Exchange of information procedure in tax matters - another eagerly awaited decision of the CJEU after the Berlioz case in 2017

 On 6 October 2020, the Court of Justice of the European Union (CJEU) released its much awaited judgment in the joined cases C-245/19 and C-246/19 in relation to the exchange of information procedure between national administrations in tax matters (EOI).

The judgment rules on two preliminary questions raised by the Luxembourg Administrative Court in the context of two EOI proceedings currently pending before the Luxembourg Administrative Court. These proceedings concern a taxpayer (the Taxpayer), being an individual resident of Spain, as well as several companies with whom the Taxpayer maintains legal, banking, financial or other economic relationships (the Companies), all of them acting against the State of Luxembourg following an EOI procedure initiated by the Spanish tax authorities (the Spanish EOI requests). As far as the Companies are concerned, one of them is the recipient of one of the information orders issued by the Luxembourg tax authorities; the others have not been requested to provide information but are mentioned in the information orders. The proceedings also involve a bank (the Bank) in its capacity as recipient of one of the information orders issued by the Luxembourg tax authorities.

Further to the proceedings initially brought by the Taxpayer and by the Companies before the Luxembourg Administrative Tribunal, and to the appeal lodged by the Luxembourg State before the Luxembourg Administrative Court against the decision of said Tribunal, the Luxembourg Administrative Court lodged the preliminary questions with the CJEU.

The cases are often referred to as "Berlioz 2" cases, while a continuation of the trend initiated by the CJEU following its decision in the Berlioz Investment Fund case of 16 May 2017¹  (the Berlioz decision) was hoped for. The expected new impetus to the recognition of the rights of the taxpayer and of third parties mentioned in an EOI procedure was finally balanced out by the limits put by the Court to those rights (despite the more taxpayer friendly position of the Advocate General Juliane Kokott in her conclusions of 2 July 2020).

As regards the first question raised by the Luxembourg Administrative Court, the CJEU had to analyse whether national legislation of a Member State which precludes a judicial remedy against a tax information request entails a violation of article 47 of Charter of Fundamental Rights of the European Union (the Charter).

Article 47 of the Charter covers the right to an effective remedy and to a fair trial². In the case at hand, the alleged "rights and freedoms guaranteed by the law of the Union" that would have been violated are the right to privacy (article 7 of the Charter) and to the right of protection of personal data (article 8 of the Charter).

The CJEU first reiterated that the right for both natural and legal persons to an effective remedy against the arbitrary or disproportionate intervention by public authorities in their private sphere is a general principle of EU law.

In accordance with article 52 of the Charter³, a limitation on the exercise of this right should be provided for by EU law (which is not the case as far as the relevant provisions applicable in case of an EOI procedure are concerned), or absent these provisions, by national legislations subject to the conditions provided by article 52 of the Charter (i.e. limitations may be made only if they are necessary and genuinely meet the objectives of general interest recognised by the European Union or the need to protect the rights and freedoms of others).
In order to answer the question, the CJEU then made a distinction between the information holder, the taxpayer and third parties.

As far as the information holder is concerned, based on the legislation applicable in Luxembourg to the EOI procedure at the time of the information requests (which excluded the possibility for the information holder to bring a direct action to court and obliged the taxpayer to refuse to provide information and therefore to be liable to penalties⁴), the Court concluded that this legislation does not comply with article 47 of the Charter.

As regards the taxpayer and third parties, the Court stated, however, that the right to such an effective remedy does not automatically translate into the right to challenge a particular measure, like an information order, when other remedies are available, such as the right to challenge a tax adjustment or a tax reassessment (for the taxpayer), or the right to initiate an action to establish liability (for third parties). The availability of these alternative remedies shall be evaluated by the national courts. According to the CJEU, the legislation at stake is suitable to (proportionally) pursue the objective of general interest, consisting of combating international tax evasion and avoidance by strengthening cooperation between national authorities.

As regards the second question raised by the Luxembourg Administrative Court, the CJEU had to determine whether a request for exchange of information, and a consequent information order from the competent authority of the requested Member State, satisfy the condition that there is not a manifested lack of foreseeable relevance where the requesting Member State states the identity of the taxpayer concerned, the period covered by the investigation in the requesting Member State and the identity of the holder of the information in question, while seeking information concerning contracts and the associated invoices and payments which are unspecified but which are defined by criteria concerning, first, the fact that the contracts were concluded by the identified holder of the information, secondly, their applicability to the tax years covered by the investigation by the authorities in the requesting State and, thirdly, their relationship with the identified taxpayer concerned. Building on the analysis of the foreseeable relevance in the Berlioz decision, the CJEU continued to outline the contours of this concept, considering as foreseeably relevant "any information that is not manifestly lacking any realistic importance" and clarifying that the potential relevance of the information requested shall be determined ex ante and not ex post, in light of the results of the EOI. By doing so, the CJEU may pave the way to a more consistent application of this concept by the EU tax authorities and national courts (and perhaps even by those in third jurisdictions which follow the OECD framework of EOI set of principles).

There is a lot to be said about this decision, in particular as regards the interpretation made by the CJEU of concepts such as the objective of general interest and the proportionality principle, as well as about the analysis made by the Court as regards the availability of alternative remedies for the Taxpayer and the Companies. As far as Luxembourg is concerned, a number of decisions are now expected from the Administrative Tribunal/Court while decisions on EOI matters have been put on hold since 2019, waiting for the CJEU decision. The situation is obviously the same in a number of other EU countries. The interpretation that will be made by national courts of this decision will be extremely interesting.

Cases C-245/19 and C-246/19 show that not only taxpayers but also economic operators involved, such as banks, shall be prepared to deal with EOI requests. A timely and informed response is essential to protect the taxpayer and other players' rights and to avoid penalties.

In light of the ever increasing recourse to the EOI procedures, the complexity of the matter, and more generally, the increasing number of tax audits initiated by tax authorities seeking to fight against tax evasion and tax avoidance, taxpayers should be aware of their rights and obligations and be guided through these complex matters of growing importance. Ashurst has a highly specialised team to deal with these questions and can assist at all stages of the procedure.

Should you have any questions, we are at your disposal to discuss.

1. C 682/15, 16 May 2017
2. Article 47 of the Charter: "Everyone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal […]".
3. Article 52(1) of the Charter: "Any limitation on the exercise of the rights and freedoms recognised by this Charter must be provided for by law and respect the essence of those rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others".
4. At the time of the Spanish EOI requests and the information orders issued by the Luxembourg tax authorities, back in 2017, persons ordered to provide information in the framework of an EOI procedure could not oppose such order under Luxembourg law. Following the Berlioz decision, Luxembourg law was changed in 2019, giving rights to the holder of information notified by the Luxembourg tax authorities to bring a direct action to court.