To fight against tax fraud and tax avoidance, the States have significantly developed the use of exchanges of information. Indeed, in the course of tax audit procedures, it is now very habitual that a Tax authority requests information on a taxpayer to the tax authority of another state.
Within the European Union, exchanges of information for tax purposes are provided for by directive 2011/16/EU of 15 February 2011. Such exchanges of information must also comply with the provisions of the Charter of Fundamental Rights of the European Union (hereinafter "the Charter") and the data protection principle provided for by regulation 2016/679 of 27 April 2016 (originally provided for by directive 95/46 of 24 October 1995).
In its Grand Chamber judgment Luxembourg vs A of 6 October 2020 (C-245/19 and C-246/19), the Court of Justice of the European Union (hereinafter « CJEU ») provides predominantly clarifications regarding taxpayers’ rights, and answers the following questions: in the context of exchanges of information, what are the rights of the persons who hold such information and who might communicate it to a tax authority ? What are the rights of the taxpayers subject to such an inquiry and of third persons potentially concerned?
When a State (the requiring State) requests information to another State (the required State), it is sometimes necessary that the required State requests a third party (corporation, financial institution) to provide the requested information. The cases at hand address the issue of a request for information sent by the Spanish tax authority to the Luxembourg tax authority regarding a taxpayer residing in Spain (hereinafter “taxpayer A”) and under tax investigation in Spain. Further to the reception of the request from the Spanish tax authority, the Luxembourg tax authority issued (i) an order toward a Luxembourg company requiring such company to provide the information requested regarding taxpayer A (ii) and an order toward a Luxembourg bank requiring such bank to communicate information regarding taxpayer A and third parties (legal entities).
1. What are the rights of the person holding information?
• Confirmation of the right to a direct remedy against the administrative decision
In a Berlioz Investment Fund decision of 16 May 2017 (case C-682/15), the CJEU had ruled that a person who had been subject to a financial penalty for non-compliance with a decision requiring such person to communicate information in the context of an exchange of information between tax administrations under Directive 2011/16 was entitled to challenge the legality of that decision. In the present judgment, the Court pursues this reasoning when judging that the person holding the information has, on the basis of article 47 of the Charter (Right to an effective remedy and to a fair trial), the right to an effective and direct remedy against a decision requiring him to provide information.
2. What are the rights of taxpayer A who is the subject of a tax investigation?
• The assertion of the right to an effective remedy
Insofar as, in the case of a natural person, the communication of information constitutes an interference with the right to respect private life and data protection, the taxpayer could, on the basis of article 47 of the Charter, be granted the right to an effective and direct remedy against the collection of information.
• The restriction of the taxpayer's right to an effective remedy
Pursuant to the Charter (Art.52 – Scope and interpretation of rights and principles), the right to an effective remedy may be restricted if three cumulative conditions are met:
– a clear and precise legal provision must provide for such a limitation No restriction of the right to an effective remedy is possible unless it is explicitly provided for by a law. In the absence of a law, a taxpayer should therefore be granted the possibility of a direct remedy against the decision to collect information by the requested State.
– the substantive content of the right to an effective remedy must be respected
The CJEU states that the right to an effective remedy does not imply that the taxpayer must be granted the right to a direct remedy against the collection of information by the requested State.
According to the CJEU, the taxpayer is not in the same situation as the person holding the information and the taxpayer must have an effective remedy before a court when the information is used by the requesting State to make a tax adjustment. Such a remedy thus enables to challenge the collection of information by the requested State on an incidental basis.
In other words, if the law does not allow the taxpayer to have a direct remedy against the order for the collection of information in the requested State, the fact that the taxpayer is able to challenge in the requesting State the validity of an exchange of information which is then used to justify a tax reassessment is sufficient to guarantee the right to an effective remedy.
– the limitation must correspond to a public interest objective and not be disproportionate
The fight against tax fraud and tax evasion is an objective of public interest recognised by European Union law. Since exchanges of information must take place within a limited time frame, excluding the possibility for a taxpayer to file a claim against the order enables to achieve this objective.
Moreover, such a limitation is not disproportionate either, since the taxpayer has the possibility to challenge the order incidentally in the context of a claim against the rectification.
3. What are the rights of third parties concerned by the request for information?
The requesting State's request for information may concern third parties with whom the taxpayer maintains relationships (legal, financial, etc.). Based on an analysis similar to that made for taxpayers, the CJEU considers that:
– third persons concerned must be granted a right to an effective remedy against the decision ordering the communication of information relating to them;
– this right may be limited by a legal provision (provided that such persons have also access to another remedy, such as a liability claim).
This judgment of the CJEU confirms that a taxpayer under investigation for tax purposes in one State may challenge the validity of an exchange of information in the requested State. While the right to appeal against such collection of information may be limited, this must be explicitly provided for by the law and necessarily such a restriction must not be disproportionate in the light of the objective of combating tax fraud and tax evasion.
Incidentally, the CJEU also confirms that requests for information relating to contracts, invoicing and payments are not lacking foreseeable relevance within the meaning of directive n°2011/16 on exchange of information, as long as such information is defined by personal, temporal and material criteria relating to the taxpayer under investigation.