Legality of DAC6

In 2019, the CJEU held that the provisions of DAC6 requiring the reporting of cross-border tax avoidance arrangements were invalid to the extent that they required 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 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.

The Belgian Association of Tax Lawyers and a number of other associations have now returned to court in Case C-623/22 arguing that the provisions incorporating DAC6 into Belgian law are contrary to their fundamental human rights or infringe general principles of EU law and should be set aside. The CJEU has now rejected those arguments.

Background

The decision 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 certain persons to report cross-border tax avoidance arrangements falling within the scope of DAC6 or, where intermediaries are bound by LPP, to inform the other intermediaries acting on the arrangements, in writing, that they cannot fulfil their reporting obligation.

The Belgian courts referred to the CJEU questions concerning the legitimacy of the provisions of DAC6, focussing on five areas.

Reporting obligation and the principle of equality

The CJEU has rejected the argument that including other taxes within the scope of the Directive other than corporate taxes was in breach of the principles of equality and non-discrimination guaranteed by Articles 20 and 21 of the Charter of Fundamental Rights of the European Union. As noted by the Court, the broad scope of the reporting obligation appears consistent with the subject matter and purpose of the legal instrument which introduced it (Directive 2018/822) and, more generally, appropriate for the combatting of cross-border tax avoidance and evasion.

Legal certainty, clarity of Directive 2018/822, respect for private life and the principle of legality of penalties

The claimants argued that a broad range of concepts in the Directive were insufficiently clear and precise (arrangement, intermediary, main benefit etc) and this lack of clarity was contrary to the principle of legal certainty and the imposition of penalties in relation to such provisions. In addition, it was argued that the lack of clarity and precision in the key concepts included in Directive 2018/822 could give rise to a far-reaching and hardly predictable interference with the intermediaries' and taxpayers' right to keep their communication confidential such as to infringe Article 7 (respect for private life).

The CJEU accepted that the rules of law must be clear and precise and their application foreseeable, particularly where they have adverse consequences (such as penalties). However, that does not prevent the rules using abstract legal notions and nor must the legal concepts be absolutely precise, provided that the provisions are sufficiently clear in the large majority of cases. Therefore, the fact that the Directive refers to broad concepts which must be clarified gradually does not, in principle, preclude it being sufficiently clear and precise. In addition, the Court pointed out that a law may still satisfy the requirements even if a person has to take appropriate legal advice to assess the consequences, particularly where the person is carrying out professional activities.

The Court went on to consider a number of concepts within the Directive from the perspective of their precision and clarity, including: cross-border, participant, intermediary, the hallmarks and the main benefit test. In each case, the Court has concluded that they do not lack the necessary precision and clarity.

Interference with private life

More broadly, the referring court asked the Court, in essence, whether the reporting obligation infringes the right to respect for the private life of the intermediaries and of the taxpayers concerned because the interference with that right would not be justified or proportionate, in the light of the objectives pursued by Directive 2018/822. In particular, it was pointed out that the Directive may result in reporting obligations for cross-border arrangements that are lawful, genuine and non-abusive.

The Court has again rejected this argument. Whilst DAC6 clearly interfered with the right to private life, the question was whether that interference could be justified. On that question, the Court considered that it was justified as necessary and proportionate to attain its objectives which were in the public interest.

Scope of the waiver from reporting

Finally, the Court has been asked to examine the validity of the provisions requiring intermediaries (other than lawyers) who have the right to a waiver, on account of the obligation of professional secrecy under national law, to notify any other intermediary of that intermediary's reporting obligations. Essentially the question was whether that obligation to notify, revealing the existence of the relationship between the intermediary and the client, is contrary to the right to privacy.

The Court noted that the protection afforded to client / lawyer communications is a special situation and recognised in the earlier case of Belgian Association of Tax Lawyers v Vlaamse Regering (Case C-694/20). However, other professionals not having the characteristics of lawyers, were not due the same protection, even if they were authorised to provide legal advice (such as university professors). Therefore, the provisions of the Directive requiring notification of the obligation to notify, in place of actual reporting, in those other cases were not contrary to EU law.