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Oct. 12 (Bloomberg) -- European Union regulators opened a probe into Italian tax breaks on real estate granted to the Catholic Church, saying they may distort competition.

The tax breaks may be an illegal state subsidy if church-run businesses “could be considered as commercial and may be in competition with commercial service providers,” the European Commission said in an e-mailed statement today.

Under Italian law, the Holy See doesn’t pay tax on its estimated 100,000 non-commercial properties and also receives a 50 percent reduction on a corporate tax charged on commercial real estate. The exemptions save the church 2 billion euros ($2.8 billion) a year, according to newspapers including La Repubblica.

The inquiry is at least the third the Brussels-based commission has conducted into how member states treat former state religions. The EU regulator has also questioned subsidies for the Catholic Church in Spain and sales tax rules for churches in Belgium. In Italy, where citizens can send a portion of their taxes to religious groups, the church may be forced to return any funds deemed to be illegal government aid.

Officials at the Vatican press office and Italian finance ministry weren’t immediately available for comment.

The EU antitrust authority, which reviews whether government grants harm competition, quizzed Italy on the tax breaks in 2008.

Sports Clubs

The commission said today it will also examine rules that stop church institutions and amateur sports clubs from losing the non-commercial status that gives them favorable tax treatment.

Italy has gradually changed how the church is financed. Before the country’s unification in 1870, the pope, the church’s spiritual leader, was also the ruler of much of middle Italy. Under the 1929 Lateran Treaty, the church recognized the Italian state, which in turn guaranteed the Vatican’s sovereignty, gave it an indemnity to set up its own bank and laid the groundwork for tax exemptions on its property.

Catholicism lost its status as a formal state religion in a renegotiation of the Lateran Treaty in 1984, under former Prime Minister Bettino Craxi. In exchange, taxpayers were given a choice to send about 0.8 percent of income tax to religious affiliations or public coffers.

To contact the reporter on this story: Aoife White in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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