4 A Statute for a European Foundation
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6580/12
+ ADDs 1-2
COM(12) 35
| Draft Regulation on the Statute for a European Foundation
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| Legal base | Article 352 TFEU; unanimity; consent
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| Department | Cabinet Office
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| Basis of consideration | Minister's letter of 12 June 2013
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| Previous Committee Report | HC86-iii (2012-13) chapter 6 (23 May 2012)
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| Discussion in Council | Not known
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| Committee's assessment | Legally important
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| Committee's decision | Not cleared; further information requested
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Background and previous scrutiny
4.1 We set out the full background to the proposal, a detailed
account of its provisions and the Government's initial view in
our first Report.[14]
4.2 To recap, the Commission, recognising that
foundations with a public benefit purpose play an important role
in the social agenda of the internal market and development of
core EU values and objectives, wants to make it easier for them
to operate across national borders, in particular, by making it
easier for them to fund cross-border operations and reducing cost
and administrative burdens arising from diversity in national
legal and fiscal frameworks.
4.3 The Commission's solution is the creation
of a European Foundation (FE). This new legal form is intended
to add to rather than supplant existing national legal forms.
Under the proposed Regulation an FE would be an entity with a
public benefit purpose and an exhaustive list of public benefit
purposes is set out in the Regulation. FEs would have legal personality
and full legal capacity in all Member States, subject to specified
qualifying conditions.
Minister's letter of 12 June 2013
4.4 The Minister for Civil Society at the Cabinet
Office (Nick Hurd), apologising for the delay, writes to update
us on progress in negotiations on the proposed Regulation on the
Statute for a European Foundation, and to provide responses where
possible to the questions we raised in our Report.[15]
4.5 The Minister says, by way of preliminary
remarks, that:
- Council working party negotiations
have made little progress and it is very hard to see unanimous
agreement being reached on the proposal as currently drafted;
- there are important differences between Member
States in what currently qualifies as a "charitable"
organisation under national laws, how they are regulated, and
what tax advantages they are eligible to receive;
- the proposed FE would have its own definition,
which would in many ways be different to that of nationally recognised
foundations, resulting in a two-tier system with foundations recognised
under national laws sitting alongside FEs which would not necessarily
qualify for foundation status under national laws;
- FEs could exist for purposes, undertake activities,
or qualify for tax benefits that would not be permitted under
national laws; and
- the proportionality of creating a new pan-European
structure for foundations has been questioned by many, particularly
when there appears to be little evidence of real demand from existing
foundations — there has not been any strong support for
the proposal in the UK from representative civil society bodies.
4.6 Addressing the tax elements of the proposal,
the Minister comments that they are
"widely considered to go well beyond the existing
non-discrimination principles set out by the European Court of
Justice, with which the UK Government complies. It is hard to
see how the negotiations will make progress whilst these elements
remain."
4.7 The Minister then turns to the specific questions
that we raised in our Report.[16]
Article 352 TFEU as a legal base
4.8 First, we asked the Minister to explain
the Government's specific objections to the use of Article 352
TFEU as a legal base for this Regulation in view of the Court
of Justice of the European Union's ruling that ex-Article 308
TEC (the pre-Lisbon equivalent) was the correct legal base for
the European Cooperative Society.[17]
4.9 The Minister says that:
- direct taxation remains primarily
a matter for Member States;
- where action on taxation is appropriate at the
EU level, this should be done under a tax legal base using unanimity
voting, with decisions on EU level taxation measures being made
by Finance Ministers at ECOFIN;
- upholding the Member State veto on tax remains
a priority for the UK; and
- the current proposal is under a non tax legal
base, which is not appropriate given the tax content.
Changes to UK law required to implement the proposed
Regulation
4.10 We next asked the Minister whether changes
to UK law were required to implement the proposed Regulation,
particularly changes to the UK definition of "charitable
purposes". The Minister explains that:
- there would be no need to change
the UK definition of charitable purposes as the FE Statute has
its own list of headings of "public benefit" purposes
that would determine the organisations that could qualify as FEs;
- the problem for the UK and other Member States
is rather that the two lists would not necessarily align, meaning
that many purposes could qualify under both the UK and European
definition, some purposes could qualify as charitable under the
UK definition, but not the European definition and other purposes
could qualify under the European definition but not the UK definition;
it is this last category that causes the Government most concern;
- the interpretation of what is meant by "public
benefit" in the European definition is an equally difficult
issue as in the UK there are several hundred years of case law
giving meaning to the term "public benefit" and, in
the European definition, what is meant by "public benefit"
will be open to wide interpretation, or would be based on inconsistent
interpretations under different national laws;
- various provisions of charity law, company law,
tax law, and possibly insolvency law to FEs would need to be applied,
disapplied or applied with modifications;
- changes to laws would not apply to charities
recognised under UK law, but would be needed in order for FEs
to be established and operate effectively in the UK; and
- the extent of changes in the law would depend
on the final shape of the Statute, but if it were to be adopted
in its current form there would be a need for significant changes
in order to recognise FEs within the UK legal framework, whilst
enabling existing charities recognised in UK law to continue unaffected.
The Charitable Incorporated Organisation as an
alternative to the FE
4.11 We also questioned whether and how the new
legal form, the Charitable Incorporation Organisation (CIO), could
be an alternative model for the FE. The Minister responds by saying
that:
- in the UK, charities have a
range of legal structures which they can choose to adopt;
- the most common unincorporated structures are
trusts and unincorporated associations, and the most common incorporated
structure is the company limited by guarantee;
- the CIO is a new incorporated legal structure
for charities seeking to be established in England and Wales.
It is designed for small- and medium-sized charities looking for
the benefits of incorporation without the dual regulation and
reporting of the company structure. The Charity Commission began
registering new CIOs in January 2013, and already around 200 have
been established; and
- a CIO would not provide an alternative to the
FE structure, as the CIO would not enable guaranteed and automatic
recognition as a "charity" and automatic qualification
for tax benefits in other Member States of the European Economic
Area (EEA) in the way that the FE would.
Potential cost of changes to supervisory frameworks
and extension of tax exemptions and reliefs
4.12 We were also concerned about the potential
costs of complying with the proposed Regulation. The Minister
explains that:
- there remains significant uncertainty
over the final shape and scope of the measure, given the lack
of support from most Member States; and
- until the Government has a clearer picture of
the likelihood of the final shape and scope of the proposed Regulation,
it is difficult accurately to estimate the potential costs of
changes to supervisory frameworks and of extending tax exemptions.
Potential abuse of the proposed FE framework for
tax purposes
4.13 Another question we put to the Minister
concerned the potential for abuse of the FE framework for tax
purposes. The Minister comments that:
- the UK operates a generous
system of charity and donor tax exemptions and reliefs. In 2012-13
charity and donor tax reliefs in the UK amounted to over £4
billion. HMRC imposes strict criteria for access to UK charity
and donor tax benefits, and last year undertook several hundred
investigations into potential fraud or abuse of these reliefs;
- opening up the UK's generous charity and donor
tax reliefs to organisations that would not otherwise qualify
under UK law would "result in two phenomena, neither of which
is easy to quantify, and neither of which would be acceptable";
- the first consequence would be to enable organisations
in the UK that would not qualify under the UK definitions of charity
to qualify for UK tax exemptions and reliefs under the FE definition
and it is likely that UK-based organisations that cannot currently
be recognised as charities under UK laws would use the FE as a
route to accessing those tax exemptions and reliefs which "would
undermine our domestic charity law";
- the second consequence would be that, once an
organisation achieved recognition as an FE anywhere in the EEA,
it would automatically be eligible for UK tax exemptions and reliefs
without having to meet the UK's strict domestic criteria and there
is the potential for abuse "although it is difficult to quantify
the size of the risk";
- the Irish Presidency has proposed a compromise,
confidential limit text in an attempt to move the negotiations
forward;
- the main change in that text is considered to
be the insertion of a new Article, Article 51a, which would enable
Member States to impose more stringent non-discriminatory conditions
under national laws than would otherwise be allowed by the Regulation,
but only in a very limited number of specific situations. The
very narrow limitation on the situations in which there would
be discretion for Member States to impose more rigorous non-discriminatory
conditions represents a very minor concession, and does nothing
to address the fundamental concerns that the UK (and others) have
over the inclusion of tax at all; and
- the compromise text also adds several new provisions
to the Regulation that the Government finds problematic. The Government
understands that some of these changes may have been introduced
following the recent reports on the proposal of the Legal Affairs
(JURI) and Culture and Education (CULT) committees of the European
Parliament. For example, the compromise text includes a requirement
for FEs to spend 70% of each year's income within four years of
its receipt (amendments to Article 7). The Government believes
that this requirement would be "unduly bureaucratic for foundations,
particularly in terms of monitoring and reporting, and would be
almost impossible for regulators to police".
4.14 The Minister ends his letter by committing
to "continue to engage constructively in negotiations"
but says that he has "little hope for much progress on the
measure in its current form". He undertakes to write again
to keep us informed as negotiations continue.
Conclusion
4.15 We thank the Minister for his full response
to our questions but it is no more than should be expected when
a period of over 12 months has elapsed since the date of that
Report. We note the Minister's apology for what is, in our view,
an unacceptable delay. Although we recognise that the lack of
progress in the negotiations on the current document might be
partly responsible for that delay, we ask the Minister to keep
us more regularly informed in future, even if it is only to report
on slight or no progress. This is particularly important in relation
to a document such as this which has the potential to have a significant
effect on domestic charity and tax law and policy.
4.16 Pending the Minister's next update to
us, the document remains under scrutiny.
14 See headnote. Back
15
See headnote. Back
16
See headnote. Back
17
See Case C-436/03 European Parliament v Council of the European
Union, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62003CJ0436:EN:HTML. Back
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