European Court of Justice decision on DAC6 combatting aggressive tax planning: the obligation for a lawyer to inform other intermediaries not valid
Hard on the heels of the judgment of the European Court of Justice (ECJ) limiting public access to beneficial owner registers (see our recent blog here), the ECJ has now imposed a limitation on a particular aspect of the measures known as DAC6 requiring intermediaries to report arrangements that bear the hallmarks of aggressive tax planning.
On 8 December 2022, the ECJ ruled that article 8ab(5) of Council Directive (EU) 2011/16 (the Directive), known as DAC6, violates article 7 of the Charter of Fundamental Rights of the European Union (the Charter) that protects the confidentiality of all correspondence between individuals, and in particular with their lawyers and is therefore invalid.
The financial reporting obligations of the Directive provides for a dispensation to intermediaries that are subject to legal professional privilege in their home state such that they are not required to report relevant arrangements to the relevant tax authority. However, under article 8ab(5), such intermediaries are required to notify other intermediaries or, if no other intermediaries, the so-called relevant taxpayer of their reporting obligations.
In essence, the ECJ held that, while, the Directive’s objective is to prevent aggressive tax planning and is therefore in the general interest, the infringement of article 7 of the Charter is not strictly necessary in order to meet that objective and is therefore in conflict with the principle of proportionality. This takes account of not only the infringement caused by the notification to other intermediaries but also by the eventual reporting of the identity of the notifying intermediary to the relevant tax authorities as part of the reporting required under DAC 6.
While the decision appears to be clear, there are some aspects that are not entirely clear and it is hoped that Member States will provide guidance on the application of the decision in the context of their particular rules. First, the ECJ made it clear that the decision was limited to the obligation of an intermediary to notify other intermediaries who are not clients. It would therefore not apply to notifications made to the intermediary’s client. However, the decision does not address the real possibility that the relevant taxpayer may not be the client. The normal notification requirement under DAC 6 extends, where there are no other intermediaries, to notifying the relevant taxpayer. If the relevant taxpayer is not the client and, if there are no other intermediaries, then the question arises as to whether the intermediary is still required to notify the relevant taxpayer. It seems that the answer to that question is negative as, even if not specifically addressed by the ECJ, such an answer is consistent with the rational of the ECJ’s decision.
Another point not addressed by the ECJ is the possibility that the client could consent to the lawyer intermediary making the notification. While the situations may be rare where the client would provide express consent, there may be certain circumstances where that consent can be implied.
While the decision focuses on the position of lawyers, the decision would have equal application to cases where another form of intermediary benefits from legal professional privilege. In Luxembourg, for example, accountants and tax advisors are protected to the extent that they are acting within the limits of their professions.