On 29 July 2024, the Court of Justice of the European Union (“CJEU”) issued a judgment upholding various provisions of the Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU (“DAC”) as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC6”) in the case C-623/22.
The case, referred to by the Belgian Constitutional Court (“BCC”), was initiated by the Belgian Association of Tax Lawyers, among others, and related to the validity of DAC6 and whether the concepts and definitions used in DAC6 infringed notably the right to a fair trial and the right to privacy.
The CJEU concludes that DAC6 breaches neither the principles of equal treatment and non-discrimination nor the general principle of legal certainty and the right to respect for private life, as well as the principle of legality in criminal matters nor the legal professional privilege.
This case law is interesting as it provides various guidelines for the interpretation of the DAC6 provisions.
We analyse hereafter the reasoning of the CJEU.
Scope of DAC6 does not infringe the principles of equal treatment and non- discrimination
The first question referred to the CJEU by the BCC related to the validity of DAC6 in the light of the principles of equal treatment and non-discrimination to the extent it applies to taxes other than corporation tax.
The CJEU states in this respect that the DAC6 obligation forms part of the establishment of international tax cooperation to fight aggressive tax planning, which takes the form of an exchange of information between Member States to contribute to combatting the aggressive tax planning and preventing the risk of tax avoidance and evasion. This reference criterion, against which the existence of a possible infringement of the principle of equal treatment must be assessed, makes it applicable to all taxes falling within the scope of DAC. In this regard, the scope of DAC include not only corporation tax, but also direct taxes other than corporation tax and indirect taxes, such as registration fees. VAT, customs duties and excise duties that are excluded from the scope of DAC.
According to the CJEU, indeed, there is nothing to support the conclusion that aggressive tax planning practices may be implemented only in the field of corporation tax, to the exclusion of other direct taxation (i.e. income tax applicable to individuals) and the field of indirect taxation which are not subject to specific EU legislation in the context of which the objective of combatting such practices, unlike VAT, customs duties and excise duties.
On this question, the Court thus concludes that DAC6 does not infringe the principles of equality and non-discrimination in that it does not limit the reporting obligation in respect of cross-border arrangements to corporation tax.
The different concept of the general principle of legal certainty and the right to respect for private life
In the main proceedings, the plaintiffs claimed that the concepts of ‘arrangement’, ‘intermediary’, ‘participant’, ‘associated enterprise’, ‘marketable arrangement’ and ‘bespoke arrangement’ and the description ‘cross-border’, as well as the various ‘hallmarks’ and the ‘main benefit test’, were not sufficiently precise. Since the failure to comply with the reporting obligation laid down in DAC6 is enforceable by means of administrative fines provided for under national law, the BCC considered it necessary to refer the question about the validity of DAC6 in the light of the principle of legal certainty, the principle of legality in criminal matters and the right to respect for private life guaranteed in Article 7 of the Charter.
However, according to the CJEU, DAC6 does not infringe these principles and rights in that the various concepts used by DAC6 to determine the scope of the reporting obligation in respect of reportable cross-border arrangements appear to be sufficiently clear and precise. The CJEU drew its conclusion in light of the requirements stemming from the principles of legal certainty and legality in criminal matters. For each word, the ECJ justified its conclusion.
Arrangements
As regards the concept of ‘arrangement’, the CJEU states that this term must be understood in its usual sense of mechanism, operation, structure or set-up, the purpose of which, in the context of DAC6, is to carry out tax planning. In view of the wide variety and the sophistication of possible tax planning structures, it cannot be ruled out that an arrangement may itself consist of a number of arrangements. That may be the case for an “arrangement that involves the coordinated implementation, especially in different Member States or according to a staggered timetable, of separate legal and tax mechanisms that are not only steps or parts of that arrangement but which already pursue, individually and separately from each other, tax planning and which, taken together, seek to carry out overall tax planning”.
It appears to the CJEU that the definition of ‘arrangement’ is intended to be sufficiently broad and robust to capture any agreement, scheme, plan or understanding and all the steps and transactions that form part of or give effect to that arrangement.
According to the plaintiff, since the reporting obligation refers to each ‘reportable arrangement’, the fact that such arrangement may consist of a series of arrangements may give rise to uncertainty as to the breadth of the specific reporting obligations to be complied with. Nevertheless, according to the CJEU, it is only if and to the extent that an arrangement is itself composed of mechanisms that pursue, individually and separately from each other, tax planning and which constitute ‘reportable cross-border arrangements’ by themselves that this reporting obligation applies to each of those arrangements, in addition to applying, at the appropriate time, to the overall arrangement which they comprise. This involves that, individually and separately, these mechanisms contain at least one of the hallmarks set out in Annex IV of the DAC which, each individually and in isolation, entail a ‘potential risk of tax avoidance’, On the other hand, where a ‘reportable arrangement’ is composed of mechanisms that do not have these characteristics, the obligation only exists in respect of this arrangement and comes into being only on the date on which the arrangement satisfies one of the temporal conditions provided by DAC6.
Cross-border arrangement
According to the CJEU, this concept is essentially determined in light of the tax of the participant or participants in such arrangement, the location of the activity of the participant or participants or the consequences which the arrangement may have on the automatic exchange of information or on the identification of the actual beneficiaries of the arrangement.
Participant in the arrangement
Although not specifically defined, it is understood, according to the CJEU, as covering the ‘relevant taxpayer’, and as not covering, a priori, an ‘intermediary’, without prejudice, however, to the possibility that the intermediary might actively take part in the arrangement as the relevant taxpayer.
Impact on the automatic exchange of information or on the identification of beneficial ownership
This wording is, according to the CJEU, sufficiently explained by Annex IV, in so far as in category D this annex refers to specific hallmarks concerning the automatic exchange of information and beneficial ownership. Category D contains lists of various organisational and operational mechanisms by which an arrangement is liable to have the effect of undermining the reporting obligation or of concealing, by recourse to non-transparent ownership channels, the identity of the beneficial ownership of these organisational or operating mechanisms.
The CJEU restates hat the concept of bespoke arrangement should be defined as being any cross-border arrangement that is not a marketable arrangement.
Intermediary
DAC6 defines an intermediary as ‘any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross- border arrangement’ and also, ‘any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross- border arrangement.’
In order to be an intermediary, a person must also satisfy at least one of the following four conditions relating to the existence of a connection with the territory of the Member States, namely:
- to be resident in a Member State for tax purposes,
- to have a permanent establishment in a Member State through which the services with respect to the arrangement are provided,
- to be incorporated in, or governed by the laws of, a Member State, or
- to be registered with a professional association related
- to legal, taxation or consultancy services in a Member State.
The plaintiff seemed to consider the notion of person who undertakes only to provide ‘aid, assistance or advice’ (auxiliary intermediaries) was unclear. However, according to the CJEU, DAC6 does not appear to be lacking in the precision necessary to enable the operators concerned to identify themselves as falling, or not falling, within the category of persons subject to the reporting obligation, such as a person who has ‘undertaken to provide, directly or by means of other persons, aid, assistance or advice’, which is vital for enabling this identification.
Marketable arrangement arrangement and bespoke
The marketable arrangement is a cross-border arrangement that is designed, marketed, ready for implementation or made available for implementation without the need to be substantially customised. As regards, in particular, the expression ‘substantially’, the CJEU considers that this is clarified by hallmark A.3 of Annex IV, from which it follows, in essence, that an arrangement which does not need to be substantially customised for implementation is an arrangement the documentation and/or structure of which are largely standardised and which may be made available to a number of taxpayers.
The CJEU compares the notion of auxiliary intermediaries to the terms of ‘service providers’ used by the OECD Model Rules. Auxiliary intermediaries are also opposed to the persons who design, market, organise or make available for implementation or manage the implementation of the cross-border arrangement (‘the main intermediaries’) and whom those model rules designate as ‘promoters’ of the arrangement.
Main Benefit Test
Under DAC6, the Main Benefit Test (“MBT”) is satisfied where it ‘can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.’
According to the CJEU, it does not appear particularly difficult to decide whether the main benefit or one of the main benefits that can reasonably be expected of the arrangement they design and/or use is fiscal in nature. In this regard, the CJEU recalls that the BEPS Action 12 Report states that the MBT compares the value of the expected tax advantage with any other benefits likely to be obtained from the transaction and has the advantage of requiring an objective assessment of the tax benefits.
The starting point for the DAC6 reporting deadline does not breach the principle of legality in criminal matters and the right to respect for private life
The plaintiff argued that the provisions of DAC6 do not make it possible to determine, with the requisite degree of precision, the date from which the reporting period provided for in that directive begins to run.
The CJEU considered, however, that DAC6 does not infringe the principle of legality in criminal matters and the right to respect for private life in that the starting point of the 30-day period during which the intermediary or relevant taxpayer must fulfil its reporting obligation in respect of a reportable cross-border arrangement appears to be sufficiently clear and precise.
DAC6 provides that the 30-day period begins on the day after the arrangement is made available for the purposes of implementation, is ready to be implemented or when the first step of its implementation has been made, whichever occurs first. The concept of ‘implementation of the cross- border arrangement’ refers, as suggested by everyday language, to the transition of the arrangement from its conceptual stage to its operational stage.
As regards the reference to the provision of aid, assistance or advice applicable to the intermediaries, DAC6 requires information to be filed within 30 days beginning on the day after they provided, directly or by means of other persons, aid, assistance or advice. The CJEU notes in this respect that the provision of this aid, assistance or advice may be spread over a period of time. However, DAC6 does not specify whether the starting point of the reporting period available to the intermediaries is the day after the first day or the last day of the period in which the aid, assistance or advice is provided. The reporting obligation imposed on the intermediaries can thus logically only exist from the moment the person concerned knows or could reasonably be expected to know that he or she has undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing or organising a reportable cross-border arrangement and is, therefore, an ‘intermediary’ subject to the reporting obligation. This moment may only arise after the beginning of the provision, bythatperson,ofaid,assistanceoradvice.Itis,inparticular, in this circumstance that DAC6 stipulates that the person has the right to provide evidence that they did not know and could not reasonably be expected to know that they were involved in a reportable cross-border arrangement.
It must also be inferred both from the use by DAC6 of the past tense (‘provided’) and from the rule applied to the main intermediaries, according to which the reporting period does not run from the beginning of their involvement in the design of the arrangement, but only at the stage of its implementation, that the auxiliary intermediaries’ reporting period deadline cannot begin to run until the day after the date they completed their provision of aid, assistance or advice.
The judgment of 8 December 2022 (C-694/2) applies only in respect of lawyers
On 8 December 2022, the CJEU ruled that the DAC6 obligation imposed on a lawyer who is exempt from the reporting obligation as a result of legal professional privilege to notify other intermediaries involved in the tax arrangement of their own reporting obligations ('the obligation to notify') breached in itself the legal professional privilege.
Today, the CJEU specifies that such ruling only applies in respect of lawyers within the meaning of the directive to facilitate the practice of the profession of lawyer on a permanent basis in a Member State other than that in which the qualification was obtained. The CJEU justifies its conclusion in light of the unique position which they accord to the profession of lawyer within society and for the purposes of the proper administration of justice.
In these circumstances, the invalidity of part of DAC6 in light of Article 7 of the Charter, declared by the Court in the judgment of 8 December 2022 (Orde van Vlaamse Balies and Others, C-694/20) only applies to persons who pursue their professional activities under one of the professional titles referred to in the Directive 98/5, i.e. lawyers.
Therefore, the 2022 ruling of the CJEU does not apply as regards the other professionals who are not lawyers but are authorised, as the case may be, by a Member State to ensure legal representation, such as university professors in certain Member States and accountants in Luxembourg. The CJEU thus considers that there is nothing to prevent the obligation for the latter to notify other intermediaries involved in the tax arrangement of their own reporting obligations, even it has the consequence that the existence of the consultation link between the notifying intermediary and his or her client is brought to the attention of the notified intermediary and, ultimately, the tax administration.
As a reminder, DAC8 modifies DAC6 in order to comply with the 2022 ruling and amends it in such a manner that its provisions do not have the effect of requiring lawyers acting as intermediaries, where they are exempt from the reporting obligation on account of the legal professional privilege by
which they are bound, to notify any other intermediary that is not their client of the intermediary’s reporting obligations. However, intermediaries that are exempt from the reporting obligation because of the legal professional privilege by which they are bound remain required to notify their client of their reporting obligations without delay. In light of the ruling of 29 July 2024, this modification should thus not apply to intermediaries that are not lawyers. Luxembourg will have to implement most of the DAC8 provisions into its internal law by 31 December 2025 at the latest so they would become applicable as from 1 January 2026.
