The Court of Justice for the European Union (CJEU) recently invalidated a provision derived from the EU Directive informally known as DAC6 which requires lawyers to report their involvement in certain cross-border tax-planning arrangements to third parties. The provisions analyzed in the decision – a detailed summary of which is available in an accompanying press release issued by the CJEU – are similar to the “notifiable transaction” proposals released by Canada’s Department of Finance earlier this year. For further details on those proposals, see our earlier blog post.
In brief, DAC6 obligates all “intermediaries” involved in a covered transaction to provide detailed information to one or more governmental bodies. Lawyers who are bound by “legal professional privilege” (akin to solicitor-client privilege under Canadian law) may be exempted from that reporting obligation under a specific country’s laws.
If exempted, however, each lawyer involved must nevertheless disclose their participation to all other intermediaries and inform them of their reporting obligations. The requirement to provide information to the government thereafter rests solely on those intermediaries – or on the taxpayer itself if no other intermediary is involved. Two lawyers’ professional organizations challenged the Belgian law implementing the requirement under DAC6 that lawyers notify other intermediaries of their reporting obligations, and the matter was referred to the CJEU.
Ultimately, the CJEU concluded that the reporting obligation imposed on lawyers interfered with the Charter of Fundamental Rights of the European Union in an unjustified way. In particular, the CJEU said that disclosing the existence of a lawyer-client relationship to third parties infringes upon the basic right for communications between a client and their lawyer to remain confidential – a right “justified by the fact that lawyers are assigned a fundamental role in a democratic society.” An equivalent right to confidentiality exists under Canadian law.
Further, the CJEU held that such infringement was not justified. In particular, all intermediaries – including those not subject to legal profession privilege (for example, accountants and financial advisors) – are required to disclose information to governmental authorities. Accordingly, imposing the same obligation on lawyers was unnecessary. Tax authorities remain informed regardless.
The DAC6-based reporting obligation analyzed in the decision appears substantially similar to that contained in Canada’s proposed notifiable transaction rules. In particular, under the latter regime a reporting obligation would prima facie rest on each lawyer who provides any advice or assistance in respect of a notifiable transaction – notwithstanding that all other advisors, promoters, and the taxpayer itself may be subject to the same reporting obligation. This presents the same concerns as identified by the CJEU as reasons for invalidating the relevant reporting obligation derived from DAC6.
The Supreme Court of Canada has repeatedly affirmed that solicitor-client privilege is a principle of fundamental justice and “must remain as close to absolute as possible if it is to retain relevance” (see, e.g., Canada v. Federation of Law Societies of Canada, 2015 SCC 7). The CJEU’s decision appears to be the first which considers the constitutional implications of the conflict between mandatory disclosure rules in a tax reporting context and the professional obligations of lawyers to their clients. If Parliament seeks to enact the notifiable transaction rules in their current form, one can reasonably expect that Canadian courts will be tasked with considering the same issue in determining whether those rules are constitutional.