Is the Vatican going bankrupt despite its financial incentives?

Historically, the Vatican has been involved in multiple financial scandals, including its controversial financial ties to Nazi Germany during WWII, when it allegedly received significant funding. The Vatican Bank became notorious for hiding wartime loot and was even dubbed the world’s best offshore bank, according to God’s Bankers by Gerald Posner[1].

In the 1980s, the Vatican City became involved in the Banco Ambrosiano scandal, where funds were funneled into illegal offshore accounts. More recently, Vatican accountant Nunzio Scarano was arrested for attempting to smuggle €20 million into Italy to evade taxes, though he was ultimately acquitted.

Recently, the Court of Justice of the European Union ordered the Vatican to repay billions in unpaid property taxes. The decision mandates the Church to pay taxes on properties used for commercial purposes while preserving many of the Church’s existing tax exemptions. This raises an important question: what about taxation within the Vatican itself? To fully answer this question, let’s take a closer look at the finances of the Vatican City.

Vatican City is the smallest sovereign state in the world and serves as the spiritual center of the Roman Catholic Church. Covering just 0.44 square kilometers (0.17 square miles), it is entirely surrounded by the city of Rome.

How Vatican City Became a Tax Haven

During the Franco-Prussian War, the withdrawal of French troops from Rome left the Pope unprotected. Seizing the opportunity, the Italian army took the Papal States in 1870, capturing Rome and completing Italy’s unification. Popes now viewed themselves as prisoners in their Roman palaces and refused the offer to reduce the Holy See to a protectorate.

This conflict was resolved under Mussolini, when the Vatican City was recognized as sovereign, and Rome as the capital of Italy. Certain basilicas, such as St. John Lateran gained extraterritorial status. In compensation for lost territories, Italy paid the Vatican 750 million lire, approximately €790 million in 2025, and 1 billion lire in government bonds. Before these agreements, the papacy relied primarily on donations from the faithful to fund its operations. Today, the majority of its revenue comes from investments.

How Does the Vatican Make Money?

Italy is often associated with money laundering and has one of the largest shadow economies in the European Union, second only to Greece. Established in 1929 as the center of the Christian world, Vatican City is held to a higher ethical standard due to its unique status as a sovereign religious state. The smallest independent country in the world, it serves as s the Pope’s residence and the spiritual and administrative heart of the Roman Catholic Church, operating with its own governance and economic systems.

While many countries maintain complex tax systems designed to fund public services, the Vatican City approach to taxation is significantly different. It has four main sources of income:

1. Self-Generated Revenue (65%): This includes income from services, real estate management, investments, and commercial activities. According to the CIA World Factbook[2], its economy is largely tourism-based. Key industries include printing for museums and religious purposes, the production of coins and medals, postage stamps, mosaics, and staff uniforms, along with global banking and financial activities.
2. External Donations (24%): Donations from dioceses worldwide contribute to this revenue.
3. Governorate and Vatican Bank (5%): Income from the Vatican City State and the Institute for the Works of Religion (Vatican Bank) makes up this portion.
4. Titled Funds and Peter’s Pence (6%): This represents about $27 million annually, primarily from contributions in the U.S., Germany, and Italy.

Peter’s Pence is a traditional annual collection held in June, during which Catholics worldwide contribute funds to support the charitable works of the Pope and the Vatican.

Peter’s Pence raises the question about its classification. While it is not a tax in the conventional sense (mandated by law and enforced by penalties) its nature as a systematic collection from Catholics resembles a form of taxation. This perspective is supported by the expectation that Catholics contribute regularly, making it an important source of income for the Vatican.

Vatican City Taxes and the Scope of Italian Taxation

Pope Francis, a strong advocate for taxation and the “redistribution of wealth for the common good,” has often emphasized that taxation is a recurring theme in the Bible and was integral to the governments of the Holy Land. Yet, the Vatican City imposes limited taxes, especially when compared to Italy.

While the Vatican does not levy property taxes on its own assets, property outside its walls enjoy similar tax exemptions as those granted to charitable organizations. The 1929 Lateran Treaty, which solidified the Vatican’s independence, established key tax exemptions. Article 16 grants Vatican properties immunity from taxes and expropriation without prior agreement, while Article 17 ensures full tax exemption on salaries paid by the Holy See or its institutions.

The catholic Church once enjoyed full exemption from property taxes on its real estate in Italy. This status has been criticized for being unfair, especially regarding commercial properties including hotels, museums, and schools. This allowed the Vatican to benefit from tax exemptions while other businesses were required to comply with local tax laws. In 2012, Italy restricted the Vatican’s tax exemptions to non-commercial properties. However, the European Court of Justice ruled in 2018 that Italy must recover unpaid property taxes from the Vatican for the years 2006 to 2011.

Investment income has also been called into question over the years due to various controversies. Under the 2015 tax agreement between Italy and the Holy See, shared on the official Vatican Bank website, Article 2 mandates that Vatican clerics, employees, and retirees who are Italian tax residents must fulfill their tax obligations on income from capital and financial activities within the Vatican City. This includes taxes on financial assets held abroad through financial intermediaries.

Italian Taxes Rates

The Historical 10% Tithe Tax

Often referenced by Popes and forming part of the 24% of external donations that finance the Vatican City, the tithe tax is perhaps the most well-known form of religious giving, having greatly influenced community life throughout history. Originating in the Old Testament, tithing required the Israelites to give 10% of their harvest and livestock to support religious institutions, a practice seen as a divine obligation.

In medieval Europe, tithing became institutionalized, with the Church collecting these donations for religious, educational, and social purposes, as well as to maintain its properties. During this time, tithing was often enforced by law. The Protestant Reformation of the 16^th century challenged many Catholic practices, including tithing. Things remain an important tradition in many religious communities. While some churches encourage their members to donate a tenth of their income, others focus on voluntary donations without a fixed amount.

Vatican Finances Under Pressure

The Vatican is facing serious financial challenges, raising concerns about its fiscal management. Pope Francis recently warned of a looming crisis in the Vatican’s pension fund, calling for immediate reforms to secure its future. Years of mismanagement, scandals, and deficits, compounded by the impact of lockdowns on revenue from the Vatican Museums, have left the fund unstable and at risk of running out of money.

While the Holy See reported a modest profit of €45.9 million in 2023, deeper structural issues remain. Just a decade ago, the pension fund was considered financially strong and expected to exceed €500 million. Today, Pope Francis acknowledges a “serious prospective imbalance” that threatens its ability to meet future pension obligations.

Cost-Cutting Measures and Employee Backlash

To address these impending problems, Pope Francis has introduced various austerity measures, including 10% salary cuts for cardinals, freezing certain bonuses, and charging market-rate rents for Vatican properties. However, these steps have prompted backlash from Vatican employees who fear more sacrifices will be demanded of them. The Association of Lay Vatican Employees, representing a significant portion of the Vatican’s 4,500 workers, has criticized stagnant wages, rising rents, and a lack of transparency about the pension fund finances. Employees argue that the burden of reform should not fall too heavily on them, pointing out the sacrifices they have already made. They call for fairer solutions that align with the Pope’s teachings on workers’ rights and the well-being of families.

Pope Francis recently appointed Cardinal Kevin Farrell, a trusted confidant, as Sole Administrator of the Pension Fund. But will this be enough? To address the increasing financial pressures and growing employee dissatisfaction, a broader policy shift may be necessary, potentially involving new revenue sources.

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Cover Image: National flag of Vatican City (1929)

References

1. Posner, Gerald. God’s Bankers: A History of Money and Power at the Vatican. Simon & Schuster, 2015.
2. Central Intelligence Agency. (n.d.). The World Factbook: Holy See (Vatican City).