One step forward and two steps back: Progress towards harmonization of EU non-profit law

Bradley Gallop

The long-awaited EC Communication suggests that the creation of a European Association – a form of non-profit entity recognized throughout the EU – should largely remove barriers to cross-border charitable activity. But without harmonization of tax laws the new Association will not deliver the goods. Does the political will to pursue harmonization now exist?

After much waiting, the European Commission finally issued its Communication on Promoting the Role of Voluntary Organizations and Foundations in Europe.  Overall the final result was well worth the wait.

The Commission initially set out in 1992 to prepare a White Paper in order to:

  • describe the non-profit sector in the various Member States of the European Union;
  • identify the challenges to be faced by foundations and associations in a Single Market;
  • recommend general steps to be taken by State and Community institutions to improve the situation of these organizations.

The Commission succeeded in mapping out both the legal framework and the dimensions of the non-profit sector in each Member State.  As can be expected by a project of this sort, however, the recommendations were worded in vague general terms that can in no way give rise to opposition.

The Commission’s recommendations include taking measures to encourage non-profit organizations (NPOs) to form cross-border partnerships so that they can take advantage of the Single Market and thus more easily seek funds from donors and perform charitable activities in other Member States.  Facilitating the cross-border activities of NPOs also seems an appropriate and significant means of revitalizing community ties and fostering a spirit of goodwill and solidarity among people throughout the EU.

Legal and fiscal barriers to cross-border activity

In response to a Commission survey, more than 50 per cent of NPOs involved in cross-border partnerships cited obstacles to their partnership.  Although the largest problem mentioned was communication (lack of foreign language skills), 21 per cent indicated fiscal barriers, 19 per cent legal, and 29 per cent administrative. These results should not be surprising, given that Member States continue to erect and maintain barriers in an attempt to keep domestic organizations and their resources at home serving ‘national’ interests.  All Member States discriminate against NPOs established in other Member States, for example by preventing citizens of their country from deducting donations to foreign NPOs from their taxable income, or by failing to legally recognize organizations established in other Member States.

A new European Association?

The Communication suggests that the adoption of the amended proposal for a Council Regulation on the statute for a European association (the ‘Regulation’) should largely remove these barriers. The Regulation is certainly a considerable step forward in establishing a form of non-profit entity recognized throughout the EU (the ‘European Association’).  Nevertheless, even if the political obstacles blocking the adoption of the Regulation are overcome, the Regulation will not entirely remove the barriers facing NPOs involved in cross-border activities.

Which NPOs would qualify?

First, the Regulation would merely establish a new form of NPO but would not directly affect existing NPOs not choosing to convert to the new form.  According to Article 3 of the Regulation, founding members of the European Association would have to be from at least two Member States.  This requirement would apparently prevent an NPO with founders from a single country and wishing to expand its activity from choosing this form of association.

Article 3 would, however,  allow an association established in one Member State to convert into a European Association form ‘if it has, for at least two years, had an establishment in a Member State other than that of its central administration’. Such an NPO would thus have to face all the barriers confronting foreign organizations for two years before being able to qualify as a European Association.

Furthermore, the conversion option would not be open to a single organization that did not have a second establishment in another Member State.

Second, the Regulation does not define what would be a qualifying purpose for a European Association. Article 1 merely provides that its members shall ‘pool their knowledge or their activities either for a purpose in the general interest or in order to promote the trade or professional interests of its members in the most diverse areas?. The term ?general interest? may lead to conflicting interpretations by Member States once it is translated into all the official languages of the EU.

Third, the Regulation expressly excludes important areas such as taxation law, competition law, and intellectual and industrial property law from coverage. In many other areas, such as governance and disclosure, it defers to national law.

By not dealing with taxation law when drafting legislation on NPOs, the Commission appears to have avoided the major issue in this field.  The diversity in tax laws among Member States is one of the largest barriers facing an NPO wishing to act in another Member State.

Without harmonization of national law in these areas, NPOs would continue to have to study the different laws applying in the various Member States before choosing where to establish its registered office, as it would be the location of this office which would determine the applicable national law.

Although the Regulation would establish a form commonly recognized as an NPO, its failure to address the real issues would probably make it ineffective as a means of eliminating national barriers. NPOs established in the form of a European Association, as well as those established under the laws of a Member State, would still have to learn about and comply with the dissimilar laws of the different Member States.

The need for harmonization

The European Commission should take action to guide Member States towards mutual recognition of similar NPOs established in other Member States and harmonization of laws governing the non-profit sector. These organizations could be subject to certain minimum requirements set forth in a European regulation and in some respects governed by the national laws of Member States, which would be harmonized on the basis of European directives.  Such action would prepare the non-profit sector for the challenges that will arise with the completion of the Single Market and the inception of Economic and Monetary Union (EMU).

Member States would probably be more willing to agree to allow foreign NPOs to qualify for the same tax privileges as indigenous organizations if other Member States would grant similar privileges to their NPOs.  In other words, if the laws of Member States were reasonably uniform, Member States would be more prepared to eliminate the discrimination now present against organizations established in other States.  Harmonization would therefore considerably reduce the need for NPOs to invest their resources in learning about and complying with the laws of the different Member States in which they are active. Meanwhile, it would also remove donors’ uncertainty concerning the deductibility of their donations and thus encourage donors to contribute more.

The political will to harmonize

The political will to harmonize national laws ebbs and flows with the changes in national attitudes towards further European integration.  Progress towards European integration unfortunately resembles the steps of a cha-cha dancer:  one step forward, two steps back.

Harmonization of direct taxation laws, which are considered one of the last areas under full national sovereignty, is especially sensitive to swings in public sentiment.  In 1996, it was widely felt that Member States would never agree to harmonize their tax laws. Within a year, however, the political situation had changed drastically, mostly as a result of preparations for EMU. European diplomats and heads of state openly suggested that measures should be considered for harmonizing tax laws.  European ministers agreed to consider introducing a Code of Conduct to help avoid tax competition between Member States which may cause injury to other Member States. Concerned that Member States participating in EMU would use fiscal policy unfairly to influence their local economic situation, as they would have few alternatives available to them after their monetary policy was transferred to a central institution, they also agreed to examine the possibility of harmonizing the tax laws of Member States.

Renault’s factory closure heightens calls for harmonization

The political will in favour of examining tax harmonization was at its height in February 1997, when the management of Renault announced its decision to close its Belgian factory, despite the factory being profitable. The company had decided to transfer production to a region of Spain, a fellow Member State, eligible for structural aid from the European Commission and thus able to offer financial incentives to companies creating jobs in the region.  Although one of the underlying purposes of establishing a Single Market is to allow companies the freedom to establish themselves throughout the EU, and by doing so to redistribute wealth and so relieve poverty in certain regions, certain Member States somewhat surprisingly expressed outrage at the decision.  Renault’s decision thus reinforced calls for harmonization of tax and labour laws to prevent states from unfairly competing for a company’s investment.

In the lead up to the Amsterdam Summit in June 1997, it appeared likely that tax harmonization would be included in the action plan aimed at completing the Single Market by January 1999, to be approved by the Amsterdam Summit.   However, with the election of Mr Jospin as Prime Minister of France on a platform which emphasized the need to protect national sovereignty in the face of European integration, the political will swung away from harmonization, and even in some respects away from EMU.

After Amsterdam

In the coming months we will have to watch whether EMU will begin on time and, if so, whether the resulting market forces will create a push for further harmonization in areas such as tax and labour laws. Mr de Silguy, the EU Monetary Affairs Commissioner, seems right to suggest that the states involved in the future EMU will inevitably move towards greater fiscal harmonization after the introduction of EMU in January 1999 in order to assure the single currency’s stability. If this proves correct, then states not involved in EMU may also find themselves compelled to follow suit and agree to further harmonization.

Although patience and perseverance will be required, much hope remains that EMU will evoke the requisite political will to harmonize tax and other laws, thereby eliminating the most significant national barriers now preventing NPOs from participating freely in the Single Market.

Bradley Gallop is an Associate Attorney-at-Law at the leading Brussels law firm Loeff Claeys Verbeke and a European Commission Expert on Social Economy Law.

The EC Communication

On 4 June 1997 the European Commission adopted the long-awaited paper on associations and foundations in the form of a Communication on Voluntary Organizations and Foundations. The primary purpose of the Communication is to raise consciousness and understanding of the association and foundation sector among policy-makers.

The Communication describes the legal and fiscal environment of non-profit organizations and foundations in the different Member States, the range of activities they carry out and their economic importance, as well as their contribution to solving social and economic problems. It illustrates the growing importance of the sector in Europe, but also the challenges and problems it currently faces, in particular in developing its transnational European work.  Finally, the Communication proposes a series of specific measures at a European level as well as at Member State level, with a view to strengthening the development of the sector in Europe and improving its capacity to meet future needs and maximize its contribution to European integration.

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