The Concept of Legal Professional Privilege in DAC 6 Reporting: A Challenge to Attorney-Client Confidentiality in Cyprus

By George Kazoleas, Lawyer in Cyprus

The Administrative Cooperation in the Field of Taxation (Amending) Law of 2021 was enacted in Cyprus to harmonize with Council Directive (EU) 2018/822 of 25 May 2018, which amends Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements ("DAC 6").

The Law, echoing the Directive, imposes an obligation on every "intermediary" to submit information within thirty (30) days to the competent authority concerning reportable cross-border arrangements that have come into their knowledge, possession, or control.

According to the aforementioned Law, an "intermediary" is defined as any person who designs, markets, organizes, makes available for implementation, or manages the implementation of a reportable cross-border arrangement, and/or any person who, taking into account all relevant facts and circumstances, and based on available information and the relevant expertise and understanding required to provide such services, knows or could reasonably be expected to know that they have undertaken to provide, directly or through other persons, aid, assistance, or advice concerning the design, marketing, organization, making available for implementation, or management of the implementation of a reportable cross-border arrangement. Any person has the right to provide evidence that the aforementioned person did not know and it would not be reasonable to assume that they knew that the said person was involved in a reportable cross-border arrangement, and for this purpose, a person may refer to all relevant facts and circumstances, as well as the available information and the person's relevant expertise and understanding.

Based on this definition, a lawyer or a law firm can indeed be considered an "intermediary." The question then arises as to how this reporting obligation to the Authorities is reconciled with the lawyer's duty of secrecy and confidentiality towards their client. This is addressed by Article 7D (5)(a) of the aforementioned Law, which states that an intermediary is not obliged to disclose information covered by the legally recognized professional privilege.

However, this answer is ultimately unsatisfactory, as Article 7D (5)(b) of the same article complicates matters by establishing an obligation that appears incompatible with legal professional privilege. It stipulates:

"5(b) An intermediary who is restricted by the legally recognized legal professional privilege from submitting information regarding the reportable cross-border arrangement, is exempt from the obligation to submit such information and is obliged to notify, within ten (10) days, any other intermediary or, if there is no other intermediary, the relevant taxpayer of the reporting obligations they are subject to under the provisions of subsection (6):

Provided that, for the purposes of this subsection, the legally recognized legal professional privilege applies only in cases where the intermediary is a lawyer practicing the profession or a Law Firm, as defined in the Advocates Law."

This obligation is "inspired" by Article 8ab paragraph 5 of the Directive:

"5. Each Member State may take the necessary measures to grant intermediaries the right to a waiver from filing information regarding a reportable cross-border arrangement in cases where the reporting obligation would violate legal professional privilege under the national law of that Member State. In such cases, each Member State shall take the necessary measures to require intermediaries to notify, without delay, any other intermediary or, if there is no other intermediary, the relevant taxpayer of their notification obligations under paragraph 6. Intermediaries may only have a right to a waiver under the first subparagraph if they operate within the limits of the relevant national laws governing their profession."

In 2021, a relevant Decree (K.Δ.Π. 438/2021) was issued by the Minister of Finance of Cyprus, which, among other things, specifies these obligations for intermediaries. Article 49, titled "Legal Professional Privilege," attempts to create an exception to the overall application of privilege:

"49.-(1) Under the Law, lawyers acting as intermediaries are not exempt from the obligation to submit information to the Tax Department unless they are covered by legal professional privilege:

Provided that, given that privilege belongs to the client and not to the lawyer, the client may choose to waive their right to legal professional privilege to the extent that it allows the lawyer to communicate information to the Tax Department.

(2) For the purposes of this specific exemption from submitting information to the Tax Department, the term 'legal professional privilege' shall be interpreted in accordance with the relevant provisions of the Advocates Law and relevant Regulations issued thereunder.

(3) Legal professional privilege applies only in cases of lawyers practicing the profession and Law Firms as defined in the Advocates Law."

And subsection (4) of the same article reiterates the obligation of the intermediary bound by legal professional privilege to notify another intermediary of what they would have disclosed if not bound by privilege:

"(4) An intermediary who is exempt by the legally recognized legal professional privilege from submitting information regarding the reportable cross-border arrangement, is obliged to notify any other intermediary involved in the same arrangement or, if there is no other intermediary, the relevant taxpayer of the notification obligations that the relevant taxpayer is subject to under subsection 6 of Article 7(D) of the Law. The above notification must be made within a period of 10 calendar days from the day on which the obligation to submit information would have arisen if the intermediary was not covered by legal professional privilege."

The question here is whether this regulation of the Directive, and by extension of national legislation, is compatible with Article 7 of the Charter of Fundamental Rights of the EU [1], Article 8 par. 1 of the ECHR [2], and the jurisprudence of the European Court of Human Rights [3], and of course, with the Code of Conduct for Lawyers which establishes legal professional privilege (Regulation 13 K.Δ.Π. 237/2002) [4].

Because in this case, from the moment a lawyer, as an intermediary, is obliged to disclose the subject matter of legal professional privilege to another intermediary (who will submit the data to the Authorities as they are obliged to), thereby revealing, beyond the critical information (such as that the cross-border arrangement is reportable), their identity and the fact that their client has appointed them as a lawyer, is there not a circumvention of legal professional privilege?

We remind that the protective scope of Article 8 par. 1 of the ECHR includes not only the defense by a lawyer in the context of judicial proceedings but also the confidentiality of legal advice and the related privacy and confidentiality of communication between lawyer and client.

Therefore, the violation of confidentiality is obvious from the obligation imposed by the Directive and national legislation on the intermediary lawyer to notify any other intermediary of information regarding a reportable cross-border arrangement, and then the other intermediary, as the obligated party, to submit this information to the Authorities.

Indeed, the Court of Justice of the EU already identified the problematic nature of the above provisions and, in its decision of 8/12/2022 in case C‑694/20 [5], recognized that the obligation for a lawyer-intermediary, if exempted due to professional privilege they are bound by under national law from the reporting obligation, to notify without delay other intermediaries who are not their clients of the reporting obligations they are subject to, necessarily implies that these other intermediaries become aware of the identity of the notifying lawyer-intermediary, their assessment that the relevant arrangement is reportable, and the fact that they provided legal advice concerning the arrangement. And that this notification obligation, provided for in Article 8ab, paragraph 5, of the amended Directive 2011/16, entails an interference with the right to respect for communication between lawyers and their clients, which is guaranteed in Article 7 of the Charter.

Furthermore, the Court clarifies: "... it must be observed that this notification obligation also entails, indirectly, a further interference with the same right, which results from the disclosure to the tax authority, by the third-party intermediaries to whom the notification was addressed as above, of the identity of the lawyer-intermediary and the fact that they provided legal advice."

And the CJEU concludes: "Article 8ab, paragraph 5, of the amended Directive 2011/16 is invalid in light of Article 7 of the Charter, to the extent that its application by the Member States effectively requires a lawyer acting as an intermediary, within the meaning of Article 3, point 21, of the Directive, in cases where they are exempted from the obligation to submit information, as provided for in paragraph 1 of Article 8ab of the Directive, due to the professional privilege by which they are bound, to notify without delay any other intermediary who is not their client of the reporting obligations that this other intermediary is subject to under paragraph 6 of Article 8ab."

Despite the CJEU's decision declaring the said provision invalid, it has been incorporated and remains in force in the Cypriot legal system, through Article 7D (5)(b) of the Administrative Cooperation in the Field of Taxation Law of 2012 (205(I)/2012) as amended and in force, as well as Article 49(4) of the implementing K.Δ.Π. 438/2021. 

This legitimizes an attempt to circumvent what some consider an inconvenient obstacle of legal professional privilege, through a legislative loophole that practically results in the breakdown of the trust and confidentiality relationship between lawyer and client.

* Giorgos Kazoleas is lawyer qualified both in Cyprus and Greece (email: giorgos.kazoleas@gmail.com)

[1] Article 7 - Respect for private and family life: "Everyone has the right to respect for his or her private and family life, home and communications."

[2] Article 8 par. 1. Everyone has the right to respect for his private and family life, his home and his correspondence.

[3] See, inter alia, ECHR judgment of 6 December 2012, Michaud v. France & judgment of 9 April 2019, Altay v. Turkey.

[4] 13.(1) The professional privilege of a lawyer is recognized as a fundamental and primary right and obligation and must be protected by the Court and any state or public authority. See also subsequent paragraphs.

[5] CJEU 8.12.2023 Case C-694/20 Orde van Vlaamse Balies, IG, Belgian Association of Tax Lawyers, CD, JU v. Vlaamse Regering. The decision here.

 

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