Background

The recent judgment of the CJEU in Orde van Vlaamse Balies and Others v Vlaamse Regering signals a more expansive, but still restrictive, approach to LPP.

The case involved a reference to the CJEU from proceedings in the Constitutional Court of Belgium regarding the implementation in Belgium of EU Directive 2011/16 (the “Directive”), which requires aggressive cross-border tax arrangements which carry a risk of tax avoidance to be reported to the competent authorities.

A question arose in the Belgian proceedings over the requirement in the implementing Belgian legislation for lawyer-intermediaries involved in cross-border tax arrangements, who are bound by LPP and therefore unable to report the tax arrangements to the competent authorities, to notify any other intermediaries involved in designing or managing the tax arrangement (thus passing the reporting obligation on to the other intermediaries).

The Belgian courts referred to the CJEU the question of whether this requirement nonetheless infringes on LPP, as it would entail other parties becoming aware of: (1) the identity of the notifying lawyer; (2) the fact that they have been consulted in connection with the arrangement; and (3) that they have conducted an assessment of whether the arrangement in question is reportable.

The CJEU considered the issue in light of the rights protected by the Charter of Fundamental Rights of the European Union (the “Charter”); specifically the right to respect for private and family life (Article 7), and the right to a fair trial (Article 47).

Findings

Regarding Article 47 of the Charter, the CJEU found that the requirement to notify other intermediaries does not infringe the right to a fair trial, as there is no discernible link with judicial proceedings. The fact that the tax arrangement which the notifying lawyer is being consulted on may result in future litigation does not equate to acting for the purpose or in the interest of the client’s defence.

However, in respect of Article 7 (the right to respect for private and family life):

• The CJEU drew on case law concerning Article 8(1) of the European Convention for the Protection of Human Rights and Fundamental Freedoms (“ECHR”), which corresponds to Article 7 of the Charter and affords specific protection to LPP, to highlight the importance of confidentiality in respect of both the content and existence of lawyer-client communications, due to the ‘fundamental role [of lawyers] in a democratic society’. The CJEU noted that this confidentiality is essential to uphold the ability of any person, without constraint, to consult a lawyer, and the duty of the lawyer to act in good faith towards their client.
• The CJEU therefore held that the obligation to notify other intermediaries would interfere with LPP, as guaranteed by Article 7 of the Charter, as it would force the lawyer-intermediary to reveal to other intermediaries their identity and the fact that they have been consulted on the matter. Additionally, the intermediaries who are notified would be required to notify the tax authorities of these facts, resulting in a further infringement of LPP.

Proportionality

Although representing a wider view of LPP, the judgment makes clear that the concept of LPP under EU law continues to be limited.

The CJEU emphasised that rights under the Charter are not ‘absolute rights’, and that limitations may be imposed on them provided that ‘those limitations are provided for by law, that they respect the essence of those rights and that… they are necessary and genuinely meet objectives of general interest… or the need to protect the rights and freedoms of others’. The CJEU also took the view that the notification obligations did not undermine the principles of legality or the essence of the right to respect for lawyer-client communications, on the basis that the obligation is limited to notifying other intermediaries and, indirectly, the tax authorities, and does not entail revealing the content of communications without a client’s consent.

However, it was held that the obligations were invalid on the basis of proportionality:

• The CJEU applied the case of Luxembourg Business Registers and Sovim to show that infringements of Charter rights must not go further than necessary to meet legitimate objectives or protect the rights and freedoms of others, and the disadvantages of such an infringement must not be disproportionate to these aims.
• In this case, the CJEU concluded that, even though the prevention of tax avoidance constituted a legitimate objective, the infringement of LPP was not justified. This was for a number of reasons, including the fact that the tax arrangements would be caught by the reporting obligations of the other intermediaries or, if there were none, of the taxpayers set to benefit from them. As a result, the CJEU concluded that notification by the lawyer-intermediary was not strictly necessary, and that the resulting infringement of LPP was disproportionate.

Significance of the judgment

Despite the specific subject matter of the case, this judgment has significant implications for the treatment of legal advice by the European courts, and shows the high degree of scrutiny that will be applied to any infringement of LPP by Member States.

Prior to the judgment, the case of AM&S v Commission as upheld by Akzo Nobel – both of which related to dawn raids in competition cases - had established LPP under EU law as limited to: (1) communications made for the purposes or in the interests of the client’s rights of defence; and (2) communications with external lawyers, or at most the internal reporting of such communications (Hilti).

This latest judgment transforms the EU approach, finding LPP to be applicable to all legal communications between lawyer and client, regardless of their purpose or relation to legal proceedings. This brings the position under EU law closer to the scope of legal advice privilege under English law. However:

• Unlike the position in English law, where LPP is considered to be an absolute right, the CJEU has continued to emphasise that the opposite is true under EU law, and that any inroads into LPP will be subject to a proportionality assessment, which tends to be fact-specific.
• It should also be noted that LPP under EU law still only protects communications with external lawyers rather than in-house counsel.

As a result, companies in the EU receiving external legal advice can now take comfort that neither the content, or even existence, of their communications with external lawyers will have to be disclosed to third parties except in limited circumstances, where there is a justified public interest reason for doing so, and only where such a measure is strictly necessary.

It remains to be seen how this ‘general interest’ requirement may be met, but it seems for now that the EU courts will not be easily persuaded to permit infringements of LPP.

LPP regimes differ dramatically between jurisdictions.