EU – DAC6 - ECJ further clarifies the mandatory disclosure obligation

The presence of such aggressive tax planning is evaluated on the basis of certain objective indicators (called “hallmarks”). A number of these hallmarks only become relevant if one of the arrangement's primary motives is to obtain a tax advantage (the ‘main benefit test’). Others will be reportable on the basis of specific indications that the intermediary is (supposed to be) aware of. For more detailed information, see our DAC6 Insights page.

Following the annulment procedures lodged by several Belgian Bar Associations and the Institute for Accountants and Tax Advisors against the Belgian law implementing the DAC6 Directive before the Belgian Constitutional Court, the latter sought assistance from the European Court of Justice in relation to the principles of non-discrimination, equal treatment, legal certainty and private life (covering the lawyer’s legal professional privilege). The European Court of Justice ruled in those cases on 8 December 2022 (C-694/20) and on 29 July 2024 (C-623/22).

The most important takeaways from these cases are:

• Lawyers must not report to other intermediaries
  The DAC6 Directive requires that a lawyer-intermediary, who is exempt from reporting to the tax authorities due to his legal professional privilege, must instead notify other intermediaries or, if there are no other intermediaries, the client himself.
  The ECJ ruled that the DAC6 Directive infringes the base principle of the legal professional privilege by requiring such notification to other intermediaries who are not the lawyer’s client. Lawyers therefore must not report to other intermediaries.
• Legal professional privilege exemption only applies to lawyers
  Other professionals with a professional secrecy (such as tax consultants, accountants, notaries, and auditors) had hoped that the ECJ’s decision on the exemption to inform other intermediaries due to their legal professional privilege equally applied to them. However, the Court ruled that its earlier decision was limited to only lawyers pursuing their professional activities under one of the professional titles referred to in Article 1(2)(a) of Directive 98/5 (such as advocaat, avocat, advokat, rechtsanwalt, barrister/solicitor, advogado, abogado, avvocato). Such limited scope is justified by the special position occupied by lawyers in the judicial organisation of the Member States and to the fundamental task entrusted to them and which is recognised by all the Member States. Furthermore, extending this exemption to other professionals with a professional secrecy would call the effectiveness of the Directive into question. Other professionals can therefore still benefit from the exemption to directly report to the tax authorities but remain liable to inform other intermediaries.
• Disclosure and reporting is not limited to corporate income tax
  Although the Commission’s Impact Assessment accompanying the DAC6 proposal attached more importance to direct taxes, any type of tax or duty is susceptible to aggressive tax planning. While the DAC6 Directive excludes VAT, customs duties and excise duties covered by other EU legislation on administrative cooperation between Member States, the reporting obligation may extend to other direct income taxes and indirect taxes or duties in light of the Directive’s objectives.
• Definitions are sufficiently clear and precise
  Given the severe sanctions which a Member State can apply for non-compliance, the principle of legality in criminal matters requires that definitions are sufficiently clear and precise. The ECJ found that, considering the evolving nature of hypotheses to which the Directive may apply, and which cannot be determined in advance by the legislature, the Directive may use abstract legal notions.
  The Court found that the notions alleged to be too broad, were either sufficiently defined or don’t need any clarification at all. Some of those notions were:
  •  ‘Arrangement’ must be understood in its usual sense of mechanism, operation, structure or set-up, the purpose of which 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, in essence, 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.
  • ‘Participant in the arrangement’ only covers the ‘relevant taxpayer’, and not an ‘intermediary’, unless he would actively take part in the arrangement as a relevant taxpayer.
  • ‘Marketable arrangement’ is a cross-border arrangement that is designed, marketed, ready for implementation or made available for implementation without a need to be substantially customised. This covers, in essence, an arrangement the documentation and/or structure of which are largely standardised, and which may be made available to a number of taxpayers. A ‘Bespoke arrangement’ is a cross-border arrangement that is not a marketable arrangement.
  • The ‘main benefit test’ refers to the benefit which, ‘having regard to all relevant facts and circumstances, a person may reasonably expect to derive from [that] arrangement’. It does not appear particularly difficult for an intermediary or the relevant taxpayer 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. The main benefit test compares the value/amount 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.
• Starting point for 30-day reporting period
  The DAC6 Directive obliges intermediaries to report within 30 days from (i) the day after the reportable cross-border arrangement is made available for implementation, or (ii) the day after the reportable cross-border arrangement is ready for implementation, or (iii) the moment the first step in the implementation of the reportable cross-border arrangement is taken, whichever occurs first. after they have provided assistance, aid, or advice directly or through other persons.
  The ECJ indicated that ‘implementation’ refers to the moment when the arrangement transitions from the ‘conceptual’ to the ‘operational’ stage, which a ‘promotor’ intermediary (i.e. the lawyer or tax consultant advising on the construction) surely knows. Their 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.
  The Court recognizes, however, that a ‘service provider’ intermediary (i.e. the lawyer ‘assisting’ with the implementation of the various steps) may be less directly involved than the ‘promotor’ intermediaries, and is less likely to be specifically instructed on the progress of the arrangement. Their reporting period cannot begin to run until the day after the date on which they completed their provision of aid, assistance or advice and, at the latest, on the day of effective implementation, provided they are aware of it. This obviously does not preclude them to report, if they so wish, even before the 30-day period starts to run.