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Orde van Vlaamse Balies vs Belgium: Legal Privilege and Cross-Border Tax Reporting Obligations

ATL-Editor 29 October 2024

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VIEW THE FULL JUDGMENT HERE

NOTICE: Please see the Preventative Measures for Tax Risk Management note at the end of this summary.  It is important for MNE’s to take this seriously.

Case Information

  • Court: Court of Justice of the European Union (Grand Chamber)
  • Case No: C-694/20
  • Applicant: Orde van Vlaamse Balies, IG, Belgian Association of Tax Lawyers, CD, JU
  • Defendant: Vlaamse Regering (Flemish Government, Belgium)
  • Judgment Date: 8 December 2022

Judgment Summary

In Case C-694/20, the European Court of Justice (ECJ) examined the legality of certain reporting obligations imposed on lawyers under Council Directive 2011/16/EU (as amended by Directive 2018/822). This directive, commonly referred to as DAC6, requires intermediaries involved in potentially aggressive cross-border tax arrangements to report these transactions to the relevant tax authorities within 30 days. However, a critical issue arises with intermediaries who are lawyers, as they are bound by legal professional privilege. DAC6 provides an exemption allowing lawyer-intermediaries to abstain from reporting arrangements if doing so would infringe upon this privilege. The directive further mandates that these lawyer-intermediaries notify other involved intermediaries of their reporting obligations. This requirement to notify other intermediaries was contested in the Belgian Constitutional Court by the Flemish Bar Association and several tax lawyers, who argued that it infringed on the right to private life (Article 7) and the right to a fair trial (Article 47) under the Charter of Fundamental Rights of the European Union (Charter).

The ECJ ruled that Article 8ab(5) of Directive 2011/16/EU is invalid in situations where lawyers are required to inform non-client intermediaries of their reporting obligations. It concluded that such requirements infringe upon the confidentiality of lawyer-client communications, which is a fundamental aspect of legal professional privilege. The court’s decision emphasized that the directive’s transparency goals must be balanced against fundamental rights, especially in relation to the privacy of legal consultations. However, the court also clarified that this requirement does not impact the right to a fair trial as outlined in Article 47, given that this reporting obligation pertains to advisory functions, not litigation.

This decision has substantial implications for both multinationals and tax authorities, as it reinforces the boundaries of legal professional privilege in tax matters. While revenue authorities are keen to gather information on cross-border tax arrangements to curb aggressive tax planning, this judgment clarifies that legal professional privilege must be protected. Multinationals engaging in tax planning with legal advisers benefit from the assurance that confidential discussions remain protected, allowing them to seek advice on complex tax matters without concern for unwarranted disclosure.

Key Points of the Judgment

Background

Directive 2011/16/EU established a framework for cooperation among EU Member States in combating tax avoidance through the automatic exchange of information. In response to rising concerns over aggressive cross-border tax schemes, this directive was amended in 2018 (Directive 2018/822, known as DAC6) to require intermediaries to report potentially aggressive tax arrangements. This amendment introduces significant transparency, aiming to prevent tax base erosion by providing tax authorities with early knowledge of high-risk arrangements.

While DAC6 facilitates proactive tax authority responses, it creates challenges for lawyer-intermediaries, who must adhere to legal professional privilege, which protects confidential client communications. Legal privilege is central to the legal profession, guaranteeing that clients can seek advice with assurance that their information remains private. DAC6 acknowledges this privilege by allowing lawyer-intermediaries to waive reporting obligations in situations where disclosure would infringe on privilege. However, the directive mandates that lawyer-intermediaries, even when exempt, notify any other intermediaries involved in a reportable arrangement of their reporting responsibilities. The directive’s inclusion of such notification requirements led the Flemish Bar Association and tax lawyers to file an action in the Belgian Constitutional Court, questioning the validity of DAC6’s notification requirement under the Charter of Fundamental Rights of the EU, particularly Articles 7 and 47.

This background illustrates the ECJ’s task: it had to determine whether the transparency intentions of DAC6 could justify overriding the fundamental right to privacy that legal professional privilege protects, as well as whether such requirements were proportionate and necessary to achieve DAC6’s goals.

Core Dispute

The primary issue before the ECJ concerned whether the notification requirement under Article 8ab(5) of DAC6 violated Articles 7 and 47 of the Charter. The applicants argued that legal professional privilege not only protects the content of lawyer-client communications but also the fact of their occurrence. They asserted that requiring lawyer-intermediaries to notify other intermediaries—especially those who are not clients—about their reporting obligations indirectly reveals that privileged consultations occurred, thus infringing upon privacy rights under Article 7 of the Charter.

Moreover, the applicants contended that this requirement impedes the right to a fair trial under Article 47. They argued that the notification requirement could compromise legal privilege, even when no details of the consultation are disclosed, as it forces lawyers to disclose their involvement in reportable arrangements to non-client intermediaries. This indirect revelation, the applicants argued, could undermine clients’ trust in their lawyers, deterring them from seeking legal advice in complex tax matters.

The court had to consider whether the mandatory notification requirement for lawyer-intermediaries, who are exempt due to legal privilege, serves a legitimate and proportionate goal. It needed to determine if the privacy and fair trial rights of lawyers and clients could be safeguarded without compromising the directive’s aim of transparency. This balancing act was central to the court’s task: to clarify the boundaries between EU tax law objectives and the preservation of fundamental rights within the legal profession.

Court Findings

The ECJ found that Article 8ab(5) of DAC6 disproportionately interfered with legal professional privilege by requiring lawyer-intermediaries to notify other intermediaries, particularly those not bound by privilege, of their reporting obligations. In its ruling, the court emphasized that legal professional privilege serves a critical role in protecting the confidentiality of lawyer-client communications, which is fundamental to the role of lawyers in democratic societies. DAC6’s notification requirement, the court noted, breaches the core of this privilege by indirectly revealing consultations with legal advisers to third parties.

In examining the impact on Article 47, the right to a fair trial, the court concluded that the notification requirement did not directly infringe upon fair trial rights. Since the directive’s reporting requirements apply to advisory stages and not necessarily to ongoing or anticipated litigation, the court found that DAC6 does not undermine the essential purpose of legal privilege within the context of judicial proceedings. Therefore, while the notification obligation infringed upon the privacy rights protected by Article 7, it did not compromise Article 47 in the context of this case.

The court ultimately declared that Article 8ab(5) of DAC6 is invalid, to the extent that it obliges lawyer-intermediaries to disclose their involvement in reportable tax arrangements to other intermediaries. The ruling underscores the court’s commitment to upholding fundamental rights even amid complex tax enforcement measures, establishing a precedent for the protection of legal professional privilege in tax advisory roles.

Outcome

The ECJ’s ruling invalidates Article 8ab(5) of Directive 2011/16/EU as amended by Directive 2018/822 in cases where lawyer-intermediaries are bound by legal professional privilege. The court clarified that such intermediaries cannot be compelled to notify other intermediaries about reporting obligations when legal privilege is applicable. This decision protects confidential lawyer-client communications, ensuring that such disclosures do not undermine the trust essential to the legal advisory relationship. It reinforces the role of legal professional privilege in preserving the confidentiality of legal advice, even in the face of broader transparency objectives.

The ruling also affirms that legal privilege encompasses not only the content of advice but also the fact that consultations occur, which aligns with the European Convention on Human Rights (ECHR) and prior case law. By upholding this principle, the court balanced the need for transparency in cross-border tax planning with the fundamental rights guaranteed by the Charter.

For lawyer-intermediaries, this judgment removes the requirement to disclose involvement in potentially reportable arrangements to other intermediaries. The court’s decision supports the integrity of lawyer-client relationships by acknowledging that legal advice must remain confidential to preserve the client’s trust in seeking guidance on complex tax matters. While tax authorities may face challenges in gathering information on certain arrangements, the ruling clarifies that the EU’s commitment to privacy and fair trial rights remains paramount in the legislative landscape.

Major Issues or Areas of Contention

The primary contention in Case C-694/20 revolved around balancing DAC6’s transparency goals with legal professional privilege, particularly the extent to which privilege protects against mandatory reporting and notification requirements. For tax authorities, the reporting obligation for cross-border arrangements is crucial in combatting tax avoidance. However, the blanket nature of DAC6’s notification requirements clashed with the rights of lawyers and their clients, prompting questions about the directive’s proportionality and necessity.

Another point of contention lay in the directive’s implementation across different EU Member States, with varying interpretations of how privilege affects notification requirements. This inconsistency created potential conflicts between Member States and legal professionals, particularly those advising on tax matters. Additionally, the directive’s notification mandate could lead to indirect disclosures, which some argued constituted a breach of client trust, even if substantive arrangement details were not shared.

The court’s judgment addressed these concerns by underscoring the importance of legal privilege in fostering client confidence. In ruling that DAC6’s notification requirements are disproportionate, the court set a limit on the degree of transparency enforceable under EU tax law. This case illustrates a significant policy debate: ensuring effective tax regulation while respecting the autonomy and confidentiality rights of legal professionals, especially in advisory roles not directly related to litigation.

Was This Decision Expected or Controversial?

This decision was both expected and controversial, given the longstanding tension between tax transparency and legal professional privilege. Many observers anticipated the ruling because previous ECJ and European Court of Human Rights (ECHR) decisions have consistently upheld the sanctity of lawyer-client communications. Nevertheless, DAC6’s broad reporting requirements and the EU’s push to combat aggressive tax planning heightened the stakes, creating a challenging legal landscape where transparency and privacy intersect.

The court’s emphasis on legal privilege over DAC6’s transparency goals may stir further controversy, particularly among tax authorities seeking robust tools to counteract tax avoidance. The judgment underlines that while transparency is critical, it should not disproportionately infringe upon fundamental privacy rights. This perspective reinforces the European legal tradition of protecting confidentiality, especially for lawyers serving advisory functions rather than participating in litigation.

From a legal standpoint, the ruling could signal to lawmakers that further modifications to DAC6 or similar directives may need to consider fundamental rights more carefully. It also highlights the limitations of blanket regulations that impose uniform requirements on diverse professional roles. For multinational corporations, the decision is a reassurance that seeking legal advice remains a confidential process, though it may lead to additional reporting adjustments for non-privileged intermediaries. Ultimately, the court’s judgment underscores the need for legislative clarity, especially where professional rights and regulatory requirements intersect.

Significance for Multinationals

This ruling has profound implications for multinational enterprises (MNEs), especially those involved in complex cross-border tax planning. The ECJ’s decision reinforces the boundaries of legal professional privilege, offering MNEs assurance that confidential communications with legal advisors on sensitive tax issues remain protected. By upholding legal privilege, the court enables MNEs to seek expert legal advice without concern that such consultations may inadvertently expose them to regulatory scrutiny or undermine their competitive strategies.

Multinationals frequently engage in cross-border arrangements that tax authorities might classify as high-risk. Access to confidential legal counsel is therefore essential to ensure these arrangements comply with evolving tax regulations. The ruling in Case C-694/20 underscores that, while MNEs must meet compliance standards, their right to privileged legal advice remains intact. For MNEs, this is particularly crucial in regions where legal privilege may be subject to varying interpretations, as the court’s decision provides a unified EU standard on privileged communication in tax advisory contexts.

Nonetheless, MNEs should be cautious, as the decision does not eliminate reporting obligations for non-lawyer intermediaries involved in cross-border arrangements. MNEs may still need to ensure that their tax arrangements are transparent to a degree, but this ruling confirms that consulting a lawyer in these processes remains protected. For MNEs, understanding these boundaries and seeking counsel from lawyers familiar with EU tax directives ensures they navigate cross-border tax planning with confidence and compliance.

Significance for Revenue Services

For revenue services across the EU, this ruling presents challenges in obtaining comprehensive information on cross-border tax arrangements. The court’s decision effectively removes a key channel for obtaining insights into potentially aggressive tax planning, as lawyer-intermediaries bound by privilege are no longer required to notify other intermediaries of reporting obligations. Revenue authorities, particularly those relying on DAC6 to address aggressive tax schemes, may need to adjust their enforcement strategies or explore alternative avenues to obtain this information.

The decision underscores the delicate balance revenue services must maintain between enforcing tax laws and respecting fundamental rights. While DAC6 aimed to close loopholes and enhance transparency, the ruling signals that legal professional privilege remains a protected boundary that revenue authorities cannot easily bypass. This may require tax authorities to focus on non-lawyer intermediaries or direct tax arrangements to gather the information DAC6 intended to cover.

The ruling could also prompt discussions on refining DAC6 to address concerns over confidentiality while achieving transparency goals. Revenue services may face additional obstacles in ensuring compliance but must respect the court’s emphasis on privacy and fair trial rights. For EU Member States, this ruling is a reminder to align tax directives with constitutional protections, potentially leading to future adjustments in how tax regulations are applied across various professional services.

Additional Relevant Cases

F SCS vs Luxembourg (C-432/23)

Summary: In Orde van Vlaamse Balies and Others, the Court of Justice of the European Union (CJEU) considered whether mandatory disclosure requirements under Directive 2011/16/EU, as amended by Directive 2018/822 (DAC6), violated lawyer-client confidentiality. The directive required intermediaries, including lawyers, to report potentially aggressive cross-border tax arrangements. The Court ruled that imposing such disclosure requirements on lawyers conflicts with Article 7 of the Charter of Fundamental Rights, which protects lawyer-client confidentiality. The decision reinforced that Member States must limit such disclosures to avoid breaching fundamental rights.

Relevance: This case is crucial for EU-based MNEs, as it affirms the protection of confidential tax planning discussions with lawyers. By strengthening lawyer-client privilege, the ruling ensures MNEs can engage in candid legal advice without fearing mandatory disclosure requirements, preserving confidentiality in cross-border transactions.

CLICK HERE TO READ THE FULL SUMMARY

Belgian Association of Tax Lawyers and Others (C-623/22)

Summary: The Belgian Association of Tax Lawyers and Others case involved a challenge to the proportionality of DAC6’s mandatory disclosure requirements for lawyers under Article 7 of the Charter. The claimants argued that DAC6’s disclosure rules were excessive, potentially infringing on lawyer-client confidentiality. The CJEU held that while DAC6 serves a legitimate interest in preventing tax evasion, any required disclosure must be proportionate. The ruling confirmed that only essential information should be disclosed, ensuring that disclosure obligations do not unjustifiably compromise confidentiality rights.

Relevance: This case holds significant implications for MNEs engaging in complex tax planning across borders. By emphasizing proportionality, the judgment ensures that MNEs’ consultations with legal advisors remain protected, preventing overreach from tax authorities and preserving the balance between transparency and confidentiality.

État luxembourgeois (C-245/19 and C-246/19)

Summary: In État luxembourgeois, the CJEU examined whether individuals and entities had the right to contest information requests from tax authorities under Directive 2011/16/EU. Luxembourg authorities had issued requests for information to banks, which argued that they should have the right to challenge these orders to protect clients’ privacy. The Court held that the directive requires Member States to offer a legal remedy for such requests, upholding the fundamental right to an effective judicial review under Article 47 of the Charter.

Relevance: This case is essential for MNEs operating in the EU, as it establishes the right to contest overly broad or unjustified tax information requests. The decision ensures MNEs have legal recourse to protect sensitive financial data, maintaining procedural fairness and transparency in tax investigations across jurisdictions.

Rui Eduardo Alves v. AG of Mauritius (Mauritius, 2021)

Summary: In this case, the Supreme Court of Mauritius addressed the limits of legal privilege in cross-border tax investigations. The court ruled that legal professional privilege must be strictly upheld unless there are overriding legal provisions, reaffirming its protection even in the face of requests from foreign tax authorities.

Relevance: This decision is critical for MNEs with operations in Mauritius, underscoring the resilience of legal privilege in cross-border tax cases and offering guidance on handling foreign requests for privileged information.

Glencore International AG v. Commissioner of Taxation (Australia)

Summary: The High Court of Australia ruled that documents leaked to the public, even if previously protected by privilege, could be used in tax investigations. Glencore had argued that privilege should prevent the Australian Taxation Office (ATO) from using the leaked documents, but the court disagreed, stating that privilege does not extend to restraining the use of already-public documents.

Relevance: This case is particularly relevant for MNEs managing confidential tax documents, emphasizing the risk that privilege may be forfeited if documents enter the public domain.

CLICK HERE TO READ THE FULL SUMMARY

Canada (National Revenue) v. Thompson (Canada, 2016)

Summary: In this case, the Federal Court of Canada evaluated whether the Canada Revenue Agency (CRA) could compel a taxpayer’s lawyer to disclose privileged information. The court upheld the sanctity of solicitor-client privilege, ruling that tax authorities could not override privilege except in narrowly defined circumstances.

Relevance: This decision reinforces the importance of legal privilege in Canadian tax matters, particularly for MNEs concerned about the CRA’s reach into privileged communications.

CLICK HERE TO READ THE FULL SUMMARY

Constitutional Court Decision No. 112/2004 (South Africa)

Summary: In this case, the South African Constitutional Court examined the rights of individuals to access privileged legal counsel when involved in litigation. The Court ruled that lawyer-client privilege is a fundamental right, grounded in constitutional values and the right to a fair trial. This case reinforced privilege protections and clarified its limitations under South African law.

Relevance: This case is essential for South African MNEs as it reinforces legal privilege’s constitutional protection in cross-border tax and compliance investigations, making it highly relevant for companies operating across jurisdictions with varying privilege standards.

Preventative Measures for Tax Risk Management

Effective tax risk management is critical for MNEs to avoid unexpected liabilities and legal complications. Establishing a robust tax risk management framework helps MNEs proactively address potential risks, ensuring that tax practices align with regulatory standards. One key preventive measure is forming a dedicated tax steering committee, which oversees the organisation’s tax strategies, compliance, and risk management efforts. This committee should include legal, finance, and tax professionals who regularly review tax policies, assess potential risks, and make informed decisions to mitigate exposure.

A structured tax risk management process, supported by clear documentation and rigorous internal controls, minimizes the risk of disputes. Implementing detailed reporting and compliance protocols ensures transparency, reducing the likelihood of regulatory scrutiny. In addition, engaging in ongoing training and consulting with external tax professionals keeps the committee informed of legal updates and best practices. Regular audits and assessments allow MNEs to identify and correct potential compliance issues before they escalate. By integrating a preventive approach, including strategic oversight and risk assessments, MNEs can maintain compliance, manage cross-border complexities, and avoid costly litigation or penalties.

To help you with this, download our FREE eBook: Driving Tax Compliance – The Essential Role of the Tax Steering Committee.

 

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