Nine billion euros worth of tax breaks enjoyed by the Catholic Church in Italy could be in breach of European law and may have to be repaid, it has emerged.
The development is the latest blow to an institution that has been rocked by an annus horribilis, following the global clerical paedophilia scandal and investigations into money laundering.
The European Commission (EC) has said that tax relief on 100,000 Italian properties claimed by the Holy See since 2005 was under the spotlight, after announcing an "in-depth" investigation.
A spokesperson for Competition Commissioner Joaquin Almunia said the EC suspected the exemption amounted to state aid that was at odds with European Union law.
"These exemptions may distort competition," he said. "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".
The crux is whether the EC decides church-run businesses should really be considered as commercial enterprises and therefore liable to taxation.
The church was exempted from paying the tax in 2005 by a centre-right government under the then-Prime Minister Silvio Berlusconi, who was re-elected in 2008.
When the 2005 rules were introduced, humanist and secularist organisations claimed it was "unfair help" and breached the principle of division between church and state.
The EU initially questioned the tax exemption in 2005, which resulted in the measure being modified a year later by the then centre-left government of Romano Prodi. The EC twice shelved the case, first in 2008 and again this year. If Italy is found to have violated EU subsidy laws, it will have to cancel the exemption and seek reimbursement from the church. If that happened, the financial consequences for the church would be grave.
Estimates value the Vatican's property tax breaks at 2.27bn euro a year.
No one from the Vatican was available to comment on the EC probe. However, a statement by the Italian foreign ministry said: "The Italian government is convinced that it can demonstrate to the EC in a clear and definitive manner the good reasons that justify the current regulations, which do not violate EU rules on state help in favour of the church."
The church avoids paying tax on about 100,000 non-commercial properties, including 8,779 schools, 26,300 ecclesiastical structures and 4,714 hospitals and clinics.
In addition to avoiding the tax, the church also benefits by paying only 50pc business tax on its commercial earnings, thanks to Italian tax laws adopted in the 1950s which granted deductions for charitable organisations.
News of the EC probe on tax breaks will also send a shudder through Vatican financiers, who already fear the effect the paedophilia scandal will have on voluntary donations -- the financial life-blood of the church -- not to mention the raft of litigation they may face from abuse victims in the coming years .
In Italy, taxpayers can opt to earmark 0.8pc of income tax payments to the religions of their choice -- in most cases the Catholic Church, which last year benefited to the tune of 10.2bn euro.