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2010 10 15 * The Times * Vatican faces £7bn repayment in Brussels inquiry into tax breaks * Philip Willan

The European Commission has reopened an investigation into tax breaks enjoyed by the Roman Catholic Church in Italy, prompting fears that the Vatican may be forced to repay about €8 billion (£7 billion) and could find its charitable activities in the country severely hampered.

The initiative, ordered this week by Joaquin Almunia, the Competition Commissioner, comes as a fresh source of embarrassment after the freezing by Italian magistrates last month of £20 million belonging to the Vatican bank as part of a money-laundering investigation.

The Commission said that an exemption from council taxes on church properties could amount to state aid in violation of European Union competition laws.

“Thus far, Italian authorities have not provided sufficient evidence to enable the Commission to conclude that the contested measures are justified by the principles of the Italian tax system,” a spokesperson for Mr Almunia’s office said.

The Commission has twice shelved investigations into the tax exemption, introduced in 2005 by Silvio Berlusconi, the Prime Minister, but decided to reopen the case after the Radical Party filed a complaint with the European Court of Justice in Luxembourg. The Italian Government said it was confident it would be able to demonstrate “in a clear and definitive way” that the tax rules do not constitute a violation of European rules on state aid.

The Catholic Church has also expressed optimism that the investigation will be shelved once again. Avvenire, the newspaper of the Italian Bishops’ Conference, nevertheless voiced surprise at “the tenacity with which certain secular anti-Catholics seek systematically to dismantle the territorial presence of the Church”.

The paper said that the Radical Party’s campaign, if successful, could have a “collateral effect” on a wide range of non-profit activities unconnected to the Catholic Church, affecting soup kitchens, rest homes, hospitals, schools and clinics.

Maurizio Turco, the Radical Party activist who has led the campaign, said he was confident that this time his initiative would be successful, and he had no fears that he might be putting worthy charitable activities out of business.

“Our objective is to recover the €2 billion that has not been paid to the State every year and to put an end to the unfair competition of Church enterprises,” Mr Turco told The Times.

“Rome is full of monasteries that have been converted into hotels. They don’t pay ICI [the council property tax] and other taxes as well. Often their staff — for example nuns — don’t receive a wage, and, unlike priests, they are not entitled to a pension. We want EU directives to be valid also in Italy.”

Mr Turco said he had already waged a successful four-year battle to get the law changed in Spain so that the Spanish Catholic Church was no longer exempt from VAT. The social uses of the tax money should be decided by the State, rather than the Church, he insisted. He was optimistic that he would prevail in the end.

“The European Commission may often adopt a political position but in the European Court of Justice it’s the law that counts,” Mr Turco said.

The Church owns 100,000 properties in Italy, 2,000 of them used as hospitals, clinics and rest homes. Church-owned hotels and hostels in the Rome area generate an annual income of about €700 million, according to the Rome daily La Repubblica.

Critics say that prevalently commercial church enterprises can qualify for charitable status and exemption from the property tax provided they have a functioning chapel on the premises.