European Union: CJEU reveals breaches of fundamental rights inherent in two major EU directives

Key Takeaways

Echoing this trend, the CJEU recently considered certain provisions of two important EU directives that it found to be incompatible with the general principles of EU law, i.e., with Article 7 of the Charter of Fundamental Rights of the European Union ("EU Charter") guaranteeing the right to respect of private life.

The CJEU, sitting as the Grand Chamber, rendered two landmark decisions in which it held the following:

• The provision that information on the beneficial ownership of companies incorporated within the territory of the EU member states is accessible in all cases to any member of the general public is in breach of the fundamental rights guaranteed by the EU Charter (CJEU, Joined Cases C‑37/20 and C‑601/20, 22 November 2022).2
• The obligation imposed on a lawyer acting as an intermediary under the EU DAC6 Directive33 to notify another intermediary is in breach of the fundamental rights guaranteed by the Charter (CJEU, Case C-694/20, 8 December 2022).4

In depth

1/ The public access feature of the Ultimate Beneficial Owner (UBO) register of the Fifth AML Directive is invalid 

The Luxembourg law of 13 January 2019 establishing the register of beneficial owners (RBO) ("RBO Law") and implementing the EU anti-money laundering directives provides that a whole series of information on the beneficial owners of registered entities must be entered and retained in that register. Some of that information is accessible to the public, in particular through the internet.

The RBO Law provides that a beneficial owner may request the Luxembourg Business Registers (LBR), the administrator of the RBO, to restrict upon request access to all or part of the information on the beneficial owner on a case-by-case basis if the access to such information 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.

The beneficial owner of a Luxembourg company requested that the public's access to the information be limited based on that exemption. The request was rejected. The Luxembourg District Court in charge of the case decided to refer to the CJEU for a preliminary ruling. The main issue here was determining whether Article 30 paragraph 5 c) of Directive (EU) 2018/843 of 30 May 2018, amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36 EU ("Fifth AML Directive"), which provides for public access to information on beneficial owners, is valid in light of Articles 7 and 8 of the EU Charter (which refer respectively to respect for private life and the protection of personal data).

1.1/ Decision in relation to the public access feature of the UBO register

1. The CJEU held that the "public access" feature of the RBO Law constitutes interference with the rights guaranteed by the EU Charter; more specifically, it constitutes serious interference with the fundamental rights to private life and the protection of personal data.
   • The provision constitutes interference with fundamental rights: Article 30 paragraph 5 of the Fifth AML Directive, making personal data available to the public, constitutes interference with the fundamental rights enshrined in Articles 7 and 8 of the EU Charter. The judges reject the argument according to which the public's access to information on beneficial ownership could be justified by the fact that the data is related to professional activities.  
   • Seriousness of the interference with fundamental rights: The CJEU also highlights the seriousness of the interference, as the information relates not only to the identity of the beneficiary but also to the nature and extent of the beneficial interest held in corporate or in other legal entities. This allows anyone to ascertain a profile of the beneficial owner, determine its wealth and the economic sectors, countries and specific undertakings in which it has invested. The judges pointed out that unlimited access to such information may lead to abuse, especially when the information is freely accessible on the internet, as is the case in Luxembourg.

2. The interference with fundamental rights may be deemed appropriate to achieve the objective pursued (the prevention of money laundering and terrorist financing) but is unnecessary and disproportionate in light of this objective.

• The CJEU finds that 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. It holds that the legislature's objective is in the public interest and justifies even serious interference with the fundamental rights enshrined in Articles 7 and 8 of the EU Charter, and that the public's access to information on beneficial ownership is appropriate for contributing to the attainment of that objective. However, the interference entailed by the measure under examination is neither limited to what is strictly necessary nor proportionate to the objective pursued.
• The regime introduced by the Fifth AML Directive amounts to considerably more serious interference with the fundamental rights guaranteed by Articles 7 and 8 of the EU Charter than the former regime. The CJEU recalled that the former version of Article 30 paragraph 5 was limiting access to information on beneficial owners to persons able to demonstrate a "legitimate interest" and contended that the reason for the withdrawal of the limitation was the result of difficulties encountered by the EU Commission in reaching a consensus on the definition of "legitimate interest." The fact that it may be difficult to provide a detailed definition of the circumstances and conditions under which such legitimate interest exists is no reason for the EU legislature to allow the public to access the information.

1.2/ Consequences

The optional provisions of the Fifth AML Directive that allow EU member states to make information on beneficial ownership available to those who register online and to provide, in exceptional circumstances, an exemption that prevents the public from accessing that information need to be revisited. According to the CJEU, these provisions do not, in themselves, demonstrate a proper balance between the objective of general interest pursued and the fundamental rights enshrined in Articles 7 and 8 of the EU Charter, or the existence of sufficient safeguards enabling data subjects to protect their personal data effectively against risk of abuse.

Based on the CJEU's decision, EU member states may have to (re)introduce a limitation on the access to information on beneficial owners. To determine the framework of the limitation, the EU Commission is currently reviewing the decision. The situation in the other EU member states should be assessed.5 The Luxembourg Ministry of Justice, in consultation with the LBR, decided to temporarily suspend public access to the RBO via the internet portal of the LBR services. The Luxembourg government has stated that it will closely liaise with the EU Commission to discuss the consequences of the decision and the solutions that could be envisaged at the EU level. For any beneficial owners residing in the EU or abroad, where applicable, reference to this decision could be made to request an exemption to the public's access to their information. Beneficial owners may wish to take action to protect their personal data and seek an exemption in their case.

The purpose of DAC6 is to improve the functioning of the internal market by discouraging the use of aggressive cross-border tax-planning arrangements.6 The DAC6 Directive obliges EU member states to implement rules whereby qualifying intermediaries have to disclose to the competent tax authorities any cross-border arrangements that show signs of aggressive tax planning. Under the DAC6 Directive, the principle is that cross-border arrangements that fall within the scope of at least one of the hallmarks need to be reported to the tax authorities (subject to the main benefit test being met in some cases). The DAC6 report to the tax authorities should contain the name of the intermediaries and relevant taxpayers, their residence for tax purposes, a summary of the content of the arrangement and the value of the arrangement, among other information.7

Each member state may grant intermediaries a waiver from the obligation to file a report if legal professional privilege applies. In such circumstances, the intermediary subject to legal professional privilege is, however, required to notify without delay any other intermediary or, if there is no such intermediary, the relevant taxpayer, in writing, of their reporting obligations vis-à-vis the competent tax authorities. In line with these provisions, the Flemish decree transposing the DAC6 Directive provided that, when an intermediary involved in cross-border tax planning is bound by legal professional privilege, they must inform the other intermediaries, in writing and with justification, that they cannot report to the competent tax authorities.

2.1/ Decision in relation to the legal professional privilege notification system under the DAC6 Directive

According to the CJEU, the obligation imposed on a lawyer, subject to legal professional privilege and acting as an intermediary to a DAC6 reportable arrangement, to notify another intermediary who is not their client is an infringement of Article 7 of the EU Charter that is not strictly necessary to meet the objectives of DAC6. The DAC6 notification obligation for lawyer-intermediaries interferes with the rights guaranteed in Article 7 of the EU Charter as follows:

• The first interference is when the notified intermediary, who is not a client of the lawyer-intermediary, becomes aware (i) of the identity of the lawyer-intermediary, (ii) of the analysis that the tax arrangement considered is reportable or (iii) of the lawyer-intermediary having been consulted in connection with the arrangement.
• The second interference is caused by the fact that the intermediaries notified are required to inform the competent tax authorities of the identity of the lawyer and of the fact they were consulted as part of the DAC6 reporting.

The CJEU underlines that the information obtained by a lawyer when providing legal advice, both with regard to its content and to its existence, even outside any litigation, remains covered by professional secrecy. As pointed out by the CJEU:

Individuals who consult a lawyer can reasonably expect that their communication is private and confidential. Therefore, other than in exceptional situations, those persons must have a legitimate expectation that their lawyer will not disclose to anyone, without their consent, that they are consulting him or her.8

The CJEU then examines whether those interferences may be justified, in particular, in view of the international tax cooperation aimed at contributing to minimizing the risk of tax avoidance and evasion. According to the CJEU, as stated in the UBO register case, among others, it must be analyzed whether the objective pursued could not reasonably be achieved in an equally effective manner by other means less prejudicial to that right, ensuring that the interference is not disproportionate to that objective. This implies a balancing of the importance of the objective and the seriousness of the interference.9

With respect to the two interferences outlined above:

• The CJEU considers that the notification obligation on a lawyer subject to legal professional privilege is not necessary in order to attain the objectives of the DAC6 Directive.
• It also does not appear to be necessary for the notified intermediary third parties to disclose to the tax authorities the identity of the lawyer-intermediary and the fact that they were consulted.

2.2/ Consequences

EU member states will have to revisit national provisions to ensure compliance with the ruling. It may be the case that obligations of intermediaries subject to legal professional privilege will be limited to informing only the relevant taxpayer of their respective obligations.

1/ For lawyers, the most important takeaway of the CJEU decision is that lawyer-intermediaries subject to legal professional privilege are not obliged to notify the other intermediaries. Therefore, such lawyer-intermediaries cannot be held accountable in case of incomplete, inaccurate or late notification of another intermediary. Legal professional privilege plays a critical role in the protection of fundamental rights of clients. It should be borne in mind that any intermediary who is exempt under legal privilege from the reporting obligation is, in the absence of other intermediaries, still required to notify the client of their reporting obligations.

2/ For intermediaries other than lawyers, an important consequence of the decision is that "secondary" intermediaries10 within the meaning of the DAC6 Directive will no longer be notified of the DAC 6 analysis of the "primary/promotor" intermediary, if the latter is subject to legal professional privilege. 11 A useful effect of the DAC6 notification system was indeed to raise awareness regarding the DAC6 position of the promotors among the other intermediaries and to create a clear reportable/non-reportable expert position that secondary intermediaries could "follow." While the secondary intermediaries will no longer be notified (if the promotor is a lawyer-intermediary), they are still required to carry out the technical DAC 6 analysis by themselves. With secondary intermediaries left on their own, the CJEU decision could potentially result in over-reporting "prudent" positions, or, on the contrary, a breach of reporting obligations.

3/ While the case is framed in the context of lawyers subject to legal professional privilege, it is also possible in certain EU jurisdictions for nonlawyer tax advisers or accountants to rely on professional privilege. The CJEU's decision being rendered in the context of lawyer intermediaries, it is unclear whether the judgment applies equally to other nonlawyer exempt intermediaries (such as accountants) who may also claim legal professional privilege. In this respect, the case could have an impact on the position of tax advisers and accountants. These intermediaries could still have an obligation to notify other intermediaries, whereas lawyers clearly now do not have such an obligation following the CJEU's decision.12 Clarifications in national laws may be necessary in this respect. These intermediaries (who are perhaps at this stage still compelled by national laws to notify other intermediaries) should at the same time consider the compatibility of this obligation with the professional secrecy rules that apply to them.13

Please note as a final comment that there are other requests for a preliminary ruling concerning the EU DAC6 Directive currently pending with the CJEU:

• The French Supreme Administrative Court (Conseil d'État) raised similar questions to the CJEU, concerning the compatibility of Article 8ab of DAC6 with the right to a fair trial14 and the right to respect for private life.
• The Belgian Constitutional Court raised additional and fundamental questions to the CJEU, including whether certain obligations contained in the EU DAC6 Directive infringe the principle of equality and nondiscrimination,15 and whether the use of key terms and deadlines that are not sufficiently clear and precise infringe the principle of legality in criminal cases and the general principle of legal certainty and the right to respect for private life.16

Concluding remarks

These decisions are a testimony to the influence that the CJEU can have on acts of EU secondary law such as EU directives. In the tax and wealth management fields, the recent wave of EU regulation (directives) has introduced groundbreaking new rules, including implementing measures against aggressive tax planning or anti-money laundering. The principles and systems established by these directives are, however, subject to the scrutiny of the CJEU, which will assess their compliance with EU primary law and the general principles of EU law. The CJEU is clear: even where the objectives are honorable and abided by in the EU, such regulation should always be proportionate. This is a welcome reminder in an environment of abounded regulation.

This also holds true for any new proposals of EU directives pending approval or transposition. An example that may come to mind is the current draft EU proposal of a directive preventing the misuse of shell companies for tax purposes ("Unshell"),17 the provisions of which may one day have to be assessed in detail by the CJEU in light of the EU fundamental freedoms and fundamental rights.

_________________________________________________________________________________________________________________________________________