Exchange of information – an aftermath of the Berlioz case!
The subject of exchange of information in taxation matters continues to raise questions with respect to the compatibility of certain of its provisions with fundamental rights. In May 2017, in the Berlioz case (CJEU, Berlioz Investment Fund SA v Directeur de l’administration des contributions directes, C-682/15, 16.05.2017, EU:C:2017:373), the Court of Justice of the European Union (‘CJEU’) held the applicability of the Charter of Fundamental Rights of the European Union (‘The Charter’) to the implementation of exchange of information provisions pursuant to directive 2011/16/EU on administrative cooperation (Council Directive 2011/16/EU of 15.02.2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, OJ L 64).
In that same decision, the CJEU, responding to a request for preliminary ruling from the Cour administrative of Luxembourg, found that the exchange request sent by the competent authorities of a Member State (the requesting State) to the administration of another Member state (the requested State) cannot be disclosed to concerned parties by the exchange due to its confidential nature.
Applicability of the Charter to exchange of information upon request
In Berlioz, the CJEU recognized the application of Article 47 of the Charter, which guarantees the right to an effective remedy and to a fair trial, to a situation of Luxembourg domestic law resulting from a change in the exchange of information legislation in 2014. Under such amended rules, information holders required to communicate certain information by the Luxembourg tax authorities could no longer challenge the validity of the information order before domestic courts. However, the 2014 law maintained a limited access to judicial review to information holders subject to a pecuniary fine for non-communication of the information requested. This appeal allowed domestic courts to assess the proportionality of the administrative fine without however reviewing the legality of the information order. In Berlioz, the CJEU stated that in application of Article 47 of the Charter, an information holder subject to a pecuniary fine is entitled to challenge the legality of the information order in the framework of this appeal. The Berlioz case did not however address the right to judicial review in the sole presence of an information order issued without the application of a pecuniary fine.
Note | This nuance is important and will be the subject of a future contribution in this blog.
Confidentiality of the information request
Additionally, we learned from Berlioz that following secrecy considerations featured in the 2011/16/UE directive, the request for information must remain confidential, including to interested parties in the course of the administrative and judicial proceedings (CJEU, Berlioz Investment Fund SA v Directeur de l’administration des contributions directes, pt. 93-101). In that regard, the CJEU clarified that this provision does not infringe the rights of the defence, and more generally the right to a fair hearing, as long as the relevant person can access certain minimum information to assess the lawfulness of the information order. The level of information deemed sufficient to ensure the information holder’s defence rights are provided by Article 20 (2) of the 2011/16/EU directive and include: i) the identity of the taxpayer concerned and ii) the tax purpose for which the information is sought.
Additional fundamental rights challenges post Berlioz
Following the decision in Berlioz, one could assume that most questions relating to the compatibility of exchange of information provisions with fundamental rights, as per the factual and legal situations described therein, are resolved. Yet, this statement is far from being true.
In a recent appeal, the Cour administrative heard a dispute that perfectly fits into the scope of the Berlioz decision. In that case, the Luxembourg tax director ordered a Luxembourg-based company to provide certain information on its shareholding. The company did not comply with the information order as it considered that the information sought was not foreseeably relevant for the tax investigation. As the 2014 law suppressed any appeals against the information order, the company challenged the pecuniary fine and, at the same time, the lawfulness of the information order. More precisely, it argued that there was a flagrant contradiction in the foreign investigation as to the identity of the person subject to the tax verification. It additionally challenged that the information was not foreseeably relevant as there was no clear indication of the identity of the shareholders the foreign authority was investigating.
In conformity with the OECD commentaries of Article 26 of the Model Tax Convention on Income and on Capital, the 2014 Luxembourg law on exchange of information upon request provides that the information order must only include information on the identity of the taxpayer under investigation, without however featuring any details on the aim of the investigation, (Loi du 25.11.2014 prévoyant la procédure applicable à l’échange de renseignements sur demande en matière fiscale, Art. 3(4)).
The first instance tribunal ruled in favor of the Luxembourg company. It held that the information order was invalid and consequently annulled the pecuniary fine the company was subject to. In response to the appeal filed by the State, the company maintained its initial arguments and developed a new one based on the conformity of the pecuniary fine provisions with Article 47 of the Charter. Essentially, the company complained that it was imposed a pecuniary fine before it was even able to access the minimum information required to assess the lawfulness of the information order. It also criticized the fact that in case the national judge would recognize the validity of the information order, it would face harsh consequences since the pecuniary fine would be confirmed without it being granted any suspensive effect for the information holder to comply with the order.
In its decision of 23.05.2019 (Cour adm., 23.05.2019, n°42143C. The preliminary ruling is classified under the number C-437/19), the Cour administrative confirmed that similarly to Berlioz, EU law requires that national judges review the validity of the information order despite national provisions abolishing access to judicial review in that specific case. As such, even if the information holder was in principle only allowed to appeal the pecuniary fine, Article 47 of the Charter enables domestic courts to review the legality of the information order at the origin of the disputed fine.
In that same decision, the Cour administrative distinguished two hypothesis that may arise in a situation such as the one at stake. First, in case the information order is deemed invalid by domestic courts, the decision imposing the pecuniary fine would logically be annulled in favor of the information holder. Second, if the information order is partially or entirely confirmed by the national judge, the information holder would be forced to comply with the order in addition to having to support the financial cost of the fine. This scenario is problematic as it reveals that at no occasion the information holder was given access to the minimum information required to consider the various options available on its part (comply with the order, appeal the pecuniary fine before domestic courts, etc.).
Following this reasoning, the Cour administrative decided to stay proceedings and introduced a preliminary ruling before the CJEU. It asked, among other questions, whether Article 47 of the Charter must be interpreted as requiring the adoption of a suspensive effect to the fixation of the pecuniary fine after the national judge confirmed the validity of the information order. Under this approach, the information holder would access the minimum information featured in Article 20 (2) of directive 2011/16/EU and would be put in a position to comply with the order after it was found to be valid by a final decision issued by domestic courts.
Conclusions | As noted by the Cour administrative in its preliminary ruling request, information order recipients are in a specific situation that derogates from ordinary administrative rules. This reasoning also originates from the principles articulated by the CJEU in Berlioz, notably concerning the confidentiality of the foreign information request.
In the present case, the information holder is the recipient of an administrative decision, which creates obligations upon him. Yet, this information order is issued without containing the reasoning that led to the adoption of said order, which bar the information holder from assessing the lawfulness of that decision. Under domestic law, the information holder must comply with the information order and is unable to appeal it before national courts. If it fails to abide by it, it risks a pecuniary fine and will only be able to access the necessary information to assess the lawfulness of the information order after it was already imposed a pecuniary fine. The lack of access to the minimum information required by Article 20 (2) of the directive 2011/16/EU prevents the information holder from making an informed decision as to whether it should comply with the information order or challenge it before domestic courts. In both cases, the information holder has already been imposed a pecuniary fine.
The upcoming decision from the CJEU will be decisive as it will tell us whether the Court considers that information holders must be granted additional safeguards, particularly under Articles 7 and 47 of the Charter, to compensate the negative effects triggered by the confidential nature of the information request.
Note | This case is currently pending with the CJEU and is registered under C-437/19 (Request for a preliminary ruling from the Cour administrative (Luxembourg) lodged on 31.05.2019 — State of the Grand Duchy of Luxembourg v L.).