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Does some Member States' implementation of the legal professional privilege exemption from DAC6 reporting infringe higher-ranking Union standards?

The way in which some Member States have implemented DAC6 raises legitimate concerns on its validity and compatibility with higher-ranking European Union standards. There is some reasonable doubt as to whether the legal professional privilege exemption from DAC6 reporting included in some transposition rules, such as the Spanish Law 10/2020 of 29 December, complies with DAC6 itself, the Charter on Fundamental Rights of the European Union (the Charter) and the European Convention on Human Rights (ECHR).

Spanish implementation

DAC6 requires that intermediaries or, in some circumstances, taxpayers report certain information to the relevant EU tax authority in respect of cross-border arrangements which meet one of a number of criteria.

A Member State may, however, exempt intermediaries from this reporting obligation where such reporting would breach legal professional privilege under its national law (see Article 8ab(5) of the consolidated DAC). Most European legislators have made use of this option to exempt lawyers from DAC6 reporting to the extent that legal professional privilege applies.

In Spain, however, the legislator has limited the scope of legal professional privilege for the purposes of the exemption from DAC6 reporting to advice “the sole purpose of which is to assess the adequacy of said mechanism vis-à-vis the applicable regulations, without seeking or facilitating its implementation” (new additional provision 23.2 of the General Tax Law, introduced by Law 10/2020).

Applying the ECHR 

The protection afforded under legal professional privilege is not unlimited and, thus, may yield to a public interest, but a (fair) balance between the two must always be sought. The European Court of Human Rights (ECtHR) and the Court of Justice of the European Union (CJEU) have previously considered how legal professional privilege can be restricted within the framework of measures adopted for the prevention of money laundering and terrorist financing.

The CJEU has analysed these restrictions in light of the right to a fair trial under Article 6 ECHR, concluding that:

  • that right is not violated if the restrictions on legal professional privilege are limited to cases in which a lawyer provides services unrelated to the client’s defence in judicial proceedings. The CJEU noted that the restriction in question fell away such that the lawyer was exempt “as soon as the lawyer… is called upon for assistance in defending the client or in representing him before the courts, or for advice as to the manner of instituting or avoiding judicial proceedings” (paragraph 34 of the judgment C-305/05); and
  • these restrictions can be justified “by the need... to combat money laundering effectively, in view of its evident influence on the rise of organized crime, which itself is a particular threat to society in the Member State” (paragraph 36 of the judgment C-305/05).

Applying the CJEU’s reasoning to DAC6, it seems that where a lawyer provides advice in the context of legal proceedings, the lawyer should become exempt from the DAC6 reporting obligation.

The ECtHR analysed restrictions on legal professional privilege in light of the right to the confidentiality of lawyer-client communications under Article 8 ECHR in Michaud v. France. It must be considered whether the restrictions have a legitimate aim (in Michaud, that was undisputed) and whether the right balance was struck between the competing legitimate aim and the right to confidentiality. The question was therefore whether, “bearing in mind the legitimate aim [of combatting money-laundering and associated crimes] being pursued, the obligation imposed on lawyers to report any suspicious acts, seen in this light, constitutes disproportionate interference with legal professional privilege” (paragraph 120 of the judgment in Michaud).

Applying the reasoning of Michaud to DAC6 would therefore require balancing client confidentiality under Article 8 ECHR with the public interest pursued by DAC6 – provided that this qualifies as a legitimate interest for these purposes.

Since many cross-border arrangements that are reportable under DAC6 are entirely legal and legitimate, it cannot be said that the public interest pursued by DAC6 relates to tackling organised crime or even unlawful tax planning. It would rather seem to be – and this is a quote from the preamble of DAC6 – the need for Member States to “protect their national tax bases from erosion” by obtaining information that “would enable those authorities to react promptly against harmful tax practices and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits”. But this public interest does not seem particularly urgent, given that – again quoting from the preamble of DAC6 – “the fact that tax authorities do not react to a reported arrangement should not imply acceptance of the validity or tax treatment of that arrangement”. In other words, the aim of DAC6 is to identify neutrality or consistency flaws in the tax system (i.e. flaws that ultimately make all tax planning possible) in order to correct them when (or if) the legislator wishes to do so.

There is some reasonable doubt as to whether the public interest pursued by DAC6 would be sufficient to count as a legitimate interest to allow any curtailment of legal professional privilege, meaning that national implementing legislation, such as the Spanish Law 10/2020 of 29 December which provides for a limited application of the exemption from DAC6 reporting on the basis of legal professional privilege, may well fall foul of Article 8 ECHR. 

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gmarin, uriamenendez, dac6, eu tax, spanish tax, legal professional privilege