A row over alleged Vatican interference in Italian affairs has erupted after a demand by the European Commission for Italy to explain tax breaks for the Catholic Church on income from property.

A spokesman for Neelie Kroes, the Competition Commissioner, said Brussels had received complaints that the tax concessions amounted to illegal state aid. He said that the Commission was merely seeking information at this stage.

That was enough, however, to unleash a political storm in Italy over the role and status of the Church, with the Left accusing it of using its “privileged position” to impose a Catholic agenda on Italians with the connivance of the Right. The Right accused the Left – and the Commission – of “anticlericalism”. The Commission insisted yesterday that it had acted “not out of disrespect for religion but out of respect for EU law”.

The tax breaks at the centre of the row stem from the 1929 Lateran Treaty between Italy and the Holy See, which the latter used to negotiate exemptions on income from property on behalf of the Italian Church. They now amount to an estimated €1 billion (£67 billion).

At the end of 2005 Silvio Berlusconi, then the centre-right Prime Minister, extended the Church’s tax exemptions to include buildings used by the Church for businesses such as hostels or health clinics. Mr Berlusconi’s move was regarded by the Left as a blatant attempt to court the Catholic vote on the eve of the 2006 elections, which he narrowly lost to Romano Prodi and the centre Left.

The Prodi Government amended the tax breaks last year, saying that only Church activities “which are not exclusively commercial” were exempt. However, the word “exclusively” left a loophole allowing properties with even a minor form of religious activity to benefit.

The Church owns 100,000 properties in Italy, 2,000 of them used as hospitals, clinics or rest homes. In Rome alone the Church owns 65 rest homes, 250 schools, 580 institutes, convents and monasteries and 18 hospitals.

Under the Lateran Treaty (or Concordat) the Vatican is defined as a sovereign state that has no role in the affairs of Italy, which is officially a secular country. In practice, the culture of the Vatican is overwhelmingly Italian, as are the majority of its employees.

In a conciliatory gesture this week, Monsignor Karel Kasteel, a senior Vatican official, told La Stampa that “the Holy See is ready to sit down at a table with the Government to update the Concordat and revisit the tax issue”. But a Vatican spokesman played down the statement later, saying that Monsignor Kasteel had been speaking “in a personal capacity”.

Maurizio Gasparri, of the right-wing Alleanza Nazionale, charged the EU with siding with the “antiCatholic Left” in Europe. But Paolo Cento, the Deputy Economics Minister and a Green, said that there was “a need to end this form of privilege for the Church”. Monsignor Angelo Bagnasco, the head of the Italian Bishops Conference, said the issue was a pretext for attacks on the Church and that the tax breaks enabled it to “benefit society”.

The centre Right accused left-wingers of being behind the Brussels move, singling out Emma Bonino, a former EU Commissioner, now Minister for European Affairs. She described the allegation as grotesque.

In 2005 the Commission said that Spain was breaking EU law by exempting the Church from VAT.

Estimated Vatican investment portfolio - $3bn

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