Italy to recover €4bn of unlawful tax exemptions on Vatican properties

“Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s” is a widely quoted text from the Bible [Matthew 22:21] used as the theological basis for the relationship between temporal authority and Christianity.

However, a judgement of the Grand Chamber of the European Court of Justice in the joined cases C‑622/16 P to C‑624/16 P Scuola Elementare Maria Montessori v Commission may present the latest rupture between the two spheres in its decision to force Italy to re-coup an estimated €4bn from the Holy See for uncollected taxes on its Italian education and accomodation properties.

The judgement covers the period 2006 to 2011 when Italy created an exemption within its national legislation for “non-commercial” ecclesiastical hotels and schools from being liable for payment of the new Italian single municipal tax, the imposta communale sugli immobili, or IMU.

The Times of London in its coverage of the European Court of Justice’s decision, quoted Carlo Pontesilli, a member of Italy’s Radical Party which has campaigned against the allowance, as saying:

“It was out of this world – the Church was avoiding taxes on 10,000 metre-squared properties because three square meters contained a chapel”

In coming to its decision, the Grand Chamber over-ruled both lower court decisions and a decision of the European Commission of 19 December 2012 that whilst the aid granted by the Italian government was unlawful, the recovery of the State Aid was a practical impossibility as the Italian state’s property title registry and tax database was incomplete.

The original complaint was a Montessori school and the owner, Mr Ferraci, of a two bedroom tourist bed and breakfast establishment who complained that he faced unfair competition from Vatican owned hotel establishments as they were exempt from the IMU, whilst he was not.

European competition law aficionados may also care to note that the ECJ in recognising the Montessori school’s and Mr Ferraci’s standing (locus standi) before the Court as the first time the Court has exercised it power under Article 263 of the Treaty on the Functioning of the European Union (TFEU), to allow natural persons, as opposed to Member States or the European Commission, to institute proceedings before the Court.

The property tax exemption was excised from Italian statute in 2011 and Pope Francis is on record as stating that the Holy See’s commercial activities should be taxed appropriately, an action that the Italian government and European Commission will now be obliged to retrospectively enforce, or face further infraction proceedings in the ECJ.

Commentators in Italy and further afield have expressed the desire that the recovered funds be used to offset some of the deep financial cuts that have been imposed by Italian government austerity measures, which have lefts schools unable to invest in new infrastructure or even provide essential supplies and is set to decrease further under the terms of the new Italian budget for 2019.  This is in a country where education and research spending in Italy currently accounts for a mere four percent of GDP, far lower than other EU member states.