Agefi Luxembourg - février 2025

Février 2025 37 AGEFI Luxembourg Droit / Emploi ByEmilienLEBAS,Partner,HeadofInternational Tax, Tax controversy&dispute resolution leader &ValentinePLATEAU,Manager,International Tax, KPMGLuxembourg O n 12December 2024, the Luxembourg administrative Court ofAppeal ( Cour ad- ministrative, 12 décembre 2024, n°48677Cb et 48684Cb ) (the “administrativeCourt” or the “Court”) ruled that the provisions of §177 (2) of the LuxembourgGeneral Tax Law ( Abgabenordnung, “AO”), were not compliant withEU lawandnotably article 7 and article 52 (1) of theCharter of Fundamental Rights of the EuropeanUnion (the “Charter”) guaranteeing the confiden- tiality of legal advice givenby lawyers. Summary of the case In the case at hand, the Luxembourg tax authorities received a request for an exchange of information fromtheir Spanish counterpart basedon theEUDi- rective on administrative cooperation in the fieldof taxation (the “ Directive ” or the “ DAC ”) (1) , regard- ing a Spanish taxpayer. This Directive establishes a comprehensive framework for the exchange of tax information amongEUMember States. Complying with their request, the Luxembourg tax authorities issued an injunction decision ordering a Luxem- bourg lawfirm(whichhad advised the taxpayer in the past) to provide all available documentation and communications concerning the services they had provided to this taxpayer in connectionwith a restructuring operation under scrutiny. The lawfirmhowever refused, arguing that it had acted as legal counsel of the group to which the taxpayer belonged, and that its legal professional privilege was protected based on §177 AO from communicating information concerning its client insofar as the services provided did not relate to taxmatters. Further to several communications be- tween the law firm and the Luxembourg tax au- thorities, the latter charged a fine to the former for failing to respond positively to the request for in- formation. The lawfirm lodged an appeal seeking the cancellation of the decision, but it was deemed inadmissible ratione temporis by the administrative Tribunal on 23 February 2023 (2) .Anewappeal was subsequently filed with the administrative Court by the law firm. In a first decision renderedon 4May 2023 (3) , the ad- ministrative Court overruled the Tribunal’s deci- sion as it considered that the tax authorities had violated article 47 of theCharter (i.e., Right to an ef- fective remedy and to a fair trial) as they failed to give the law firm access to the minimum informa- tion regarding the tax purpose for which the infor- mation was sought. The administrative Court further ruled that the sanction for such a violation was the suspension of the deadline for appeal, and hence considered the appeal admissible. Regarding the dispute itself, the administrative Court observed that legal professional privilege was not defined in the DAC that the Luxembourg law had transposed, and that the domestic legisla- tiondidnot provide any clear limitation inLuxem- bourgwhen considering the information that could be requestedby the tax authorities fromthirdparty benefitting fromsuch privilege.As the administra- tiveCourt questioned the compatibility of §177AO with article 7 of theCharter protecting legal profes- sional privilege, it opted to refer the case to the Court of Justice of the European Union (“ CJEU ”) and requested a preliminary ruling regarding whether article §177AO could be deemed compli- ant with the Charter. The decisionunder reviewwas rendered in light of the clarifications provided by the CJEU (CJEU, 26 September 2024, C-432/23). Context of the decision The exchange of information upon request proce- dure (“ EOI ”) in the EU is based on the DAC and enables tax authorities from one Member State to request or provide information on identified tax- payers to tax authorities from another Member State. The EOI is aimed at addressing the tax-re- lated complications resulting from the highmobil- ity of taxpayers aswell as the increasing number of cross-border operations carried out. The transposition of the DAC in Member States’ domestic laws and its application by their tax au- thorities (consisting notably of the requested tax authority’s ordering a third party to provide “foreseeable relevant” information on specific taxpayers) regularly results in taxpayers and third parties who have been ordered to disclose infor- mation challenging those demands, both at na- tional and EU level. The Luxembourg rules on the EOI have already been challenged in the past on the grounds of its incompatibility with the Charter. In its early days notably, the requested tax authorities could only control the procedural regularity of the request, in contradiction with article 47 of the Charter. As a result of the landmark case “Berlioz” (4) , the Lux- embourg law of 25 November 2014 transposing the DAC was therefore amended, allowing the third party supposedly holding the requested in- formation to challenge the injunction decision, hence requiring the domestic tax authorities to check whether the information requested by the tax authorities of the otherMember Statewas fore- seeably relevant. In recent years inLuxembourg,most of the case law concerning the exchange of information upon re- quest has revolved around the foreseeable rele- vance criterion. Despite the fair number of cases ending up being settled either by the Tribunal or the Court, the interpretation of this cri- terion by the administrative jurisdic- tions has remained constant. The case at hand deserves our attention as it challenges the legality of the Luxem- bourg law of 2014, this time in light of the provision of article 7 and arti- cle 52 (1) of the Charter. The CJEU acknowledges that the fundamen- tal rights protected by the Charter are not absolute and that a limit in their exercise may be jus- tified by the pursuit of pub- lic interest objectives, such as the effectiveness of fiscal su- pervision byMember States. However, even though the CJEU took into account the gen- eral interest reason behind the ex- change of information procedure, it made it clear that Luxembourg could not go beyond what was necessary to reach such an objective and that the restriction had to be proportionate. As a consequence of the decision under review, §177 (2) AO is now unapplicable in the context of anEOI upon request fromthe Luxembourg tax au- thorities to a lawyer when falling within the scope the DAC. Hence it should be expected to be re- formed sooner rather than later. It is up to the leg- islator to find the right balance to reconcile the safeguarding of the rights enshrined in the Charter with the continuation of effective cooperation be- tween the Luxembourg tax authorities and those of other Member States. Such an exercise may be tricky and, even though one may reasonably assume that §177 AO will be amended in a favorablemanner for taxpayers and third-party lawyers alike, it should not, in our view, be interpreted as the final word on the mat- ter. Not only is it uncertain at this stage towhat ex- tent the unlawful provision will be amended and whether such changeswill be deemed sufficient to comply with EU law, the decision of the adminis- trative Court is also likely to encourage those im- pacted by such procedures to further challenge its legality, invoking fundamental rights enshrined in theCharter.Wewill closelymonitor developments regarding incoming reform in this area and what it means regarding the legal professional privilege of information holders. Finally, this decision is also interesting from a strictly procedural point of view. Even though this is generally not the first approach thatwould come to mind when entangled in (pre-)litigation proce- dures with the tax authorities, this decision illus- trates well that challenging the legality of the law itself may sometimes be a winning strategy. Decision of the Court The administrative Court requested a preliminary ruling from the CJEU to essentially i) clarify the scope of the protection of the communications be- tween lawyers and their clients embedded in article 7 of the Charter and, ii) in light of those clarifica- tions, to confirmwhether the Luxembourg law on exchanges of information on request which trans- poses the Directive 2011/16 should be deemed in line with the Charter’s provisions. As the CJEU ruled that the current §177 (2)AOconstitutedan in- fringement to article 7 of the Charter, the subse- quent judgment of the Luxembourg administrative Courtwas also, unsurprisingly, viewed in that light. Analyzing theprovisions of §177AO, theCourt first observed that (1) provides for an attorney-client privilegewhichmaybe invokedas adefense against investigative measures conducted by the Luxem- bourg tax authorities. This legal professional privi- lege is general in nature as it may apply to all information related to the lawyer’s clients, to the ex- tent that such information has been obtained in the course of the lawyer’s professional activity. The Court highlighted however that the protection granted is not absolute, as §177 (2) AO introduces anexemptionaccording towhich legal professional privilege may not apply to information which would have been acquired by the lawyer while ei- ther: 1. Providing tax advisory services to the client; or 2. Representing the client in taxmatters In those two situations, the lawyer would be fully obligated to provide the requested information to the tax authorities, unless the information dis- closed could potentially expose the client to crimi- nal prosecution. The administrative Court observed that the §177 (2) AO does not contain any restriction regarding the documents or information the tax administration may request froma lawyer.Although the injunction decisionshouldintheorybesuccessfulonlyinlimited cases, namely where the lawyer has provided advi- sory or legal representation services in taxmatters to hisclient,theprovisiondoesnotclearlyspecifywhich information, in those instances, shouldor shouldnot be disclosed by the lawyer. In that regard, the Court pointed out that the only reliable limit on which the lawyer may rely to contest the injunction decision seems to be the foreseeable relevance criterion. The Court reiterated the observation that made it opt for a preliminary ruling from the CJEU in the first place, outlining that this resulted from the cur- rent wording of the §177 AO that the legal profes- sional privilegedoes not preclude the taxauthorities from issuing an injunction decision in non-taxmat- ters but rather constitutes a justification a posteriori for the lawyer not to complywith the request. Considering that the CJEU concluded on the non- conformityof §177 (2)AOwitharticle 7 and52 (1) of the Charter, and based on the principle of the pri- macyofEULaw,theCourtconcludedthefollowing: - at least in the context of the exchange of informa- tion (based on the EU Directive 2011/16) the Court can no longer apply paragraph § 177 (2) AO as a legal basis for an injunction decision addressed to a lawyer; - any limit to article 7 of theCharter shouldbemen- tioned in the local law (article 52 (1) of the Charter), and that currently § 177 AO does not provide for any particular limitation as to the nature and extent of the information that the tax authorities may re- quire a lawyer to provide; - hence, the only provision of domestic law that can be validly applied in the field of exchange of infor- mation inaccordancewithArticles 7 and52(1) of the Charter, is §177 (1)AO. Further to the above, the Court concluded on the cancellation of the litigious injunction decision as it had no legal basis in conformity with article 7 and 52 (1) of the Charter. 1) Council Directive 2011/16/UE dated 15 February 2011 2) Decision of theAdministrative Tribunal dated 23 February 2023 n°48213 3) Decision of theAdministrative Court dated 4May 2023 n°48677C et 48684C 4) Decision of the CJUE dated 16May 2017, C-682/15 Administrative Court of Appeal - Decision on exchange of information and legal professional privilege