Spanish property tax exemption for Catholic Church not sacrosanct from State aid perspective

On 27 June 2017, the Court of Justice (CJ) – sitting in Grand Chamber – has rendered judgment in another fiscal State aid case concerning a tax exemption granted by Spain to the Catholic Church (Case C-74/16 Congregación de Escuelas Pías Provincia Betania).

The case touches upon a number of interesting issues, which will be addressed in this blog post after giving a brief summary of the background of the case and the judgment of the CJ.

– Educational activities of Catholic Church body fall under State aid rules, insofar as they constitute economic activities
– Exemption from property tax for such bodies amounts to ‘selective economic advantage’ (even if ultimately based on international agreement)
– Not ‘existing aid’, even though international agreement predates accession


The Congregación de Escuelas Pías Provincia de Betania (Congregación) is an establishment of the Catholic Church, which owns a range of properties in the Municipality of Getafe. On said properties, a school is located which is managed by the Congregación. In 2011, the Congregación transformed and extended the conference hall of the school with a view to hosting meetings, courses and conferences there.

In accordance with Spanish (tax) law, an indirect municipal property tax on constructions, installations and works (CIW tax) was levied on the construction of the conference hall. After all, the CIW tax is generally levied on the realisation, within the municipal territory, of any building, installation or construction work. In the case at hand, the Congregación paid around EUR 24k of CIW tax with respect to the conference hall construction.

However, as acknowledged by the Spanish Ministry of Finance by an order of 16 June 2001, the CIW tax falls within the scope of Article IV(1)(B) of the Agreement of 3 January 1979 between the Spanish State and the Holy See on financial matters, which provides for a “complete and permanent exemption from property and capital gains taxes and from income tax and wealth tax”. Hence, the Catholic Church (or its establishments) do not have to pay CIW tax on their properties, irrespective of the nature of the activities for which the properties are used (although this point was litigated before the Spanish courts).

Consequently, the Congregación applied for a tax refund. The municipal tax authority refused that application, relying on the argument that the exemption only applies to properties used for purely religious purposes and that, if not, the granting of the exemption would amount to a conferral of State aid. The case was litigated up to the Administrative Tribunal of Madrid, which made a reference to the CJ for a preliminary ruling on this point.


Undertaking / economic activity

In the substantive part of its judgment, the CJ first addresses the question whether the Congregación qualifies as an “undertaking”, as EU State aid law – similar to EU competition law in general – only applies to (aids granted to) undertakings (§39).

An undertaking, according to settled case-law, covers “any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed” (§41). In turn, an economic activity is considered to be “[a]ny activity consisting in offering goods or services on a given market” (§45). The fact that the activity is carried on by a religious community or without profit motive, in principle, does not preclude that activity from being characterised as an economic one (§43 & 46). With that said, however, economic activities are normally performed in exchange of remuneration (§47). As an entity can carry on multiple activities, it must be examined for each activity (separately) whether it falls to be classified as an “economic activity” (§44).

In the case at hand, the overarching question(s) is (are) whether (1) at least some of the activities of the Congregación are to be considered as an “economic activity” and (2) whether the conference hall is used, at least partly, for such economic activities (§63).

With respect to the first query, two types of educational activities carried on by the Congregación must be examined, i.e. (a) the public educational activities funded by the Spanish State and (b) the private educational activities financed by private contributions (of students and parents) (§52). In this respect, the CJ concludes that it is up to the national (referring) court to determine whether the Congregación’s educational activities are economic, non-economic or mixed, and it provides some guidelines in this respect (§54):

  • Educational activities are non-economic where they are “integrated into a system of public education and financed, entirely or mainly, by public funds”, as that would amount to the State aiming to fulfil a.o. its educational obligations vis-à-vis the general public (§50). In that respect, the CJ cautiously hints at the public educational activities of the Congregación being non-economic ones (§55 & 56).
  • Educational activities can, on the other hand, be considered as economic ones where they are “financed essentially by private funds” (that do not come from the provider itself) (§48). In this respect, the CJ indicates that the private educational activities of the Congregación are economic ones, as they are essentially financed by private contributions (of students and their parents) (§57 & 58) (although the CJ stipulates in §49 that it is not so much the funding by the beneficiaries of the service that is relevant, but private funding in general).
  • An entity can be deemed to carry on mixed activities, on the condition that it keeps separate accounts for the various funding sources to exclude the risk of cross-subsidisation of private activities by means of public funds (§51).

With respect to the second question, the CJ mandates the national (referring) court to determine whether the conference hall is used (a) exclusively for non-economic activities, (b) exclusively for economic activities, or (c) for both types of activities (mixed use) (§59). EU State aid law would only apply if and to the extent that the conference hall is used for economic activities (§60 – 62).

Selective economic advantage

With respect to the presence of a “selective economic advantage”, the CJ argues as follows:

  • Under Spanish tax law, the CIW tax “is normally payable by all taxpayers who carry out the construction or renovation works to which that tax applies” (§68) or, stated otherwise, all undertakings which carry out works similar to the ones carried out by the Congregación are subject to the CIW tax (§67).
  • By not subjecting the Congregación to that tax, the Spanish State “mitigate[es] the charges that are included in the Congregación’s budget” and hence, confers an “economic advantage” on the Congregación (§68).
  • As only the Catholic Church (and establishments) are exempt from CIW tax, the measure “is not a general measure applicable without distinction to all economic operators but is rather a measure that is prima facie selective” (§69 – 70).
  • Such prima facie selectivity cannot – based on the case facts – be justified by the nature or overall structure of the system of which they are part (§71 – 72).

In the light of the above, the CJ concludes that the exemption (i.e. refund) of the CIW tax enjoyed by the Congregación likely confers a selective economic advantage onto it (§73).

Imputability and financing

The CJ argues that the CIW tax exemption is imputable to the (Spanish) State, as it “derives directly” from the Ministry of Finance’s order of 2001 and “stems originally” from the Agreement of 3 January 1979 between Spain and the Holy See, as “entered into and implemented” by Spain (§75).

In addition, the CJ concludes that the selective economic advantage (the reduction of charges normally borne) is financed through (Spanish) State resources, i.e. is matched by “a corresponding reduction in the revenue of the Municipality” (§76).

Impact on competition and trade

Finally, with respect to the requirement that the aid affects trade between Member States and distorts or threatens to distort competition, the CJ reiterates settled case-law (1) that only potential instead of actual effects need to be examined (§78) and (2) that – grosso modo – granting a (selective economic) advantage entails that these conditions are fulfilled (§79 – 80). Indeed, the exemption “might make the educational services [the Congregación] provides more attractive by comparison with the services provided by establishments that are also active on the same market” (§81).

Nevertheless, the CJ recognises that the aid granted to the Congregación may fall below the de minimis threshold established by the (then applicable version of the) De Minimis Regulation (No. 1998/2006), i.e. below the ceiling of EUR 200k over any period of 3 tax years. If it does, such aid falls outside the scope of Article 107(1) TFEU (§82). It is for the national court – possibly after consulting EU institutions (§85) – to determine whether this threshold is exceeded, bearing in mind that “only the advantages that the Congregación has obtained in respect of any economic activities it may carry on can be taken into account” (§83 – 84).

New or existing aid

The Spanish State had argued that, even if the conditions of Art. 107(1) TFEU would be met, the aid would be deemed to be “existing aid” as it results from the Agreement of 3 January 1979, which was concluded before Spain’s accession to the EU. The CJ does not follow such reasoning, which I will discuss in more detail in the comments below. Therefore, the aid can only be deemed to be “new aid” and thus falls under Article 108(3) TFEU.


The case at hand is highly interesting, and triggers at least the following observations.

First, the referral seems yet another case in which the tax authorities invoke EU State aid law to deny tax advantages to undertakings that would otherwise benefit from such advantages according to national tax legislation (cf. a previous blog post). Neither the CJ’s judgment, nor AG Kokott’s opinion contain elements that would indicate that reliance by the tax authorities on EU State aid law to deny the grant of tax advantages embedded in national law is problematic. On the contrary, in her opinion, AG Kokott had argued that “[t]he correct construction of Article 107(1) TFEU is of considerable relevance to the outcome of the action brought by the Congregación; after all, the tax exemption sought can be granted only if it does not conflict with EU law provisions on State aid” (AG, §24). Similarly, the CJ holds that the request for a preliminary ruling is admissible, as the question referred to is not hypothetical and is relevant for settling the dispute before the referring court, i.e. can contribute towards a decision in the main case (§30).

Second, with regards to the concept of “undertaking” and “economic activity”, a few points should be highlighted. Primo, whilst AG Kokott had argued that an educational activity becomes economic where it is essentially financed by the pupils and their parents (AG, §42), the CJ attaches no importance to the funding by the recipients of the services (see supra). Rather, the CJ looks at the financing by private funds in general (see supra). Nonetheless, this also begs the question how this analysis relates to the “settled case-law that the mode of funding is not relevant for the purpose of ascertaining whether a body carries out an economic activity” (Case C-237/04 Enirisorse, §33). Secundo, AG Kokott goes into detail as to (a) whether, for entities carrying on mixed activities, an accessorium sequitur principale maxim applies further to which wholly ancillary economic activities are disregarded in the analysis, as well as (b) what the relevant threshold for classifying an activity as ancillary is. With respect to the latter, a 10% threshold is suggested by the AG, contrary to the usual 20% rule applied by the EC (AG, §55 – 58). The CJ does not enter into this debate and, as such, gives the impression that no threshold exists. It merely notes that an entity can carry on ‘mixed’ activities, provided it keeps separate accounts to avoid cross-subsidisation (see supra). This can probably be explained by the fact that, absent such split accounts, the public funding for the non-economic will also be subject to EU State aid law (C. Arhold in F.J. Sacker & F. Montag, European State Aid Law: A Commentary, München, Beck, 2016, 178, no. 345, with references).

Third, the CJ’s selectivity assessment is rather succinct, and therefore raises some questions. First of all, the CJ does not explicitly employ the usual three-step selectivity analysis (compare e.g. Joined Cases C-20/15 P and C-21/15 P World Duty Free Group, §57 – 58). What’s more, the CJ does not refer to the selectivity requirement as being an emanation of the principle of non-discrimination, as it had indicated in §54 of the Grand Chamber World Duty Free Group judgment (see also Case 524/14 P Hansestadt Lübeck, §53). Instead, the CJ at first sight seems to apply a (simple) derogation-based reading of the selectivity requirement, arguing that (1) the requirement to pay the CIW tax is lex generalis and that (2) the exemption provided by the 2001 order jo. 1979 Agreement constitutes a (derogatory) lex specialis, which mitigates the charges normally borne by the Congregación’s budget; hence, the exemption leads to an “economic advantage” for the Congregación (see supra). Subsequently, the CJ – after merely noting that the exemption is not a general measure that applies without distinction to all economic operators – immediately moves to the justification phase.

In effect, the reasoning of the CJ could imply that any derogation that does not apply generally to all taxpayers has to be justified, which would severely affect the tax sovereignty of the Member States. Although such reasoning does not wholly depart from earlier CJ judgments on selectivity in tax matters, it is nonetheless striking that nowhere in its analysis does the CJ examine (or rather, it does not do so explicitly) whether the exemption creates a distinction between undertakings that are in a legally and factually comparable situation. If the selectivity test should be understood as an issue of non-discrimination, such a determination of comparability is key, and should be made explicit. Instead, the CJ merely seems to  (implicitly) contend that all undertakings falling within the scope of the CIW tax are comparable, and that the limitation of the tax exemption to the Catholic Church and its surrogates is prima facie selective. The CJ does not examine whether the tax exemption’s relevant conditions of application – the presence of which cannot as such imply selectivity c.q. discrimination (see Case C-417/10 3M Italia, §42 and Joined Cases C-20/15 P and C-21/15 P World Duty Free Group, §59) – are designed in a discriminatory manner, in that they create an unjustified distinction between legally and factually comparable undertakings (Joined Cases C-20/15 P and C-21/15 P World Duty Free Group, §60).

In that respect, a comparison could be made to the approach adopted in another legal context, i.e. the European Convention on Human Rights (ECHR). In that context, the European Court of Human Rights (ECtHR) has ruled that certain tax exemptions enjoyed by the Catholic Church in Spain further to the 1979 Agreement between Spain and the Holy See did not infringe Article 14 ECHR (prohibition of discrimination), in combination with the freedom of religion (Article 9 ECHR), the reason being that the reciprocal obligations between Spain and the Holy See render other taxpayers/undertakings (with which no such ‘do ut des’ relationship exists) non-comparable to the Catholic Church (see Case No. 17522/90 Ortega Moratilla v. Spain). Although the legal framework and purpose of the ECHR is obviously dissimilar to that of EU State aid law, the difference between the CJ’s and the ECtHR’s respect for reciprocal obligations of Member States and respect for the special place the Catholic Church takes within the “historical, artistic and documentary heritage” of the Member States, is striking nonetheless.

Fourth, this brings another issue to the fore, i.e. the relationship between public international law and EU State aid law. In her opinion, AG Kokott had already held that the fact that Spain may be required under public international law to provide the tax benefit in question, does not preclude the measure from being State aid; the primacy of EU law also applies to these international law obligations, save for application of Art. 351 TFEU (see infra).

  • For instance, a measure is imputable to the State and financed by State resources, even if it finds its origin in an international agreement (“First, the 1979 Agreement came into existence with the due participation of the Spanish State and was ratified by it. In terms of EU law, it is thus to be treated in the same way as national law. Secondly, in respect of tax on constructions, installations and works, the Agreement gives rise to a revenue waiver on the part of the public authorities in Spain. Thirdly, the Spanish State also cooperates in the interpretation and giving of actual effect to the Agreement, as is evidenced by the various decrees of the Finance Ministry […]”, see AG, §68). This is similar to the EC’s position adopted in the Micula case, which deals with the question whether an arbitral award granted to private parties further to an application of the Swedish-Romanian bilateral investment treaty (BIT) constituted State aid (Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN), OJ L 232, 43–70). In that case, the EC also argues that, by voluntarily entering into the BIT and implementing the award under national law, the awards were imputable to the State. The fact that Romania is obliged under international law to grant these advantages does not detract from this conclusion; the only (narrow) exception to this is where the international law obligation is an EU obligation: “if that Member State is under an obligation under Union law to implement that measure without any discretion […], the measure stems from an act of the Union legislature and is not imputable to the State” (§120; compare the Notion of Aid Notice, §44 – 45 and case-law cited). The 1979 Holy See Agreement obviously does not fall within the latter exception. The CJ seems to agree with this reasoning: although it first held that the exemption at issue derives from the 2001 order of 5 June 2001, it also acknowledged that the exemption “stems originally from the Agreement of 3 January 1979, which was entered into and implemented by the Kingdom of Spain”.
  • Moreover, AG Kokott had also indicated that the international origin of a measure does not preclude it from being selective (“[t]he tax exemption at issue is based rather on the 1979 Agreement. It is therefore based on assessments originating outside Spanish tax law which, consequently, do not preclude the advantage from being selective”, see AG, §72). Although the CJ does not explicitly address this issue, it is relatively clear from the judgment that it takes a similar position. In this respect, the CJ’s approach can be contrasted to the one adopted by the ECtHR: contrary to the latter, nor the AG nor the CJ seem to attach importance to the fact that reciprocal obligations resulting from an international treaty may lead to situations or persons covered by that treaty becoming legally incomparable to non-covered persons or situations; instead, both the CJ and AG seem the use the limited scope of application of the measure as a positive indication of selectivity. This is similar to the EC’s position in the Micula case (see supra), where the EC argued that the measure was selective as “the BIT only [applies] to a certain group of investors, that is, to investors of the two Member States covered by the intra-EU BIT” (§112).

Although one can hardly derive general conclusions from the CJ’s judgment (and EC decision), the above findings may also be of importance to the analysis of tax treaty obligations of the Member States.

Fifth, the CJ concludes that the aid is not “existing aid” (i.e. “aid schemes and individual aid which were put into effect before, and are still applicable after, the entry into force of the TFEU in the respective Member States”), which is important as “Article 108(3) TFEU does not give national courts the power to prohibit existing aid from being put into effect” (Case C-6/12 P Oy, §41). The CJ therefore arrives at the same conclusion as AG Kokott, although their reasoning slightly differs. AG Kokott seems to attach importance to “the time from which the distortion of competition associated with the aid occurs or threatens to occur [, i.e.] 1988 when Spain introduced the tax on constructions, installations and works” (AG, §92). Conversely, the CJ seemed to focus – in addition to the introduction date of the CIW tax – on the 2001 order which in its view gives rise to the tax exemption at issue. Although this point can be debated, it cannot be disregarded that the necessary element for the aid to arise in abstracto is the 1979 Agreement; in the absence thereof, no granting of aid would be possible. Indeed, the aid does not as such result from the introduction of the CIW tax itself, nor does it seem to arise from the 2001 order, provided that this order merely has a declaratory effect. That being said, it cannot be denied that a grant of aid in concreto can only result from the combined application of the 1979 Agreement and a provision that intends to levy tax the Agreement is set out to preclude, in casu the CIW tax which was only introduced after the accession of Spain. What the CJ now seems to indicate that it is the timing of this combined application that is relevant for determining whether the measure is “existing aid”.

Sixth, the latter issue raises another question, which was already addressed by AG Kokott. Indeed, irrespective of the conclusion that the aid does not constitute “existing aid”, the question is raised whether EU State aid law should even apply at all in the case at hand. According to Art. 351 TFEU, “[t]he rights and obligations arising from agreements concluded […] before the date of […] accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties”. Assuming that the Holy See is a “third country” for the purposes of EU law, the question is whether Spain can rely on Art. 351 TFEU to give effect to its obligations (in casu to exempt the properties of the Catholic Church from CIW tax) and is in that respect unaffected by EU State aid law. According to AG Kokott, this query should generally be responded to in the affirmative, as the 1979 Holy See Agreement was concluded before the accession of Spain to the EU (so no issue of combined application arises here) (AG, §94 – 100, with further details). The possibility that Art. 351 TFEU would apply in the case at hand, is not examined by CJ. This is somewhat strange, although it may be explained by the fact that the CJ remains rather vague as to what constitutes the legal basis of the granting of aid. In that respect, it attaches particular importance to the 2001 order of the Ministry of Finance, which obviously does not fall within the scope of Art. 351 TFEU and, thus, might have been the reason why the CJ has refrained from entering into the Art. 351 TFEU analysis.

All in all, the Congregación de Escuelas Pías Provincia Betania case seems to indicate that the ancient maxim Ecclesia Ecclesiae Decimas Solvere Non Debet – according to which the Catholic Church does not have to pay taxes to itself (the tax administration) – is outdated from the perspective of EU State aid law. However, this conclusion is only valid to the extent that the aid (i.c. municipal property tax exemption) relates to buildings used for economic activities, an outcome which is fully in line with the General Court’s recent Ferracci and Montessori cases, in which an Italian exemption from municipal real estate tax for properties used by e.g. ecclesiastical institutions for non-commercial purposes was not deemed to constitute State aid (Case T-219/13 Ferracci, §131 – 150 and Case T-220/13 Montessori, §128 – 145).

One thought on “Spanish property tax exemption for Catholic Church not sacrosanct from State aid perspective

  1. Great article!

    Some precisions:

    At the oral procedure we talked a lot about the difference of treatment with respect to other schools. Only Catholic religious colleges, whether supported by private funds or by public funds, have the fiscal benefit. It only matters if the owner is a religious entity. On the other hand, public schools and non-Catholic private schools, whether supported by public or private funds, do not have the exemption.

    And on the proceedings there is evidence of the selectivity of the measure by providing at least a liquidation-tax made to a non-religious college in the same situation (mixed activities, supported by public funds and private funds). This school is a company with non-commercial form in which the owners are the workers of the school. Form of society without profit. This school pay the tax.

    By orher hand, the Ministerial Order/2011 is interpretive of the Agrement but it is the support of the national courts to recognize the exemption, even though other national institutions had interpreted that it could not be contemplated in the Treatment.

    Another cuestion, the Agrement with the Holy See of 1979 provides ( Article VI) that in the event of a modification of the Spanish tax system, they would negotiate again. But it was never done despite of the fact that only accession in the EU in 1986 implied an important transfer of sovereignty in tax matters. Neither negotiated when the construction tax was created in 1988.

    I think we have much to thank to the European Union because it gives us the tools to fix what we can not do alone.

    I leave the links to the articles we have written, will serve to better understand the situation of the origin. You can use a translator and if you have difficulty in something I can help you.

    Thank you

    Victoria Rodriguez


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