DAC6 and LPP

The CJEU has held that the provisions of DAC6 requiring the reporting of cross-border tax avoidance arrangements are invalid to the extent that they require a lawyer acting as an intermediary to notify other intermediaries of reporting obligations under the rules as a result of their inability to report due to legal professional privilege (LPP): Belgian Association of Tax Lawyers v Vlaamse Regering (Case C-694/20).

The Court has held that merely requiring a lawyer to divulge the existence of the client-lawyer relationship to other intermediaries is a breach of LPP and that this breach could not, in the circumstances, be justified by the objective of the rules to counter aggressive tax avoidance. The provision was not strictly necessary to achieve the objective pursued by the rules.

Background

The decision of the Court concerns the provisions of DAC6 which amended the Directive on Administrative Cooperation (DAC) to require reporting of certain cross-border tax avoidance arrangements. In particular, these provisions require a lawyer acting as an intermediary, where they are bound by LPP, to inform the other intermediaries acting on the arrangements, in writing, that they cannot fulfil their reporting obligation.

In this case, the applicants argued that it was impossible to fulfil that obligation to provide information without infringing LPP. Furthermore, that obligation to provide information was not necessary in order to ensure that cross-border arrangements are reported, since the client, whether or not assisted by the lawyer, can inform the other intermediaries and ask them to comply with their reporting obligation.

Do the reporting requirements infringe LPP?

The CJEU has agreed with the applicants in this case that the DAC6 rules are invalid to the extent that they require lawyers to divulge information concerning their client and client relationship to other intermediaries.

The referring court had noted that the information which lawyers must file with regard to their clients is protected by LPP, if that information relates to activities which fall within their specific tasks of defence or representation in legal proceedings and legal advice. The mere fact of having recourse to a lawyer is covered by LPP and that the same applies as regards the identity of a lawyer’s client. Information protected by LPP vis-à-vis public authorities is also protected with regard to others, such as other intermediaries.

Under Article 8ab(5) of the DAC, each Member State may take the necessary measures to give intermediaries, and in particular lawyer-intermediaries, a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach LPP. However, in such circumstances, each Member State must require lawyer-intermediaries to notify, without delay, any other intermediary or, if there is no such intermediary, the relevant taxpayer of their reporting obligations. In such a case, the reporting obligation lies with the other notified intermediary or, if there is no such intermediary, with the relevant taxpayer.

As regards the validity of Article 8ab(5), it was apparent from the case law of the ECtHR that Article 7 of the Charter on Human Rights necessarily guarantees the secrecy of legal consultation, both with regard to its content and to its existence. As the ECtHR has pointed out, individuals who consult a lawyer can reasonably expect that their communication is private and confidential. Therefore, other than in exceptional situations, those persons must have a legitimate expectation that their lawyer will not disclose to anyone, without their consent, that they are consulting them.

Furthermore, the Court noted that the obligation to notify leads, indirectly, to another interference with the client’s right, resulting from the disclosure, by the third-party intermediaries notified, to the tax authorities of the identity of the lawyer-intermediary and of their having been consulted. The provisions of Article 8ab require that the identification of the intermediaries is one of the items of information to be provided pursuant to the reporting obligation. Consequently, in the event of notification under Article 8ab(5), the third-party intermediaries notified, who are informed of the identity of the lawyer-intermediary and of their having been consulted in connection with the reportable cross-border arrangement and who are not themselves bound by LPP, must inform the competent authorities not only of the existence of that arrangement and of the identity of the relevant taxpayer, but also of the identity of the lawyer-intermediary and of his or her having been consulted.

As a result, the Court has held that the obligation in Article 8ab(5) for a lawyer-intermediary to notify other intermediaries who are not their clients of their reporting obligations under Article 8ab(6), necessarily entails an interference with the right to respect for communications between lawyers and their clients, guaranteed in Article 7 of the Charter.

Was that interference justified in the circumstances?

On this issue, the Court has held that the requirement to notify other intermediaries cannot be regarded as necessary for the purposes of combatting aggressive tax avoidance.

Combating aggressive tax planning and preventing the risk of tax avoidance and evasion constitute objectives of general interest recognised by the European Union, capable of enabling a limitation to be placed on the exercise of the rights guaranteed by Article 7 of the Charter.

However, the Court has held that even if the notification obligation is capable of contributing to the combating of aggressive tax planning, that obligation cannot be regarded as being strictly necessary in order to attain those objectives and, in particular, to ensure that the information concerning the reportable cross-border arrangements is filed with the competent authorities.

First, all intermediaries are, in principle, required to file information that is within their knowledge, possession or control on reportable cross-border arrangements with the competent authorities. In addition, each Member State is to take the necessary measures to require that, where there is more than one intermediary, the obligation to file information lie with all intermediaries involved in the same reportable cross-border arrangement. As a result, the existing duty to report already imposed on other intermediaries involved meant that there was no need for lawyers to breach LPP for the rules to be effective.

Secondly, the Commission submitted, in essence, that the disclosure of the identity of the lawyer-intermediary and of their having been consulted would be necessary in order to enable the tax authorities to ascertain whether that lawyer-intermediary is justified in relying on LPP. The Court rejected that argument also. The purpose of the reporting and notification obligations laid down in Article 8ab is not to check that lawyer-intermediaries operate within those limits, but to combat potentially aggressive tax practices and to prevent the risk of tax avoidance and evasion, by ensuring that the information concerning the reportable cross-border arrangements is filed with the competent authorities.

Comment

The decision is an important reaffirmation of the importance and scope of LPP. The fundamental protection afforded by LPP can only be subject to interference where such interference is justified on the basis that it is strictly necessary to do so.

Indeed, the judgment of the Court highlighted the importance of LPP in a society governed by the rule of law: ‘lawyers are assigned a fundamental role in a democratic society, that of defending litigants’.