Opinion of the European Economic and Social Committee – Taxation framework for social economy entities (own-initiative opinion)
Date: 2024-07-10
Institutions: European Economic and Social Committee
Subjects: health service, social economy, social enterprise, social services, sustainable development, tax exemption, tax harmonisation, tax system








C_202406017EN.000101.fmx.xml












Official Journal of the European Union


EN
C series













C/2024/6017


23.10.2024






Opinion of the European Economic and Social Committee

Taxation framework for social economy entities


(own-initiative opinion)

(C/2024/6017)


Rapporteur: 
Giuseppe GUERINI






Advisor


Samuel CORNELLA (for the rapporteur)




 


 




Plenary Assembly decision


18.1.2024




Legal basis


Rule 52(2) of the Rules of Procedure




Section responsible


Economic and Monetary Union and Economic and Social Cohesion




Adopted in section


27.6.2024




Adopted at plenary session


10.7.2024




Plenary session No


589




Outcome of vote (for/against/abstentions)


199/0/4




1.   Conclusions and recommendations









1.1.


The EESC stresses how imperative it is that the Member States’ tax systems do not hamper the development of the social economy, and welcomes the European Commission’s goal to provide support to the Member States by publishing guidance on relevant taxation frameworks applicable to social economy entities, based on available analysis and input provided by Member States’ authorities and social economy stakeholders.












1.2.


The EESC notes that knowledge on the approaches adopted in the different Member States could be a significant starting point to deepen and improve the overall tax framework of social economy entities in the internal market.












1.3.


While conscious of the serious difficulties surrounding the need to reach unanimity in the Council, the EESC hopes that efforts to harmonise the approaches to taxing social enterprises can be pursued in the future, with a view to consolidating the internal market. The EESC therefore calls for in-depth consideration of possible ways of harmonising social economy taxation in the EU in the future.












1.4.


The EESC particularly supports national tax measures aimed at offering differentiated tax treatment to profits that are reinvested either in pursuit of statutory objectives or allocated to the social economy entity’s indivisible reserves, noting that these reserves often cannot be distributed among stakeholders either while the company is in operation or even after its dissolution. These profits that are reinvested or allocated to indivisible reserves are fundamental for fostering the capitalisation of social economy entities.












1.5.


The EESC welcomes the fact that in certain Member States, social economy entities are subject to specific VAT rates (5 % and 10 %) which are compatible with the existing EU framework on VAT, and encourages the European Commission and the Member States to also consider particular VAT rates for public benefit activities carried out by social economy entities and for social services, particularly for the sector of health and social care for older people, as well as the personal services, long-term care and education sectors.












1.6.


The EESC notes that it would be worth considering introducing a definition for ‘social economy entity’ in the General Block Exemption Regulation on State aid, while at the same time developing appropriate mechanisms to exempt the financing of social economy entities from State aid rules in terms of tax.












1.7.


The EESC recommends that in order to avoid distortions and opportunistic or evasive behaviour, all Member States have public, accessible and transparent registers in which social economy entities that receive donations are registered. These registers should be set up to allow for the submission of financial statements and mission statements, clearly identifying the activities of general interest that are carried out by the entities thanks to donations, subsidies and public contributions or private donations.




2.   Background









2.1.


The EU’s action plan Building an economy that works for people: an action plan for the social economy recognises the unique nature of the social economy, clarifying the differences between social economy entities and traditional enterprises. The action plan also recognises that the social economy serves both social cohesion in the internal market and the fairness of the European economic system.












2.2.


The action plan states: ‘taxation is an important policy for the social economy. Few countries have developed a specific and consistent taxation framework for social enterprises. Many provide incentives ranging from corporate tax exemptions on retained profits to VAT exemptions or reduced rates, social insurance costs reduced/covered by subsidies, or tax reductions for private and institutional donors’.












2.3.


It also notes that in Member States that do have specific tax measures, ‘access to these incentives can be complex and the different actions do not always benefit from appropriate coordination’. In this regard, it states that ‘[t]he Commission will encourage mutual learning and provide guidance and support to Member States by [...][p]ublishing guidance on relevant taxation frameworks for social economy entities, based on available analysis and input provided by Member States’ authorities and social economy stakeholders’.












2.4.


The subsequent Council Recommendation of 27 November 2023 on developing social economy framework conditions reiterates that ‘[t]axation policy can also have a significant role in fostering the social economy and ensuring that social economy entities can afford to operate alongside mainstream businesses, creating a more equitable business environment while contributing to social inclusion and improved access to employment’.












2.5.


This recommendation comes with two extensive studies: Relevant taxation frameworks for Social Economy Entities (1) and Non-discriminatory taxation of charitable organisations and their donors: principles drawn from EU case-law (2), which focus respectively on the different tax laws in the Member States on taxing the social economy, and the principles drawn from case-law of the Court of Justice of the EU on cross-border donations to charitable organisations.












2.6.


More recently, the Liège Roadmap for Social Economy in the European Union, published in the margins of the conference of European ministers responsible for the social economy hosted on 12 February 2024 in Liège by the Belgian Presidency of the Council of the EU, called on the Commission and on the Council to, inter alia, ‘[e]nsure that taxation systems do not hinder the development of the social economy and assess whether tax systems sufficiently encourage its development’. Through this opinion, the EESC aims to address the future European co-legislators and the Member States, as those with legislative competence in the field of taxation, in order to implement these proposals.












2.7.


The EESC subscribes to the definition (3) of ‘social economy’ set out in the Council Recommendation of 27 November 2023, which is in line with the definitions adopted by other international institutions, including: i) the Resolution concerning decent work and the social and solidarity economy adopted by the International Labour Organization (ILO); ii) the Organisation for Economic Co-operation and Development’s (OECD) Recommendation on the Social and Solidarity Economy and Social Innovation; and iii) the United Nations’ (UN) resolution on Promoting the Social and Solidarity Economy for Sustainable Development.




3.   General and specific comments









3.1.


The need to spur on harmonisation of the legal framework for social economy entities at European level has long been noted, including in the Commission Communication Businesses in the ‘Economie Sociale’ sector: Europe’s frontier-free market, which dates back to 1989 and which was referred to in the study on Recent Evolutions of the Social Economy in the European Union published by the EESC in 2016 (4).












3.2.


In this vein, it is important to also start considering possible ways of harmonising the tax framework applicable to social economy entities, while being aware of the difficulties involved. Effectively recognising the diversity of different forms of business helps to create conditions of competition that enable social economy entities to compete on the same level playing field as other enterprises, taking into account the specific legal obligations and operational arrangements of the social economy, such as reinvesting surpluses in pursuit of their statutory objectives, capping wages, carrying out activities of general interest, and ensuring democratic and participatory governance involving stakeholders.












3.3.


These conditions, which exist in many legislative frameworks that recognise that social economy entities carry out activities of general interest and public benefit, are also linked to the important role that these entities play in developing local communities and in cultivating democracy, free initiative and citizen participation.












3.4.


For the purposes of this opinion, the definition laid down in the Council Recommendation of 27 November 2023 will be used, which states that ‘social economy entities’ are ‘a set of private law entities providing goods and services to their members or to society, encompassing organisational forms such as cooperatives, mutual societies, associations (including charities), foundations or social enterprises, as well as other legal forms, that operate in accordance with the following key principles and features: (i) the primacy of people as well as social or environmental purpose over profit; (ii) the reinvestment of all or most of the profits and surpluses to further pursue their social or environmental purposes and carry out activities in the interest of their members/users (“collective interest”) or society at large (“general interest”); and (iii) democratic or participatory governance’. In general terms, the EESC stresses that the Member States’ tax systems must not hinder the development of the social economy, but rather should create the conditions for social economy entities to further develop in Europe, making their own distinctive contribution to achieving a competitive social market economy, as laid down in the founding Treaties.












3.5.


In the light of this situation, the EESC welcomes the Commission’s goal of fostering mutual learning and of providing support to the Member States by publishing guidance on relevant taxation frameworks applicable to social economy entities, based on available analysis and input provided by Member States’ authorities and social economy stakeholders.












3.6.


In this regard, the EESC notes that knowledge on the approaches adopted in the different Member States could be a significant starting point to improve the overall tax framework of social economy entities in the internal market. While conscious of the serious difficulties surrounding the need to reach unanimity in the Council, the EESC hopes to see efforts towards improving and progressively harmonising the taxation framework of social economy entities, with a view to consolidating the internal market.












3.7.


The EESC notes that the Commission’s mapping of Member States’ tax laws shows that specific tax incentives and particular tax treatment are applied to social economy entities in terms of: i) income; ii) profits allocated to reserves; and iii) indirect taxes, such as VAT. One of the main factors contributing to fragmentation in this area is the fact that some Member States base their specific tax rules on the legal form of the entity concerned, others on the type of activity carried out, and others on the specific characteristics of the company or entity.












3.8.


Taxation within the social economy is complex, both because of the wide differences in national legal frameworks and because of the coexistence of different contexts in which taxation affects social economy entities. While the distinction in the treatment of entities operating entirely outside the market context and those fully operating in the economic sphere is clear, it is still difficult to classify and regulate, including for tax purposes, a broad range of entities whose operations are based on commercial criteria that pursue objectives other than mere corporate profit but instead aim to achieve social or environmental goals laid down in the social economy entities’ statutes and which carry out activities in the interest of their members/users or in the general interest. This is the case for cooperatives, mutual societies, foundations and social enterprises, for example.












3.9.


The EESC particularly supports national tax measures aimed at offering differentiated tax treatment to surpluses that are reinvested in pursuit of statutory objectives or allocated to the social economy entity’s indivisible reserves, noting that these reserves often cannot be distributed among stakeholders either while the company is in operation or even after its dissolution. These resources that are reinvested or allocated to indivisible reserves are fundamental for fostering the capitalisation of social economy entities – entities that experience similar difficulties to those faced by SMEs in accessing credit, and that cannot always access financial markets because of their specific organisational form.












3.10.


The EESC welcomes the fact that in certain Member States, social economy entities are subject to favourable VAT rates (5 % and 10 %) which are compatible with the existing EU framework on VAT, and supports these measures, especially for the sector of health and social care for older people, and for the personal services and long-term care sectors.












3.11.


In previous opinions (5), the EESC has argued that special attention should be given to the VAT regime for social, educational, welfare and health activities, especially where these activities are carried out by social economy entities.












3.12.


In particular, with regard to reduced rates, the EESC maintains that solutions that provide for reduced VAT or preferential VAT arrangements are always preferable to exemptions, especially where entities operate in economically significant contexts. Situations that penalise social economy entities may indeed be created, given that VAT exemptions, when applied to activities carried out by ordinary businesses, end up giving such businesses a competitive advantage over social economy entities that carry out all their activities outside the scope of VAT and find themselves in a ‘final consumer’ position.












3.13.


Further discrimination in treatment occurs when the charging scheme for care, health or educational services is set up by local authorities as ‘VAT inclusive’. This is the case in Italy when it comes to the VAT applied to the social and health activities of social cooperatives, which are prevented from choosing the exemption scheme, which is granted, however, to ordinary businesses in respect of any health services that they provide. Here, the same service provided by both social cooperatives and ordinary businesses ends up being more costly for social cooperatives, which are forced, by the charging scheme for services, to bear the VAT, which becomes not only an additional production cost, but also gives rise to unfair competition in favour of the businesses which are allowed to choose the exemption scheme.












3.14.


The EESC supports the tax incentives and deductions granted in the vast majority of Member States to individuals who make donations to social economy entities, and agrees that they are useful. However, it stresses the importance of checking that these donations and related incentives are actually going to social economy entities that are operational and genuinely engaged in activities of general interest, thus avoiding possible distortions. It is important that all Member States have public, accessible and transparent registers in which social economy entities that receive donations are registered, in order to adequately carry out these monitoring activities. It is also important that financial statements and mission statements be submitted into these registers, clearly identifying activities of general interest carried out by the entities thanks to donations, subsidies and public contributions or private donations.












3.15.


The EESC notes the lack of tax incentives to encourage investors to provide financial support to social economy entities. In this regard, stresses that developing tax incentives for prospective investors in social economy entities could lead to increased access to financial resources for social economy entities.












3.16.


The EESC has pointed out in previous opinions (6) that EU State aid legislation considers health and social services a subcategory of services of general economic interest (SGEI) with autonomous features because of the specific characteristics of these services and the unique objectives they pursue, which often coincide with the objectives of social economy entities providing the services.












3.17.


In order to enable the introduction of specific forms of financing for the social economy, consideration should be given to introducing a definition for ‘social enterprise’ in the General Block Exemption Regulation on State aid, developing appropriate mechanisms to exempt the financing of social economy entities from State aid rules.












3.18.


On this, the EESC points out that in its judgment of 8 September 2011, joined cases C-78/08 to C80/08 – Paint Graphos and others, the Court of Justice of the EU ruled on the Italian corporation tax exemption for cooperatives, arguing that precisely because of their characteristics, cooperatives are not in a comparable situation to that of commercial companies, and that therefore the tax treatment accorded to such entities by Italian law could not be automatically considered selective State aid.












3.19.


The EESC points out that the taxation of social economy entities must also address the issue of tax incentives focused on capital. Article 3(6) of the DEBRA Directive defines own funds as ‘the sum of the taxpayer’s paid-up capital, share premium accounts, revaluation reserve and other reserves and profit or loss brought forward’, on the basis of Accounting Directive 2013/34/EU (7). This definition is too restrictive and is often not adapted to the organisational form of mutual societies, which can be to their disadvantage.












3.20.


The EESC draws the attention of the European institutions and the Member States to the fact that various studies, as well as opinion on European philanthropy: an untapped potential (8) of 2019, show that foundations continue to have problems concerning the tax treatment of cross-border donations to public-benefit organisations in other Member States, and would like to see the principles of free movement of capital on the internal market, equivalence and non-discrimination followed with regard to cross-border donations, as set out in the case-law of the EU Court of Justice.












3.21.


In closing, the debate on taxing the social economy should take into account the fact that some Member States allow citizens the possibility to allocate a predefined share of their taxes to projects and initiatives carried out by social economy entities or other non-profit actors, such as Italy with its ‘five per thousand’ measure, allowing citizens to direct resources towards a social objective. These measures have the advantage of not only enhancing tax payers’ choices and freedom, but also encouraging social economy entities to develop transparent and effective reporting systems.






Brussels, 10 July 2024.


The President


of the European Economic and Social Committee

Oliver RÖPKE
            





(1)  SWD(2023) 211 final.

(2)  SWD(2023) 212 final.

(3)  Opinion of the European Economic and Social Committee on the proposal for a Council Recommendation on developing social economy framework conditions (OJ C, C/2024/882, 6.2.2024, ELI: http://data.europa.eu/eli/C/2024/882/oj).

(4)  
            https://www.eesc.europa.eu/sites/default/files/files/qe-04-17-875-en-n.pdf.

(5)  Opinion of the European Economic and Social Committee on the ‘Proposal for a Council Directive amending Directive 2006/112/EC as regards rates of value added tax’, ‘Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises’, ‘Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax’, and on the ‘Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax, with regard to the obligation to respect a minimum standard rate’ (
OJ C 283, 10.8.2018, p. 35), and Opinion of the European Economic and Social Committee on the role of Domestic Advisory Groups in monitoring the implementation of Free Trade Agreements (
OJ C 159, 10.5.2019, p. 38).

(6)  Opinion of the European Economic and Social Committee on State aid rules applicable to health and social services — SGEI in a post-pandemic scenario. Thoughts and proposals on the Commission evaluation to amend the 2012 legislative package (
OJ C 323, 26.8.2022, p. 8).

(7)  Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19).

(8)  Opinion of the European Economic and Social Committee on ‘European philanthropy: an untapped potential’ (
OJ C 240, 16.7.2019, p. 24).


ELI: http://data.europa.eu/eli/C/2024/6017/oj
ISSN 1977-091X (electronic edition)