to an organisation on the basis of the amount of financial support it receives from Norwegian tax payers. This part of the gift is not covered by Article 40 and the Directive. Thus, gifts to organisations seated abroad and gifts to those seated in Norway cannot be deemed to be subject to differential treatment as far as the net contributions by donors are concerned. The fact that gifts (net gifts) to an organisation trigger a state subsidy to the same organisation does not constitute a restriction within the meaning of Article 40 and the Directive. This effect is too indirect and minimal to be said to dissuade donors from donating money to organisations seated abroad. The fact that the donor disburses a part of the cash contribution on behalf of the State for a short period of time should not alter this. A system of indirect state subsidies granted in the form of tax deductions should not be viewed differently from a system of direct state subsidies

Even if a donor’s gross gift is considered to be covered by the concept of capital movement, the Norwegian Government will maintain that the right to tax deduction cannot be said to dissuade donors from donating to non-profit organisations that are established in another EEA State. The effect of the tax deduction is too indirect and minimal for this to be the case. To our knowledge, neither the EFTA Court nor the ECJ has ruled on free movement of capital in a similar context.

b) Articles 4 and 28 EEA and Council Regulation 1612/68 EEC on freedom of movement of workers within the Community

Article 4 EEA prohibits any discrimination on grounds of nationality within the scope of application of the EEA Agreement. Article 28 EEA provides that the free movement of workers shall be secured among EC Member States and EFTA States. The free movement of workers may be limited on grounds of public policy, public security and public health. According to Regulation 1612/68, Article 7, paragraph 2, workers who are nationals of a Member State shall enjoy the same social and fiscal advantages as national workers.

The ECJ has consistently held that the equal treatment rule laid down in the Treaty (Article 28 EEA) and in Article 7 of Regulation 1612/68 prohibits not only overt discrimination by reason of nationality, but also all covert forms of discrimination which, by the application of other distinguishing criteria, in fact lead to the same result.

Accordingly, conditions imposed by national law must be regarded as indirectly discriminatory where, although applicable irrespective of nationality, they essentially affect migrant workers, or the great majority of those affected are migrant workers, where they are indistinctly applicable but can more easily be satisfied by national workers than by migrant workers, or where there is a risk that they may operate to the particular detriment of migrant workers, (see e.g. ECJ case C-237/94 paragraphs 17-21).

The right to tax deduction according to section 6-50 of the Tax Act does not overtly discriminate foreign nationals from other EEA States. It is the Government’s view that section 6-50 does not constitute covert discrimination according to Articles 4 and 28 and Regulation 1612/68. Any discriminatory effect is too indirect and minimal to be covered by these provisions.

The risk that the legal conditions may operate to the particular detriment of migrant workers is too indirect and minimal to be covered by Articles 4 and 28 and Regulation 1612/68.

When considering the financial effects of the system, the gross donation to an organisation seated in Norway must logically be split into a net donation and a state subsidy to the non-profit organisation that receives the gift. A migrant worker may also grant an amount equivalent to the net donation to an organisation abroad. The financial effect of such a grant is similar to that of a donation eligible for tax deduction according to section 6-50. Thus, the system does not result in discriminatory treatment of migrant workers. A system of direct state subsidies to non-profit organisations seated in Norway calculated on the basis of received donations would not constitute an infringement of Articles 4 and 28. A system of indirect state subsidies granted in the form of tax deductions is in financial terms equal to a system of direct state subsidies.

c) Interpretation and application of Articles 4, 28 and 40 EEA in the context of non-profit organisations

The objective of the EEA Agreement, including the fundamental freedoms, is to create a well-functioning internal market within the EEA area. Non-profit organisations that are not engaged in any activity consisting of trade in goods or services which could, at least in principle, be carried out by a private actor in order to make profits, fall outside the scope of the core objective of the EEA Agreement. It should be noted that this applies to all of the non-profit organisations that may benefit from tax-deductible grants according to section 6-50. The system requires any tax-deductible donations to be used exclusively for activities that benefit the general public such as listed in the provision, and includes safeguards to ensure that this is the case.

Although the wording of the Articles 4, 28 and 40 EEA does not differentiate between non-profit organisations and commercial actors, the provisions of the EEA Agreement must be interpreted and applied in accordance with its objectives. In determining whether the system in question is restrictive and discriminatory, due regard must be had to the fact that the donations are given to non-profit organisations and solely for use in their social activities.

d)Justification grounds

Independence of non-profit, voluntary organisations

The Norwegian Government maintains that the independence of non-profit, voluntary organisations is an important social policy objective that justifies differential treatment. A state subsidy system based on support from private donors to such organisations forms part of general policy and efforts to achieve and secure the independence of non-profit organisations. Non-profit organisations that pursue legal but non universally supported goals are in particular in need of support by a system of donor-governed state subsidies. A system of tax-deductible donations is a suitable measure for this purpose and must be considered as proportionate to the aim of ensuring independence for non-profit organisations.

Granting direct state subsidies only to non-profit organisations that are seated in Norway does not infringe the EEA Agreement. The EEA States must have the freedom to set the terms for such direct subsidies. It should make no difference if the state subsidy system is established as fiscal regulations.

Effectiveness of fiscal supervision

The ECJ has repeatedly held that the effectiveness of fiscal supervision constitutes an overriding requirement of general interest capable of justifying a restriction on the exercise of fundamental freedoms guaranteed by the Treaty, see for example ECJ case C-250/95 paragraph 31. It is the Norwegian Government’s view that the effectiveness of fiscal supervision in this case constitutes an overriding requirement of general interest.

It is more difficult and may be impracticable to determine whether an organisation meets the requirements of section 6-50, and to control whether the money donated is used solely for the social activities listed in the provision, if the organisation is seated abroad. Norwegian authorities do not have jurisdiction over foreign organisations.

Even if the donor was required to furnish the tax authorities with information on foreign organisation to which he had made donations, the organisations themselves would not be obliged to fulfil the requirements of section 6-50 of the Norwegian regulations of 19 November 1999 No. 1158, in particular the requirements to keep separate, audited accounts of the donations. Although other EEA States can be assumed to apply rules in the accounting and auditing field that are similar to the Norwegian rules, it is most unlikely that the ordinary accounting rules of other States include requirements similar to those of section 6-50. Consequently, foreign accounts will not explicitly disclose or demonstrate that a sum equal to the donated money has been used for the social activities listed in section 6-50 of the Tax Act. Nor will the mere transmission of the auditor's certificate confirm this fact.

Under Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation, the competent authorities of an EU Member State may always request the competent authorities of another Member State to provide them with any information necessary to enable them to ascertain the correct amount of tax payable by a taxpayer who is resident in another Member State. The ECJ has referred to this Directive in its considerations concerning the argument of fiscal supervision as an overriding requirement. However, Directive 77/799 is not included in the EEA Agreement. In an EEA context, Directive 77/799 cannot be used to argue against the acceptance of effectiveness of fiscal supervision as an overriding requirement of general interest.

3. Conclusion:

As follows from the reasoning set forth above, section 6-50 of the Norwegian Tax Act is not in breach of the EEA-Agreement.

Yours sincerely,

Thorbjørn Gjølstad
Director General

Vibeke Parr
Legal Adviser