CJEU issues landmark ruling on DAC6

CJEU issues landmark ruling on DAC6:

The obligation for a lawyer to inform other intermediaries is unnecessary and infringes the right to respect for lawyer-client communications

On 8 December 2022 the Court of Justice of the European Union (CJEU) has issued a landmark ruling regarding the implementation of the European Union (EU) Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, as amended by Council Directive (EU) 2018/822 of 25 May 2018 (commonly referred to as “DAC6”).


The Request for a PR & CJEU’s Judgment

The CJEU’s Judgment follows a request for a preliminary ruling referred by the Grondwettelijk Hof (Constitutional Court, Belgium) on 21 December 2020 concerning the integrity of legal professional privilege by which lawyers are bound vis-à-vis the obligation imposed on them to disclose information to other intermediaries involved in cross-border tax planning under DAC6.

According to the CJEU, Article 8ab(5) of Council Directive 2011/16/EU (as amended by Council Directive (EU) 2018/822) is invalid in the light of Article 7 of the EU Charter of Fundamental Rights (Charter), in so far as the EU Member States’ application of that provision has the effect of requiring a lawyer acting as an intermediary, within the meaning of Article 3(21) where he or she is exempt from the reporting obligation laid down in Article 8ab(1), on account of the legal professional privilege by which he or she is bound, to notify without delay any other intermediary who is not his or her client of that intermediary’s reporting obligations under Article 8ab(6) (Judgment, para.67).


Reasoning behind CJEU’s Judgment

The reasoning behind the CJEU’s Judgment revolves around legal privilege and respect for the privacy and confidentiality of communications.

Article 7 of the Charter (which corresponds to the right guaranteed in Article 8(1) of the European Convention of Human Rights) protects the confidentiality of all correspondence between individuals and affords strengthened protection to exchanges between lawyers and their clients (Judgment, paras.25-27).

The protection afforded to lawyers’ legal professional privilege is justified by the fact that lawyers are assigned a fundamental role in a democratic society, that of defending litigants. This role requires that any individual is able to seek advice freely from their lawyer, a principle recognised across all EU Member States (Judgment, para.28).

Legal professional privilege also covers legal consultation, both with regard to its content and its existence. Other than in exceptional situations, clients must have a legitimate expectation that, without their consent, their lawyer will not disclose to anyone that they are consulting them (Judgment, para.27).

However, the CJEU highlighted, amongst others, that:

  • the obligation in Article 8ab(5) for a lawyer-intermediary 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; and
  • those other intermediaries become aware of their analysis that the tax arrangement at issue is reportable and of them having been consulted in connection with the arrangement (Judgment, para.29).

Therefore, the obligation to notify entails an interference with the right to respect for communications between lawyers and their clients, guaranteed in Article 7 of the Charter (Judgment, para.30).

In addition, the obligation to notify leads, indirectly, to another interference with the right to legal professional privilege, resulting from the disclosure, by the third-party intermediaries thus notified, to the tax authorities of the identity of the lawyer-intermediary, and of them having been consulted (Judgment, para.31).

The CJEU further examined whether the notification obligation on a lawyer subject to legal professional privilege is necessary in order to attain objectives of general interest recognised by the EU, such as the objective of international tax cooperation aimed at contributing to the prevention of the risk of tax avoidance and evasion (Judgment, paras.41-44).

Following such examination, the CJEU concluded that such notification is not 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 (Judgment, para.46). In that regard:

  • Intermediaries’ reporting obligations are clearly set out in Article 8ab(1).
  • All intermediaries are required to file information that is within their knowledge, possession or control on reportable cross-border arrangements with the competent authorities.
  • No intermediary can claim that they were unaware of the reporting obligations to which they are directly and individually subject, as these obligations are clearly stated in the Directive (as amended).
  • By expressly providing in Article 8ab(5) that legal professional privilege may lead to a waiver from the reporting obligation, amended Directive 2011/16 makes a lawyer-intermediary a person from whom other intermediaries cannot, a priori, expect any initiative capable of relieving them of their own reporting obligations.
  • The disclosure, by notified intermediary third parties, of the identity of the lawyer-intermediary and of them having been consulted to the tax authorities does not appear to be necessary for the pursuit of the Directive’s objectives.
  • 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 relevant taxpayer, who will then be able to consult their lawyer for assistance.
  • The tax authorities may, by themselves, conduct an audit of that taxpayer’s tax situation (Judgment, paras.47-52).

In light of the foregoing, the CJEU held that the obligation to notify laid down by the Directive, as amended, infringes the right to respect for communications between a lawyer and his or her client.

The CJEU Judgment in Case C-694/20 (Orde van Vlaamse Balies and Others) is available here.


DAC6 in EU & Republic of Cyprus: what’s next?

It is now in the hands of the European Parliament, along with the Council of the EU, from the EU’s part, and the competent authorities (including the Ministry of Finance and Parliament), on the Republic of Cyprus’ part, to amend EU and national legislation, respectively, in order to comply with the CJEU’s ruling.

It is anticipated that the Tax Department (Ministry of Finance, Republic of Cyprus) will issue an announcement suspending the obligation in question, until such legislative amendments take place.


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