All EU Member States apply some sort of tax measures to support the social economy as a whole, or to support specific types of social economy entities. Often existing tax practices have been designed for the traditional philanthropy, which in most cases predate the introduction of the concept of the social economy and therefore do not target specifically social economy entities. Not all social economy entities are charitable/philanthropic organisations, while the traditional tax practices generally only favour ‘non-profit entities’ that pursue a ‘public benefit objective’. Social economy entities, however, operate by providing goods and services for the market in an entrepreneurial and often innovative fashion, having social and/or environmental objectives as the reason for their commercial activity. The definition of a social economy entity does therefore not always fit the descriptions included in relevant tax legislation.
The European Commission launched in 2021 the Action plan for the social economy: Building an economy that works for people (SEAP) in which it recognises the potential of the social economy as a key driver for economic and social development in Europe. The plan contains over 60 actions to support the development of social economy. One of the key actions was the adoption of a Council Recommendation on developing social economy framework conditions (2023). The recommendation recognises that taxation policy can have a significant role in fostering the social economy.
In this context, the Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL) in cooperation with the Directorate-General for Taxation and Customs Union (DG TAXUD) organised a series of three mutual learning workshops on ‘Taxation in support of the social economy’, aimed at providing national authorities with an overall understanding of the role of tax systems in the social economy ecosystem and the potential of tax systems in fostering or hindering the social economy. This page summarises the different tax measures in support of the social economy discussed during the three mutual learning workshops.
The workshops welcomed around 40 public officials from national and regional administrations across 14 Member States, as well as thematic experts, social economy representatives, OECD and European Commission officials. Participants were invited to discuss and exchange tax practices in support of the social economy, assess the effects of these tax measures, as well as reflect on whether their national taxation frameworks could be adapted to better encourage and foster the development of the social economy.
1. Relevant tax measures in support of the social economy
There are two main forms of tax measures the social economy entities can benefit from in the EU:
Tax measures in support of the social economy entity: Almost all Member States provide for philanthropic organisations some form of income tax exemptions on retained profits and on exemptions and rate reductions for VAT. These measures also apply to social economy entities, provided they fulfil the required conditions under the respective national law. Few Member States also have tax measures in place especially designed for social economy entities. National laws, however, apply different conditions on which types of charitable entities and public benefit organisations can (voluntarily) qualify for these tax practices.
Tax measures in support of funding of social economy entities (donations): Almost all Member States provide for some sort of tax practice for donations to public benefit organisations. Donors to social economy entities will benefit from such tax practices, if the social economy entities fulfil the required conditions for a public benefit organisation under national law.
There are three models of integration of the tax measures for social economy into national legislation:
The regulation of the tax measure for public benefit organisations is found in national income tax laws or codes. Social economy entities are covered by the regulations, if they fulfil the required conditions for a public benefit organisation under national law (identified in Austria, Belgium, Cyprus, Czech Republic, Denmark, Germany and the Netherlands).
The regulation of the tax measure is found in broader texts or codes that provide the overall legal framework for public benefit organisations, which are a substantial category of organisations (identified in Italy and Poland).
The regulation of the tax measure is found in tax law; however, there also are comprehensive substantial laws that provide detailed regulations concerning the beneficiary entities (Ireland, Lithuania and Slovenia). This model aligns more closely with the ‘substantial law’ model.
2. Tax measures for social economy entities
2.1. Corporate and Income Tax Exemptions
The tax exemption on retained profits of corporations is the most popular tax measure to support social economy entities. Qualifying for corporate income tax exemptions can either be based on a particular legal form (such as a foundation or an association), or on specific activities rather than on their organisational structure.
Some Member States link the right to tax exemptions to a number of conditions. Involvement in economic activities, for example, may be restricted or excluded from the tax relief under a non-profit regime. This is to avoid competition distortion in the market.
Most Member States apply limitations to the amount and conditions under which social economy entities can access tax exemptions (some Member States exempt all income, while in other Member States income tax exemptions only apply if profits are reinvested in a non-profit purpose). The diverse nature of social economy entities can make it difficult for them to fit into a corporate taxation framework which is still largely dominated by the traditional classification of entities into ‘for-profit’ and ‘charity’.
Examples of legal status as a basis for the tax relief:
- Italy
Social cooperatives in Italy are exempted from payment of corporate tax (IRES) on retained profits (non-distributed profits) and can carry out business activities which have the applicability of the business income tax legislation. However, social enterprises do not enjoy any of the fiscal advantages provided to cooperatives: they are subject to the payment of corporate tax, VAT, IRAP (a regional production tax) and social security costs (if they engage in work integration activities) just as any other enterprise.
- Lithuania
Associations in Lithuania have access to tax practices while still enjoying the right to carry out economic and commercial activities (unless they are explicitly prohibited by law, and unless it contradicts its statutes).
- Germany
Public benefit organisations can benefit from tax support measures, provided they don’t pursue any economic activity as their main purpose. Nonetheless, some auxiliary commercial activities in support of the non-profit purpose which only play a subordinate role are still allowed. These activities may be related and unrelated to the core activity of the association. If the annual revenue from unrelated economic activity stays below EUR 45,000, it is not taxed.
- Spain
The profits obtained by not-for-profit associations, derived from the exercise of economic activities and the provision of services, must be used exclusively for the fulfilment of their purposes, and may under no circumstances be distributed among the members, their spouses or persons living with them.
2.2. Other types of tax measures for social economy entities
There are two main forms of differentiated VAT rules: exemptions and reduced rates. Unlike other forms of tax measures VAT exemptions or being out of scope of VAT are not necessarily of benefit to the social economy entity. The first workshop discussed existing issues and potential solutions around VAT exemptions/at reduced rate.
The VAT Directive requires Member States to apply exemptions within their national legislation for certain activities in the public interest. The right to deduct refers to a taxable person’s right to claim the input VAT they paid on goods and services from tax authorities. There are two categories of exemptions without the right to deduct: exemptions on activities carried out in the public interest and exemptions on other activities.
Reduced VAT rates refer to rates which are set lower than the standard VAT rate, depending on the product or service involved in the transaction. Member States can apply 2 reduced rates of at least 5% to a maximum of 24 points of the list of the supply of goods and services listed in Annex III to the VAT Directive (Article 98(1)). In some cases, reduced rates lower than 5% (including 0%) can be applied (Article 98(2)).
Financial instruments can refer to many different types of monetary contracts of which stocks and bonds are the most common ones. They are less commonly applied to social economy entities in EU Member States. However, one example is providing tax benefits to individuals and companies that buy shares issued by (new) social economy entities (also through crowdfunding platforms) or bonds issued by banks or social economy entities themselves to finance the development of social projects, allowing social economy entities to create a bottom-up supply of financial resources.
There are other financial support non-fiscal measures for social economy entities outside the fiscal framework, of which grants and subsidies are the most common. Other well-known measures are preferences in public procurement; however not all social economy entities qualify for this preference. Another measure is using the label of European Social Entrepreneurship Fund (EuSEF), which is designed to identify funds focusing on European social businesses, making it easier for them to attract investment.
3. Tax measures in support of corporate and individual donations to social economy entities
Tax privileged donations are voluntary transfers of money or other goods to social economy entities upon which the donor is exempted or relieved from paying taxes.
There are two principal forms of tax measures for charitable donations to not-for-profit entities in the social economy: tax deductions and tax credits, which could be given to both individual and corporate donors. Another form is matching which in the EU is only used in Ireland. The eligibility criteria can vary depending on the type of donor (individual or corporate) and the type of donation.
A condition for the tax benefit at the level of the donor is that the social economy entity as recipient of a donation needs to qualify as a public benefit organisation. If the social economy entity has not qualified for this public benefit status, then the donor will not receive any tax benefit.
3.1. Deduction from taxable income
Tax deduction is the most popular tax measure among Member States, which can be awarded to individual and/or to corporate donors. The design of a tax deduction can vary considerably, with Member States either limiting the deduction to a ceiling of donor’s income (total or taxable, usually in percentage), or setting a specific amount of allowable deduction (often in a range between a minimum and maximum amount). Some states, like Cyprus, have no limits on charitable deductions.
Deduction from a taxable income is based on a progressive income taxation system, which makes it more beneficial for wealthier taxpayers;
Maximum and minimum donation amounts can be set.
Examples:
- Cyprus
Donations made by corporations are completely deductible without any limitations (as long as the entity responds to the criteria of a charitable entity as included in the law).
- Netherlands
Donors can deduct up to 10% of their gross income for a one-off donation, but there is a minimum donation of EUR 60. In case of regular donations, they can be deducted up to EUR 250,000.
3.2. Tax credit
A tax credit is an amount that is deducted directly from the tax liability rather than from taxable income. Tax credits are less common than tax deductions. In terms of corporate giving, it is very rare for Member States to opt for a tax credit as a tax measure. A notable feature of tax credits is that it is based upon the value of the donation and not on the total income and marginal tax rate (as is the case with deductions from the taxable base), provided their tax liability is at least equal to the value of the credit.
Tax credits provide a deduction based upon the amount of the donation, regardless of the overall income levels; this makes tax credits more equal for all donors;
In some cases, tax credits are considered less efficient, which might lead to fewer donors wanting to make use of them.
Examples:
- Belgium
The law distinguishes donations made by individuals and corporations. Individuals benefit from a non-refundable tax credit of 45% subject to ceilings on both the percentage of the donor’s net income and the amounts exempted (the minimum donation must exceed EUR 40). Companies can claim tax deductions of up to 5% of the taxable income.
- France
The law distinguishes donations made by individual and corporations. Individuals may benefit from tax reductions up to 66% of the value of their gifts. Corporate donations are entitled to a tax credit of up to 60% of the actual amount donated (and 40% for payments exceeding EUR 2 million).
3.3. Matching
In the so-called ‘matching grants’ systems, the government tops up charitable donations made by individuals to specific charitable entities. A donation must be made to an entity that is either a tax-exempt charity that has applied and received an authorisation for these purposes of the tax authority or another entity that is specifically designated by law.
Social economy entities can claim a matching benefit at a certain rate from the tax authority, regardless of the donor’s total income;
In economic experiments, matching grant subsidies sometimes stand out as measures which are more efficient than tax deductions when it comes to encouraging giving.
Example:
- Ireland
The Charitable Donation Scheme provides tax relief for qualifying donations made to an approved charity.
When an individual donates a minimum of EUR 250 (up to EUR 1,000,000) within a year, the receiving entity can request a matching payment from the tax authority at a rate of 31%, or 10% if a connection between the donor and the charity can be proven (for example via employment), on that donation.
4. Cross-border donations and equal treatment
Although Member States design their own tax systems, these do need to comply with European Union law. In accordance with the fundamental freedoms guaranteed by the Treaty on the Functioning of the European Union (TFEU), donations to social economy entities based in other Member States should be subject to the same forms of tax relief as domestic donations unless certain limitations apply other than the location of the donor. The European Court of Justice confirmed that foreign public benefit organisations cannot be discriminated against in favour of national social economy entities that are ‘comparable’. However, the ‘burden of proof’, confirming the comparability of the foreign social economy entity to a national social economy entity, often still lies with the donor. This can limit the number of donations to social economy entities based in other EU Member States.
Although most Member States allow taxpayers to make tax-privileged donations to social economy entities established in another EU Member State, often they also apply limitations to tax measures on cross-border donations (the receiving entity may for example have to register on a list of approved entities in the Member State of the donor);
The establishment of a European public benefit legal status which would be recognised across the EU could be considered in the future a way to ensure equal treatment for social economy entities in the EU.
Examples:
- France
If a foreign organisation has not previously gained approval, taxpayers can still submit evidence to the tax authority demonstrating compliance with the necessary requirements for approval.
- Spain
Tax measures for cross-border donations to social economy entities in Spain should be treated in the same way as domestic donations provided that the entity that receives the donation is effectively included in article 2 of the Act 49/2002 and complies with the requirements listed in its article 3.