Belgium - Constitutional Court assesses Legal Professional Privilege in light of DAC6 reporting obligations

“DAC6” or the 6th Directive on the Administrative Cooperation between EU Member States (2018/822/EU) aims at improving the functioning of the internal market by discouraging the use of aggressive cross-border tax planning arrangements.

In a nutshell, the directive requires intermediaries (such as lawyers, consultants, financial institutions and other service providers) – or in certain circumstances the taxpayers themselves – to report any advice and/or implementation of a cross-border arrangement of potentially aggressive tax planning to the local tax authorities. The presence of such aggressive tax planning is evaluated on the basis of certain objective indicators (called “hallmarks”). Some of these hallmarks only become relevant if one of the arrangement's primary motives is to obtain a tax advantage. Others will just be reportable on the basis of specific indications that the intermediary is (supposed to be) aware of.

For some professions (such as for lawyers or tax consultants) the intermediary reporting obligation is at odds with their legal professional privilege (or LPP). Although the DAC6 Directive allows member states to exempt intermediaries from the reporting obligation when they are bound by a legal professional privilege, there are still circumstances where the LPP must be breached, either pursuant to the Belgian implementation or even following the provisions of the DAC6 Directive itself. For those reasons and following the objection by several professional associations, on 15 September 2022 the Belgian Constitutional Court partially annulled the reporting obligation where it was deemed contrary to the LPP, and partially referred some preliminary questions to the European Court of Justice, where potential breaches of LPP find their basis in the directive itself (case 103/2022).

Lawyers’ Legal professional privilege

Firstly, the Constitutional Court confirmed its well-established jurisprudence on the lawyers' LPP. The Court considers the lawyers' LPP to be an essential component of the right to respect for private life and the right to a fair trial, as guaranteed by the Charter of Fundamental Rights of the European Union and the European Convention on Human Rights.

The Court also reiterates that the information obtained by a lawyer during the defence and representation of the client in court and in the provision of legal advice, even outside any litigation, remains covered by the LPP. Only when the lawyer engages in an activity that goes beyond that, he could be subject to an obligation to disclose the information of which he has knowledge to the authorities.

Marketable arrangements

In regard to “marketable arrangements”, which are cross-border arrangements that are designed, marketed, ready for implementation or made available for implementation without a need to be substantially customised, the Court observed that intermediaries are subject to a double reporting obligation: (i) the initial and the (ii) periodic reporting obligation.

The initial reporting obligation covers the situation where marketable arrangements are first made available or ready for implementation, even before any client is in sight. Hence, the Court considers it is unlikely that a lawyer would report information that is covered by LPP. The initial reporting obligation is therefore not covered by the LPP. Obviously, in the exceptional case that information would be covered by the LPP, a lawyer must refrain from making such initial reporting.

The periodic reporting covers the situation where an intermediary effectively offered, advised or implemented such an arrangement. In such case, the DAC6 implementation regulation provides that the intermediary must provide the tax authorities every three months with an overview of new notifiable information available on the marketable arrangements (such as the identification of a client), without the possibility to invoke the LPP.

The Court now confirmed that lawyers must invoke their LPP. The reporting obligation then shifts to the taxpayer-client, by analogy with bespoke arrangements. The lawyer must then provide the taxpayer client with the necessary information so that he can fulfil his reporting obligation himself.

Bespoke arrangements

According to the DAC6 regulations, in the case of a customized or “bespoke” arrangement, the intermediary who is prohibited by his LPP to report to the tax authorities, must inform the other intermediaries (who are not his clients) (or his client), that he cannot fulfil the reporting obligation due to the LPP. In that case, he is relieved from the reporting obligation. That obligation then shifts to the other intermediaries (or his client).

According to the Court, the mere fact of having used a lawyer falls under the protection of the LPP. The same applies a fortiori to the identity of a lawyer's clients. The information protected vis-à-vis the authority by the LPP is likewise in respect of other actors, such as other intermediaries (who are not his clients).

However, the obligation to immediately inform the other intermediaries is derived directly from the DAC6 Directive. The Court therefore repeats and refers to the preliminary questions it had already asked the ECJ in its earlier judgement of 17 December 2020 (case 167/2020), which is still pending: does the DAC6 Directive – in forcing lawyers to be in breach of their LPP when having to inform other intermediaries (not being their client) – infringe the right to a fair trial and the right to respect for private life as guaranteed by the Charter of Fundamental Rights?

DAC6 compliance audits

The tax authorities are allowed to audit an intermediary to verify whether they comply with the DAC6 reporting obligations. The Court finds that a lawyer-intermediary can sufficiently invoke their LPP in relation to income taxes under the provisions of the Belgian Income Tax Code. However, the Court annuls the compliance audit provisions for other taxes, as the relevant tax codes do not foresee the possibility for lawyers to invoke their LPP.

LPP for non-lawyers

The Court recognizes that the lawyers’ LPP is different from any other LPP for other professions in that the former also includes the right to a fair trial and is subject to a special status and serves a specific purpose in the framework of the administration of justice (the breach of which is criminally sanctioned). However, the reasons for annulment equally apply to the LPP applicable to such other professions.

Preliminary questions

Finally, the Court asked some additional preliminary questions.

  • The preamble of the DAC6 Directive refers to art. 115 VWEU, which implies that it should only apply to direct income tax. However, the DAC6 Directive applies to multiple forms of direct and indirect taxes. Therefore, should it not be limited to corporate income tax?
  • The imposed sanctions qualify as criminal penalties within the meaning of the European Convention on Human Rights and the Charter of Fundamental rights. Such sanctions can only be imposed if the law is sufficiently clear so that a person cannot mistakenly ignore the criminal nature of their actions. The legislature has put forward that some notions are not too strictly defined in order to avoid restriction of the law’s intended application. Also certain notions (such as “arrangement” or “participant”) are not defined at all in the Directive. The Court is clearly concerned about the principles of material lawfulness in criminal matters and the principle of legal certainty. Therefore, are the concepts such as '(cross-border) (marketable) (bespoke) arrangement’, 'intermediary', 'participant', 'associated company', 'cross-border', the various ‘hallmarks’ and 'main benefit test' sufficiently clearly defined?
  • There is uncertainty as to whether the starting point of the 30-day reporting period could be triggered by the intervention of other intermediaries in relation to facts which were unknown to the other intermediaries. Therefore, is the starting point of the 30-day reporting period for intermediaries and relevant taxpayers precisely defined?
  • The Court finally questions whether or not the reporting obligation is not too far-reaching from the point of view of the right to respect for private life as guaranteed by the Charter of Fundamental Rights of the European Union and the European Convention on Human Rights.

Firstly, this question is to broaden the scope of its earlier question in December 2020 (see above), which only covered the justification for a breach of LPP by lawyers, to the breach of LLP by non-lawyers who cannot invoke the right to a fair trial but only rely on the right for respect for private life.

Secondly, the question also serves the purpose of knowing whether the DAC6 Directive is not being disproportionate. Indeed, infringements on the respect of private life are allowed if there is a legitimate purpose and measures are taken proportionately. However, considering that the purpose of the infringement is to combat tax fraud, the Court observes that the DAC6 also obliges to report on acts that are lawful, authentic and not improper and of which the main purpose is non-fiscal.