Client Lawyer Privilege and Mandatory Reporting under DAC6
In its decision of 8 December 2022, in re Orde van Vlaamse Balies, IG, Belgian Association of Tax Lawyers, CD, JU v. Vlaamse Regering (C-694/20), the European Court of Justice confirms that the need to combat transactions involving aggressive tax planning under DAC6 does not justify obliging lawyers to inform other intermediaries involved and such obligation infringes the right to respect for the communications between the lawyer and his client (Professional Secrecy).
The reporting obligation imposed on all the other intermediaries involved in aggressive tax planning, and even on the taxpayer himself, makes it possible to ensure that the tax authorities are informed.
DAC6 refers to EU Directive (EU)2018/822 of 25 May 2018 that aims to combat aggressive tax planning arrangements. DAC6 requires intermediaries, and in some cases taxpayers, to disclose tax information concerning potentially aggressive cross-border tax-planning (that present a high risk of tax avoidance or tax evasion).
Cross-border tax arrangements that contain one of the hallmarks in the Directive must be reported to the tax authorities. The information reported is then exchanged between EU Member States. Non-compliance with the reporting obligations can lead to fines of up to €50.000 or €100.000 in case of fraudulent intent.
These reporting obligations are imposed on all players who participate in the design, marketing, organisation or management of the implementation of a reportable cross-border transaction or a series of reportable cross-border transactions, as well as on those who provide assistance or advice, including lawyers. However, if the player in question has a legal privilege of non-disclosure – such as the privileged lawyer-client relationship – the reporting obligations are transferred to another intermediary, and when there is no other intermediary to the taxpayer himself.
That could oblige a lawyer when he is an intermediary to share with another intermediary information about his client which are covered by lawyer-client privilege.
Article 8ab(5) of Directive 2011/16 on Administrative Cooperation (the original DAC) provides that each Member State may take the necessary measures to grant intermediaries the right to waive the obligation to provide information about a reportable cross-border arrangement where the obligation to notify would infringe their legal privilege under the national law of that Member State. Each Member State must then take the necessary measures to oblige the intermediaries to notify without delay any other intermediary or the relevant taxpayer of its reporting obligations.
The Belgian legislation provides that when an intermediary is bound by professional secrecy, he is obliged to inform the other intermediary or intermediaries in writing and provide reasons why he cannot comply with the notification obligation. In the absence of another intermediary, he must inform the relevant taxpayer in writing and provide reasons for his or their notification obligation.
As Belgium is a federal state, transposing DAC6 into Belgian law requires decisions of the federal parliament and the regional parliaments. The Flemish decree transposing that directive thus provides that, when an intermediary involved in cross-border tax planning is bound by legal professional privilege, he or she must inform the other intermediaries that he or she cannot make that report him- or herself.
Two lawyers' professional organisations (the Order of the Flemish Bars of Belgium and the Belgian Association of Tax Lawyers) brought actions before the Belgian Constitutional Court. They asked the Constitutional Court to suspend the increased scope of the reporting requirements and annul the Flemish Decree and annul the law in whole or in part.
The Constitutional Court suspended the disputed requirement and stayed the proceedings in while it requested a preliminary ruling from the Court of Justice of the European Union. The court asked whether the reporting requirements under DAC6 infringe the rights to a fair trial and respect for private life (articles 47 and 7 of the EU Charter of Fundamental Rights.
The Court of Justice recalls that Article 7 of the Charter of Fundamental Rights of the European Union protects the confidentiality of all correspondence between individuals and grants strengthened protection to exchanges between lawyers and their clients.
That specific protection afforded to the legal professional privilege of lawyers is justified by the fact that lawyers have a fundamental role in a democratic society, that of defending litigants. That role requires that any individual can seek advice freely from his or her lawyer; that is a principle recognised in all Member States. Legal professional privilege also covers legal consultation, both with regard to its content and its existence. Except for exceptional situations, clients must have a legitimate expectation that their lawyer will not disclose to anyone that they are consulting him or her without their consent.
However, when DAC6 obliges a lawyer-intermediary who is subject to legal professional privilege to notify – without delay – other intermediaries of their reporting obligations implies that those other intermediaries become aware of the identity of the lawyer-intermediary. They also become aware of their analysis that the tax arrangement at issue is reportable and of the fact that they have been consulted in connection with the arrangement.
That reporting obligation interferes with the right to respect for communications between lawyers and their clients, guaranteed in Article 7 of the Charter of Fundamental Rights. As other intermediaries are required to inform the tax authorities of the identity of the lawyer and of the fact that they have been consulted in connection with the arrangement, that obligation also indirectly interferes with the right to legal professional privilege.
The Court cannot find any justifications for such interferences. They do not meet objectives of general interest recognised by the EU and they are not necessary for the pursuit of those objectives.
The Court recalls that DAC6 forms part of international tax cooperation aimed at contributing to the prevention of the risk of tax avoidance and evasion, which constitutes one of the objectives of general interest recognised by the EU.
However, the Court considers that the reporting obligation on a lawyer subject to legal professional privilege is not necessary in order to achieve that objective. All intermediaries are required to file that information with the tax authorities. No intermediary can claim that they were unaware of their reporting obligations that are clearly set out in the Directive to which they are directly and individually subject.
The Directive makes a lawyer-intermediary a person from whom other intermediaries cannot, a priori, expect any initiative that might relieve them of their own reporting obligations.
The obligation of notified intermediary third parties to disclose to the tax authorities the identity of the lawyer-intermediary and the fact that he has been consulted also does not appear to be necessary for the pursuit of the objectives of the Directive. The reporting obligation on other intermediaries who are not subject to legal professional privilege and, if there are no such intermediaries, that obligation on the relevant taxpayer, ensure, in principle, that the tax authorities are informed. The tax authorities may, after receiving such information, request additional information directly from the taxpayer, who will then be able to consult their lawyer for assistance. The tax authorities may then also conduct an audit of that taxpayer’s tax situation.
The Court therefore holds that the reporting obligation in DAC6 infringes the right to respect for communications between a lawyer and their client.
The CJEU ruled that Article 8ater §5 of the DAC6 Directive violated the EU Charter of Fundamental Rights (Article 7 which guarantees the right to respect for communications between lawyers and their clients), in that it obliged the lawyer-intermediary exempted from the reporting obligation because of his professional secrecy to notify any other intermediary of his reporting obligations.
Although the decision of the European Court of Justice relates to the Flemish decree transposing the Regulation, it should also apply to the other transposition laws and decrees. This reporting obligation has indeed been transposed in an identical manner in the various Belgian tax codes that may be affected, i.e. the Income Tax Code, the Registration Tax Code, the Inheritance Tax Code and the Code of Miscellaneous Duties and Taxes.
This means that a lawyer who assists a client in an aggressive cross-border estate planning arrangement (e.g. by transferring assets into a trust, with the specific aim of obtaining savings under the Walloon inheritance tax code) could invoke his professional secrecy to discharge his obligation to report to the tax authorities. He cannot then be blamed for not having notified another intermediary (for example, the client's private banker) of his obligation to report. However, it is then up to the intermediary to notify his client of his obligation to report the scheme.
The question is whether a similar conclusion be drawn for professionals and tax professionals other than lawyers, e.g. members of the Institute for Tax Advisors and Accountants, who also have the legal privilege of their professional secrecy. The decision only deals with lawyers ... another request for a preliminary ruling has been submitted by the Constitutional Court in respect of all intermediaries who are subject to professional secrecy. The court may refer to the Court of Justice of the European Union again.