Almost all corporate taxpayers will have sought the advice of tax lawyers at one time or another – be it in the context of a transaction, a tax dispute, or otherwise – and the question may then arise as to whether and in what circumstances this advice is required to be disclosed to tax authorities.
In many jurisdictions, the tax authority is unable to compel the disclosure of such advice because it is protected by privilege or professional secrecy rules. However, as outlined in our Tax investigations and disputes across borders guide, that is not always the case – with Italy being just one example of a jurisdiction offering very little protection to taxpayers in this respect.
Against that backdrop, the decision of the Court of Justice in Case C-432/23 is significant. It confirms that it is contrary to Article 7 of the Charter of Fundamental Rights of the European Union (the Charter) for tax authorities to be able to compel lawyers to disclose the tax law advice given to their clients. The rationale is that lawyers in a democratic society are entrusted with a fundamental task: the defence of litigants. Accordingly, legal advice given by a lawyer, whatever the area of law to which it relates, is protected.
The decision
The facts
The Luxembourg tax authority (à l’administration des contributions directes) requested a Luxembourg law firm to provide it with all available information and documents relating to the services provided to a named (Spanish) company in connection with a particular corporate transaction. The request was made for the purposes of an exchange of information on request by the Spanish tax authority, as provided for by Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation (the Directive).
The law firm refused. The tax authority issued an injunction compelling such disclosure, and subsequently a fine for non-compliance. Perhaps unsurprisingly, litigation followed.
Privilege/professional secrecy under Luxembourg law
Broadly speaking, under the Luxembourg General Tax Law of 22 May 1931 (Abgabenordnung, the AO), persons must provide the Luxembourg tax authority on request with information relevant to its tax supervision functions and/or any ongoing tax investigation procedures. Article 177 of the AO provides some exceptions to this including for lawyers:
- insofar as they have acted in criminal proceedings, and
- in respect of matters they have become aware of in their capacity as such, unless they have been representing their client in tax matters, in which case this exception will only apply in the case of questions the affirmatives or negative answer to which would expose their client to the risk of criminal prosecution.
In short, in the absence of some proximity to (alleged) criminality, Luxembourg domestic law offers no scope for tax lawyers to refuse to share information about their clients with the Luxembourg tax authority on the grounds of privilege or professional secrecy.
Article 7 of the Charter
Article 7 of the Charter provides that “[e]veryone has the right to respect for his or her private and family life, home and communications”. Article 52(3) of the Charter explains that the “meaning and scope” of this right is, at a minimum, the same as the corresponding right guaranteed by Article 8(1) of the European Convention on Human Rights (the ECHR).
The case
Before the national courts, the law firm argued (among other things) that the actions of the Luxembourg tax authority were unlawful because they failed to comply with European law – specifically, Article 7 of the Charter. The national court sought various clarifications from the Court of Justice before issuing its decision.
Responding to the request for a preliminary ruling (and having regard to the written observations made by the governments of Luxembourg, Germany, Spain and Austria, as well as the European Commission and Council of the European Union), the Court of Justice found that Article 8(1) of the ECHR affords particular protection to exchanges between lawyers and their clients. Such protection extends to legal advice, and is not limited to defence activity. In light of Article 52(3), it follows that Article 7 of the Charter necessarily guarantees the secrecy of both the content and existence of such legal advice. Such secrecy is justified by the fact lawyers in a democratic society are entrusted with a fundamental task: the defence of litigants. Accordingly, legal advice given by a lawyer, whatever the area of law to which it relates, is protected.
The Court of Justice went on to find that Article 7 of the Charter precludes any provision of national law (including Article 177 of the AO) which purports to limit the scope of privilege or professional secrecy in respect of advice by a lawyer relating to tax matters to circumstances in which there is a risk of criminal proceedings against the client. Although the rights enshrined in Article 7 are not absolute prerogatives, and there are circumstances in which a very limited waiver of confidentiality may be justified, such provision renders the protection offered by Article 7 of the Charter devoid of its very substance in relation to tax law and so cannot be justified.
For those reasons, an injunction such as the one issued by the Luxembourg tax authority in this case is an interference with the rights guaranteed by Article 7 of the Charter.
Practical implications
In confirming that tax advice given by a lawyer does benefit from privilege/professional secrecy under European law, the Court of Justice has increased the level of protection available to taxpayers in jurisdictions which offer more limited protection under domestic law.
For legal systems to function effectively and equitably, all persons must be able to obtain legal advice in confidence – and that fundamental principle applies to tax law as it does every other specialism. Indeed, the English courts have long seen this as a fundamental human right. As it was explained by the House of Lords in R (Morgan Grenfell): “[privilege] is a fundamental human right long established by the common law. It is the necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.”
It remains to be seen how European jurisdictions which do not currently offer this level of protection in their domestic law will respond. In the meantime, though, taxpayers facing a tax investigation or dispute in Europe would be well-advised to reassess their privilege/professional secrecy position and take steps to ensure they do not inadvertently waive this (new) protection.
Looking beyond tax investigations, we would expect the legal communities in antitrust and corporate investigations in the European Union to also put to the test the possibly significant implications of this judgment in many areas of agency and public prosecution work where the full benefits of legal professional privilege have remained a bone of contention.
If you would like to discuss any of the points raised in this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact.
