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EU Investigates Italy for Tax Breaks to Catholic Church

By John R. Theadore
The Digest, Form & Accuracy Editor

For years the Catholic Church has received a substantial tax break from the Italian government on its properties in Rome. Under the provision of Italian tax law, the Holy See does not pay tax on approximately 100,000 non-commercial properties. The Church also receives a break on its commercial real estate in the form of a 50 percent reduction on its corporate tax on those properties. All in total, the Church saves approximately 2 Billion Euros (2.8 Billion Dollars) each year because of these exemptions.

Recently, however, European Union regulators have opened a probe into Italian tax breaks on real estate granted to the Catholic Church. These regulators believe that these exemptions may distort competition. Specifically, the target of the investigation is into clinics and hostels that are run by the Church.

The theory is that if Church-run businesses could be considered commercial, and would therefore be in competition with other commercial service providers. This would make the tax breaks an illegal state subsidy.

Italy has gradually changed how the Catholic Church is financed. Prior to the country’s unification in 1870, the pope, the Church’s spiritual leader, was also the ruler of much of middle Italy. In 1929, however, the Lateran Treaty was signed. This treaty provided that the Church would recognize the Italian state, and in return Italy would guarantee the Vatican’s sovereignty, and provide it an indemnity to set up its own bank and laid the groundwork for tax exemptions on its property.

Under a 1984 renegotiation of the Lateran Treaty, Catholicism lost its status as a formal state religion. In exchange, taxpayers were given a choice to send about 0.8 percent of income tax to religious affiliations or public coffers.

In 2008, the EU Antitrust Authority investigated Italy on the tax breaks as a preliminary matter to see if government grants harmed competition.

On October 12, 2010, the commission stated that while their findings are not yet concluded, its preliminary investigations indicate that Italy’s exemptions to the Church do violate EU rules on state subsidies.

The Italian government has one month to respond before the commission makes its final decision. If it is found that the Catholic Church is running commercial businesses with these funds, the EU could order Italy to compel the Church to return the money as illegal government aid.

The commission also stated on October 12 that it will examine rules that stop Church-run institutions and amateur sports clubs from losing the non-commercial status that allows them to have tax exemptions.

This present inquiry by the Brussels-based EU commission is part of a larger investigation into how member states treat former state religions for legal purposes, and is at least the third inquiry of its kind. The commission has also questioned subsidies for the Catholic Church in Spain and sales tax rules for churches in Belgium.

For more information, please see:

EU investigates Italy for church tax breaks, FORBES, October 12, 2010.

Aoife WhiteItaly's Tax Breaks for Catholic Church Are Subject of EU Regulatory Probe, BLOOMBERG, October 12, 2010.