ECJ AG’s opinion on issues relating to protection of legal privilege in the context of exchange of information obligations under DAC6

ECJ AG’s opinion on issues relating to protection of legal privilege in the context of exchange of information obligations under DAC6

ECJ AG’s opinion on issues relating to protection of legal privilege in the context of exchange of information obligations under DAC6

ECJ AG’s opinion on issues relating to protection of legal privilege in the context of exchange of information obligations under DAC6

By Luca Tortorella and Michele Targa, Senior Associates, Gatti Pavesi Bianchi Ludovici, Milan

On December 21, 2020, the Belgian Constitutional Court submitted to the European Court of Justice (ECJ) a preliminary ruling in C-694/20 Orde van Vlaamse Balies and Others seeking clarification as to whether the mandatory exchange of information in cross-border arrangements required for intermediaries is compatible with articles 7 and 47 of the EU Charter of Fundamental Rights, related to the right to respect for private life and the right to a fair trial.

On April 5, 2022, Advocate General Rantos opined that while the right to a fair trial is not violated, the right to respect for private life may indeed be infringed upon in certain cases.

DAC6 directive and the obligation to report specific cross-border arrangements

The stated purpose of DAC6 is to enhance tax transparency by tackling aggressive tax-planning arrangements. DAC6 applies to specific cross-border tax arrangements that meet one or more hallmarks, concerning either more than one European country or a European country and a non-European country. Such specific arrangements must be reported, regardless of whether they are in line with national laws.

Reporting obligations fall on intermediaries—any person who designs, markets, organises, or makes available for implementation (or manages the implementation of)  a reportable cross-border arrangement. Most of the time intermediaries are advisors. However, considering that in almost every European member state a “legal professional privilege” exists, an issue that DAC6 takes into account is whether or not the notification obligation actually complies with attorney-client privileges. In this sense, recital no. 8 of the directive considers it “crucial that, in such circumstances, tax authorities do not lose the opportunity to receive information about tax-related arrangements that are potentially linked to aggressive tax planning (…) while Article 8ab(5) specifies that when the reporting obligation would breach the legal professional privilege under the national law of a member state “(…) each Member State shall take the necessary measures to require intermediaries to notify, without delay, any other intermediary or, if there is no such intermediary, the relevant taxpayer of their reporting obligations (…)”.

As a consequence, intermediaries subject to legal professional privilege (lawyers), who were not released from this obligation by their client, can be exempt from reporting provided that they have notified other intermediaries of their reporting obligation.

A summary of the case

A decree on “administrative cooperation in the field of taxation,” last amended in 2020, transposed the DAC6 directive in the Belgian legislative system. Article 11/6 of the decree states that lawyer-intermediaries bound by legal professional privilege are required to inform other intermediaries in writing who are involved in the cross-border arrangement of their impossibility to comply with the mandatory obligation. They must detail the reasons preventing the notification, transferring to them the mandatory disclosure. Should no other intermediaries have been involved in the arrangements, lawyer-intermediaries must inform the taxpayer of their notification obligations.

The Flemish Bar Association, the Belgian Association of Tax Lawyers, and other Belgian institutions challenged this requirement to transfer to other intermediaries the reporting obligations of cross-border arrangements when lawyer-intermediaries invoke the legal professional privilege, since it is impossible to fulfill the requirement without breaching professional secrecy, the applicants said. They also said the requirement is not necessary to ensure that the cross-border arrangement is actually reported, since the client—whether assisted by the lawyer-intermediary or not—can always ask the other intermediaries to fulfill the reporting obligations.

The applicants stated that a lawyer’s professional secrecy is an essential component of the right to respect for private life and the right to a fair trial. The rule of professional secrecy should only be waived if this can be justified by an overriding reason relating to the public interest and if the waiver of secrecy is strictly proportionate.

For applicants, information that lawyers would be required to pass on to tax authorities regarding their clients is protected by professional secrecy when such information relates to matters such as legal defense or representation and the provision of legal advice. As a result, applicants lodged claims with the Belgian Constitutional Court for the suspension and annulment of the 2020 decree, stating it was not compliant with Articles 6 and 8 of the European Convention on Human Rights and with Articles 7 and 47 of the Charter of Fundamental Rights of the European Union.

The Flemish government’s position is of course different. According to the government, no breach of  legal professional secrecy arises when the obligation shifts to the client as intermediary or—in the cases where another intermediary exists—the latter has been directly put in contact with the lawyer-intermediary by the client. In addition, if the lawyer-intermediary is not aware that other intermediaries exist, the reporting obligation lies with the taxpayer.

Given the nature of the controversy, the Belgian Constitutional Court referred the matter to the ECJ, which is the only competent body that can rule on the compatibility of the DAC6 directive with Articles 7 and 47 of the Charter of Fundamental Rights of the European Union.

The Advocate General’s opinion

As far as infringement of Article 47 of the EU Charter of Fundamental Rights is concerned, the Advocate General recalled a precedent case where the question was raised regarding the compatibility of legal professional privilege—including confidentiality of written communications—with the obligation to cooperate with the competent authorities responsible for anti-money laundering. On that occasion, the Court ruled that the nature of activities covered by the requirement to communicate was such that they must take place in a context with no link to judicial proceedings. Consequently, those activities fell outside of the scope of the right to a fair trial and did not infringe on the related principle.

Given that the purposes of DAC6 are preventive in nature, the Advocate General opined that for DAC6 reporting purposes, lawyer-intermediaries do not act as defenders of their client in a dispute with the tax authorities. Thus, since there is no link with a legal procedure, the Advocate General considered that the obligation for lawyer-intermediaries to notify other intermediaries to report the tax administration of a cross-border arrangement cannot affect the rights of Article 47 of the Charter of Fundamental Rights of the European Union, as it doesn’t fall within the scope of that provision.

As for Article 7 of the EU Charter of Fundamental Rights (i.e. the right to respect private and family life), the Advocate General initially underlined that such rights are aligned with those granted by Article 8 of the European Convention of Human Rights. According to the jurisprudence of the European Court of Human Rights (the Michaud v. France case), legal professional privilege and correspondence between lawyers and clients are protected by the mentioned Article 8. At the same time, though, the European Court of Human Rights ruled that legal professional privilege does not apply for activities falling outside “legal proceedings.”

As a consequence, services rendered by lawyers acting as intermediaries cannot be automatically covered by Article 8 of the European Convention of Human Rights, because when activities of lawyer-intermediaries go beyond the usual activities of defending the legal position of their clients, legal- professional privilege cannot be invoked, the Advocate General said. However, considering that professional legal secrecy is not harmonized within Europe, the Advocate General indicated that national courts should determine which activities actually fall within the scope of legal professional privilege, on a case-by-case basis.

As far as the compatibility of the notification obligation with Article 7 of the EU Charter of Fundamental Rights is concerned, the Advocate General observed that the lawyer-intermediaries exempted from the obligation to report have only to transfer to other intermediaries (that are then required to proceed with the reporting) limited information—which does not include the content—regarding the legal assessment of the lawyer or the communication with their client. When other intermediaries and taxpayers know which tax arrangements are subject to notification, no breach of professional secrecy occurs, the Advocate General said.

Obligations to notify other intermediaries could instead infringe on Article 7 when the lawyer-intermediaries are forced to disclose their relationship with a client to which they gave legal advice for cross-border arrangements, however. Nevertheless, the requirement to notify is deemed justified and proportionate by the European Union’s general interest in fighting tax avoidance and evasion through aggressive tax arrangements, as well as its interest in protecting national tax bases from erosion, the Advocate General opined. Indeed, as the European Court of Justice ruled in case C‑358/16, “fundamental rights do not constitute unfettered prerogatives and may be restricted, provided that the restrictions in fact correspond to objectives of general interest (…)”. Combating international tax avoidance and evasion as an objective of general interest within the European Union also can be inferred by reviewing the judgment dated October 6, 2020 regarding joined cases C‑245/19 and C‑246/19.

In any case, the Advocate General specified that the disclosure of the name and the data regarding the lawyer-intermediary to tax authorities by other intermediaries (including the taxpayers) indeed conflicts with Article 7. It is not consistent with the principle of proportionality and is not necessary to achieve the ultimate aim of fighting aggressive tax planning, he said.

One should note, by the way, that this opinion is contrary to what was said during the hearing by certain member states and the European Commission.

Conclusions

The Advocate General concluded that Article 8ab(5) of the DAC6 directive does not infringe on the right to respect private life as guaranteed by Article 7 of the Charter of Fundamental Rights of the European Union. This is provided that the name of the lawyer-intermediary—in compliance with the obligations referred to in Article 8ab, paragraphs 9 and 14 of the DAC6 directive—is not communicated to the tax authorities.

In almost every European member state there is a professional privilege issue in the context of DAC6 reporting obligations. There are also similar questions to those brought up by the Belgian Constitutional Court, which other European countries have already raised. It will be interesting to understand how the European Court of Justice will follow up on this scenario, since this decision might have an impact on mandatory disclosure rules and will be deeply analyzed by lawyers operating in Europe.

  • Luca Tortorella and Michele Targa are international tax and transfer pricing senior associates at Gatti Pavesi Bianchi Ludovici in Milan.

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