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Suggested citation Bluebook: Donato Vozza, EU Court Of Justice: Steps Backward in Preventing Tax Abuse and Money Laundering?, CORPORATE CRIME OBSERVATORY, (Dec. 14, 2022), www.corporatecrime.co.uk/post/ecj-limits-aml-tax-abuses
Harvard: Vozza, D. (2022) EU Court Of Justice: Steps Backward in Preventing Tax Abuse and Money Laundering?. Available at: www.corporatecrime.co.uk/post/ecj-limits-aml-tax-abuses
OSCOLA: Donato Vozza ‘EU Court Of Justice: Steps Backward in Preventing Tax Abuse and Money Laundering?’, (Corporate Crime Observatory, December 2022), <www.corporatecrime.co.uk/post/ecj-limits-aml-tax-abuses>
1. Introduction
Over the past weeks, the EU Court of Justice – based in Luxembourg – has ruled on three meaningful cases in the area of tax rulings, aggressive tax planning, and anti-money laundering (AML). Chronologically, the Grand Chamber decided on the following three relevant questions:
On the compatibility of a tax ruling, which was granted by an EU Member State to the advantage of a multinational, with the EU state aid legal framework (i.e., the framework that prohibits a Member State from providing aid to a company distorting competition) - CJEU, Grand Chamber, 8 November 2022, Joined Cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission.
On the validity of the EU legal framework providing "that Member States must ensure that information on the beneficial ownership of companies and of other legal entities incorporated within their territory is accessible in all cases to any member of the general public” - CJEU, Grand Chamber, 22 November 2022, Joined Cases C‑37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers.
On the validity of the EU legal framework on administrative cooperation in the field of taxation regarding the duty of the intermediaries-lawyers subject to the professional legal privilege to notify their reporting obligations to other intermediaries involved in potentially aggressive cross-border tax-planning - CJEU, Grand Chamber, 8 December 2022, Case C-694/20, Orde van Vlaamse Balies and Others v The Flemish Government.
2. The judgments of the Grand Chamber in a nutshell
2.1. The compatibility of tax ruling with the EU aid state regime
On 8 November 2022, the Grand Chamber of the EU Court of Justice, in the joined cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission, annulled – by overturning the General Court’s judgment – the European Commission’s decision to declare advance tax rulings incompatible with the EU’s state aids framework.
More specifically, on 21 October 2015, the European Commission, at the end of its investigation, found that the tax ruling granted by Luxembourg in favor of Fiat Chrysler Finance Europe (‘FFT’), which enabled FFT to determine its corporate income tax liability to Luxembourg on a yearly basis, constituted a state aid in breach of Article 107 of the Treaty on the Functioning of the EU (TFEU). In this case, the European Commission ordered Luxembourg to recover the undue aid from the company. On 24 September 2019, the General Court confirmed the European Commission’s decision appealed by Luxembourg and FFT.
On 8 November 2022, the Grand Chamber of the Court of Justice – after a further appeal – set aside the judgment of the General Court of the EU and annulled the decision of the European Commission based on the fact that the reasoning of the European Commission, which established that the tax ruling derogated from the national corporate tax system, was vitiated by an error of law (paras. 81-113). In essence, the Court of Justice, considering that the Member States are competent in direct taxation, argued that the European Commission did not assess the tax ruling based on the arm’s length principle provided for in the law of Luxembourg.
As remarked by the EU Court of Justice in the last part of the judgment:
The “Member States must exercise their competence in the field of direct taxation, such as that which they hold in the area of the adoption of tax rulings, in compliance with EU law and, in particular, the rules established by the FEU Treaty on State aid. They must therefore refrain, in the exercise of that competence, from adopting measures which may constitute State aid incompatible with the internal market within the meaning of Article 107 TFEU …” (CJEU, Grand Chamber, 8 November 2022, Joined Cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission, para 121).
“In particular, after having observed that a Member State has chosen to apply the arm’s length principle in order to establish the transfer prices of integrated companies, the Commission must … be able to establish that the parameters laid down by national law are manifestly inconsistent with the objective of non-discriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system, by systematically leading to an undervaluation of the transfer prices applicable to integrated companies or to certain of them, such as finance companies, as compared to market prices for comparable transactions carried out by non-integrated companies" (CJEU, Grand Chamber, 8 November 2022, Joined Cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission, para 122).
“In the present case, … the Commission did not carry out such an examination in the decision at issue” (CJEU, Grand Chamber, 8 November 2022, Joined Cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission, para 123)
2.2. The general public access to the beneficial ownership registers and the right to private life and data protection
On 22 November 2022, the Grand Chamber of the EU Court of Justice, in the joined cases C‑37/20 and C‑601/20 WM and Sovim SA v Luxembourg Business Registers, decided on two requests for preliminary rulings from the Luxembourg District Court related to proceedings concerning the refuse of Luxembourg Business Registers “to prevent the general public’s access to information concerning” a company and a beneficial owner (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 2). The main question, in this case, was whether “Member States must ensure that information on the beneficial ownership of companies and of other legal entities incorporated within their territory is accessible in all cases to any member of the general public” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 34).
More precisely, based on Article 30(5)(c) of Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, as amended in 2018, “5. Member States shall ensure that the information on the beneficial ownership is accessible in all cases to: … c) any member of the general public. The persons referred to in point (c) shall be permitted to access at least the name, the month and year of birth and the country of residence and nationality of the beneficial owner as well as the nature and extent of the beneficial interest held. Member States may, under conditions to be determined in national law, provide for access to additional information enabling the identification of the beneficial owner. That additional information shall include at least the date of birth or contact details in accordance with data protection rules.” Pursuant to Article 30(9) of Directive (EU) 2015/849, as amended in 2018, “9. In exceptional circumstances to be laid down in national law, where the access referred to in points (b) and (c) of the first subparagraph of paragraph 5 would expose the beneficial owner to disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or otherwise legally incapable, Member States may provide for an exemption from such access to all or part of the information on the beneficial ownership on a case-by-case basis. Member States shall ensure that these exemptions are granted upon a detailed evaluation of the exceptional nature of the circumstances. Rights to an administrative review of the exemption decision and to an effective judicial remedy shall be guaranteed. A Member State that has granted exemptions shall publish annual statistical data on the number of exemptions granted and reasons stated and report the data to the Commission. ...”. The implementing legislation, the Law of 13 January 2019 establishing a Register of Beneficial Ownership in Luxembourg, establishes that information related to the beneficial owners must be entered into the register and accessed by the general public online. However, the beneficial owner may request to restrict access to information under specific circumstances laid down in Article 15 of the Law of 13 January 2019.
In the first case C-37/20, a real estate company, according to Article 15 of the Law of 13 January 2019, requested to restrict access to the information related to its beneficial owner, WM, solely to the entities mentioned in that provision because “the general public’s access to that information would seriously, actually and immediately expose WM and his family to a disproportionate risk and risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 20). The Luxembourg Business Registers rejected that application, and WM brought legal action before the Luxembourg District Court. In these circumstances, WM argued that he frequently traveled “to countries whose political regime is unstable and where there is a high level of crime, which creates a significant risk of his being kidnapped, abducted, subjected to violence or even killed” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 21). The Luxembourg Business Registers argued that this situation was not an “exceptional circumstance” envisaged in Article 15 of the Law of 13 January 2019.
In the second case, C-601/20, Sovim lodged an application to the Luxembourg Business Registers to require the restriction of access to the information about its beneficial owner only to the entities mentioned in Article 15 of the Law of 13 January 2019. The Luxembourg Business Registers rejected that application, and Sovim brought legal action before the Luxembourg District Court. The main complaint was that the access of “any person” to the identity and personal data contained in the register of beneficial owners would have infringed the right to respect for private and family life and the right to the protection of personal data.
The Grand Chamber of the EU Court of Justice has, in essence, responded to Case C-601/20, deeming it unnecessary to proceed with the other questions given its decision to consider invalid Article 30(5)(c) of Directive (EU) 2015/849, as amended in 2018.
More specifically, the Court assessed the compatibility of the first subparagraph of Article 30(5)(c) of Directive (EU) 2015/849, as amended, with Article 7 (respective for private and family life) and Article 8 (protection of personal data) of the Charter of Fundamental Rights of the EU (CFREU). In particular, the Court of Justice undertook its assessment on the basis of the following steps:
In answering these questions, the EU Court of Justice stated that:
“The general public’s access to information on beneficial ownership … constitutes a serious interference with the fundamental rights enshrined in Articles 7 and 8 of the Charter (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM v Luxembourg Business Registers, para 44). In this case, information is “accessible to a potentially unlimited number of persons,” including “persons who, for reasons unrelated to the objective pursued by that measure, seek to find out about, among other things, the material and financial situation of a beneficial owner” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM v Luxembourg Business Registers, para 42). Moreover, “once those data have been made available to the general public, they can not only be freely consulted, but also retained and disseminated and that, in the event of such successive processing, it becomes increasingly difficult, or even illusory, for those data subjects to defend themselves effectively against abuse” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 43).
In these circumstances, the exercise of fundamental rights is limited according to the law, as it “is provided for by an EU legislative act,” i.e., the legal provisions of the Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, as amended. Therefore, “the principle of legality must be considered to have been fulfilled” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, paras 47-49).
Moreover, “making available to the general public information” consisting of “data relating to the identity of the beneficial owner (name, month and year of birth, and nationality)” and “economic data (nature and extent of the beneficial interest held),” which are so related to the Directive, does not undermine the “essence” of the fundamental rights at stake (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, paras 50-54).
Additionally, “by providing for the general public’s access to information on beneficial ownership, the EU legislature seeks to prevent money laundering and terrorist financing by creating, by means of increased transparency, an environment less likely to be used for those purposes. That aim constitutes an objective of general interest that is capable of justifying even serious interferences with the fundamental rights enshrined in Articles 7 and 8 of the Charter (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, paras 58-59).
However, the measure is not strictly necessary and proportioned to the pursued objective. First, “the fact that it may be difficult to provide a detailed definition of the circumstances and conditions under which the public may access information on beneficial ownership is no reason for the EU legislature to provide for the general public to access that information” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para 72). Moreover, “although it is stated in recital 30 of Directive 2018/843 that the general public’s access to information on beneficial ownership ‘can contribute’ to combating the misuse of corporate and other legal entities and that it ‘would also help’ criminal investigations, it must be found that such considerations are also not such as to demonstrate that that measure is strictly necessary to prevent money laundering and terrorist financing. In light of the foregoing, it cannot be considered that the interference with the rights guaranteed in Articles 7 and 8 of the Charter, which results from the general public’s access to information on beneficial ownership, is limited to what is strictly necessary” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, paras. 75-76). Moreover, Article 30(5) allows “for data to be made available to the public which is not sufficiently defined and identifiable. Consequently, the substantive rules governing interference with the rights guaranteed in Articles 7 and 8 of the Charter do not meet the requirement of clarity and precision …” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para. 82).
Additionally, “the optional provisions of Article 30(5a) and (9) of Directive 2015/849 as amended, which allow Member States to make information on beneficial ownership available on condition of online registration and to provide, in exceptional circumstances, for an exemption from access to that information by the general public, respectively, are not, in themselves, capable of demonstrating either a proper balance between the objective of general interest pursued and the fundamental rights enshrined in Articles 7 and 8 of the Charter, or the existence of sufficient safeguards enabling data subjects to protect their personal data effectively against the risks of abuse” (CJEU, Grand Chamber, 22 November 2022, Joined Cases C-37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers, para. 86).
2.3. The obligation of lawyers to inform other intermediaries involved in potentially aggressive tax planning and the legal professional privilege
On 8 December 2022, in case C-694/20 Orde van Vlaamse Balies and Others, the Grand Chamber of the Court of Justice decided on the request for a preliminary ruling from the Belgium Constitutional Court, which was raised in the context of a proceeding between lawyers and the Flemish government concerning the duty of lawyers, despite their client-attorney privilege, to notify potential aggressive tax planning to other intermediaries involved in the operation.
As a preliminary remark, it must be noted that Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, as amended in 2018, provided that all intermediaries involved in potentially aggressive tax planning at a cross-border level had to report it to tax authorities. However, the Directive recognized the right of legal professionals to a waiver from filing information about tax planning in case it would breach the client-attorney privilege. However, in these circumstances, the lawyer-intermediary had to notify any other intermediary. The relevant provision is Article 8ab of Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, as amended in 2018, establishes that “1. Each Member State shall take the necessary measures to require intermediaries to file information that is within their knowledge, possession or control on reportable cross-border arrangements...”. Moreover, “5. Each Member State may take the necessary measures to give intermediaries the right to a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach the legal professional privilege under the national law of that Member State. In such circumstances, each Member State shall take the necessary measures to require intermediaries to notify, without delay, any other intermediary or, if there is no such intermediary, the relevant taxpayer of their reporting obligations under paragraph 6. Intermediaries may only be entitled to a waiver under the first subparagraph to the extent that they operate within the limits of the relevant national laws that define their professions.” The Flemish government implemented the Directive.
The Court of Justice has assessed the compatibility of this legal provision with Article 7 CFREU which ensures the confidentiality between lawyers and their clients, considering their essential role in defending litigants in a democratic society. Any person has to seek advice from a lawyer, and legal consultation is protected by professional privilege. As argued by the Court of Justice, the duty of the lawyers-intermediaries to notify the other intermediaries about their involvement in the potentially aggressive tax planning is an interference with Article 7 CFREU. Moreover, the second interference is because the other intermediaries have to report the information (identity of the lawyers and the fact they are consulted) to the competent tax authorities. Those interferences are justified by an objective of general interest consisting of countering tax avoidance and tax evasion. However, the Court of Justice excluded the duty of a lawyer subject to a professional privilege to notify other intermediaries of their reporting obligations as well as the duty of those further intermediaries to inform the tax authorities were necessary to reach the objective, considering that other intermediaries are required to file that information.
In conclusion, the Grand Chamber of the Court of Justice stated that “Article 8ab(5) of Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, as amended by Council Directive (EU) 2018/822 of 25 May 2018, is invalid in the light of Article 7 of the Charter of Fundamental Rights of the EU, in so far as the Member States’ application of that provision has the effect of requiring a lawyer acting as an intermediary, within the meaning of Article 3(21) of that directive, as amended, where he or she is exempt from the reporting obligation laid down in paragraph 1 of Article 8ab of that directive, as amended, on account of the legal professional privilege by which he or she is bound, to notify without delay any other intermediary who is not his or her client of that intermediary’s reporting obligations under paragraph 6 of that Article 8ab.”
3. Steps forward in protecting fundamental rights or steps backward in preventing tax abuse and money laundering?
These three judgments, which have as a common denominator the invalidation of measures to counter tax abuse and money laundering based on fundamental rights, raise a question:
do these judgements lead effectively to steps forward in protecting rights or steps backward in preventing tax avoidance, tax evasion and money laundering?
As a first point, it must be remarked that the EU Court of Justice’s judgments demonstrate how it is difficult to effectively balance the need to protect fundamental rights with the need to combat tax abuse and money laundering.
The debate, which preceded and is following the EU Court of Justice rulings, also demonstrates the difficulty of reaching a shared view on the matters:
On the one side, some consider that the Court of Justice, through these decisions, has ensured the effective protection of fundamental rights. The rights at stake in these three cases are the principle of legality (and competence), the right to confidentiality, and the right to respect communications between lawyers and their clients.
On the other side, others believe these decisions have weakened the fight against tax avoidance and money laundering. However, the legal reasoning behind these decisions is different, and each should be considered carefully and separately.
More specifically, the first measure that was annulled concerned the use by the European Commission of the EU legal framework on state aid to assess the tax ruling. The EU Court of Justice annulled the decision of the European Commission and set aside the decision of the General Court based on an error of law made by the European Commission (CJEU, Grand Chamber, 8 November 2022, Joined Cases C-855/19 P and C-898/19 P Fiat Chrysler Finance Europe and Ireland v European Commission). These conclusions seem to leverage the current structural limitations pertaining to the EU’s legislative competence in direct taxation. Moreover, before the decision of the EU Court of Justice, some authors already pointed out the problematic aspects in terms of legality related to the decision adopted by the European Commission. After the EU Court of Justice decision, other commentators welcomed the decision as a "beacon of hope for legal certainty." On the other side, the decision of the EU Court of Justice was considered by the EU Competition Commissioner Margrethe Vestager as a “big loss for tax fairness.” At the same time, it seems essential to remember that the EU Court of Justice has not excluded that tax rulings may be incompatible with state aid. Still, the European Commission must follow a different way to assess them. It will be interesting to observe whether and to what extent the European Commission and the Court of Justice will move in the future. At the same time, the importance of continuing to work towards fair taxation in the EU is essential. In that regard, the agreement reached on 12 December 2022 by the Council of the EU on a minimum level of taxation for the largest corporations is welcomed. However, further significant steps are needed to improve matters.
The second measure censured by the EU Court of Justice concerned the EU AML legal framework, which allowed the general public access to the information reported in the beneficial ownership register. In principle, the EU Court of Justice recognized that public access to beneficial ownership registers increases transparency and fosters the fight against money laundering. However, it considered that the measure was not proportionate (CJEU, Grand Chamber, 22 November 2022, Joined Cases C‑37/20 and C‑601/20, WM and Sovim SA v Luxembourg Business Registers). On the one side, some commentators argued that the Court of Justice’s decision undermined corporations’ transparency and liability. As shown by the Financial Times, the decision of the Court of Justice immediately impacted the online registers of beneficial owners of the Netherlands and Luxembourg: from 22 November 2022, the service is temporarily suspended. In reviewing the Court of Justice’s decision, we wonder if the Court could adopt a more prudent judgment in evaluating the rules and exceptions and reach an effective balance between protecting fundamental rights and effectively combating economic crimes through increased transparency.
The third measure censured by the Court of Justice was related to the duty of the intermediary lawyer to notify its involvement in potentially aggressive tax planning. In this case, the Court of Justice adopted a decision to protect the fundamental right to correspondence between lawyers and clients, also considering the role played by other intermediaries to report aggressive tax planning (CJEU, Grand Chamber, 8 December 2022, Case C-694/20, Orde van Vlaamse Balies and Others v The Flemish Government). However, some questions remain open on the difference between the "lawyer" that has the essential role of advising and defending people in a democratic society, and the "lawyer-intermediary" serving as an intermediary in potentially cross-border tax planning.
DOCUMENTS
Case 1) Fiat Chrysler Finance Europe and Ireland v European Commission (C-855/19 and C-898/19)
Press Release No 178/22 - Luxembourg, 8 November 2022
Judgment of the Court (Grand Chamber) ECLI:EU:C:2022:859 - 8 November 2022
Case 2) WM and Sovim SA v Luxembourg Business Registers ( C‑37/20 and C‑601/20)
Press Release No 188/22 - Luxembourg, 22 November 2022
Judgment of the Court (Grand Chamber) ECLI:EU:C:2022:912 - 22 November 2022
Request for a preliminary ruling - Tribunal d’arrondissement (Luxembourg) - 13 November 2020
Case 3) Orde van Vlaamse Balies and Others v The Flemish Government (C-694/20)
Press Release No 198/22 - Luxembourg, 8 December 2022
Judgment of the Court (Grand Chamber) ECLI:EU:C:2022:963 - 8 December 2022
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