By Rafael Rivera, Managing Partner and Tax & Legal Partner at BDO Panama, Panama City
On July 13, Luxembourg’s High Administrative Court, in decisions pertaining to the so-called “Panama Papers” cases, overruled a lower court and held that the tax administration used its powers to obtain relevant tax information in accordance with legal and regulatory provisions, and therefore such information should be handed over by the relevant lawyers.
Legal dispute over information request
On September 29, 2020, the Lower Administrative Court of Luxembourg issued several decisions (cases 45185C, 45186C, 45187C, 45188C, 45189C, 45190C and 45191C) related to legal appeals filed in relation to information request orders issued by the Luxembourg Tax Administration against several lawyers which were included in the press investigation documents pertaining to the Panama Papers.
The Luxembourg Bar Association at this point, sent notices to its members reminding them of their obligations under the professional secrecy rules covering the attorney-client relationship and the fact that any violations thereof may result in civil, criminal and disciplinary actions.
The Lower Administrative Court ruled in favor of the lawyers involved in the information request processes, noting that the information request did not refer to any particular taxpayers (resident or non-resident) but referred to any information revealed in the Panama Papers investigation and therefore it could be considered as a “fishing expedition.” The court further considered significant that the information request was not originated by any particular tax audit carried out by the Luxembourg Tax Administration and that the information request did not refer to any tax claim (i.e., any tax litigation process initiated by the Luxembourg Tax Administration).
As could be expected, the Luxembourg Tax Administration appealed the decisions issued by the Lower Administrative Court.
High Court’s decision
An interesting aspect of the High Court decision is that it reflected on certain precedents by the Luxembourg Constitutional Court, dated January 22, 2021, and March 19, 2021. In doing so, it concluded that the duty to exchange tax information at the international level, when confronted with confidentiality rights and the rights of privacy, cannot result in a restriction of the mission of the Luxembourg Tax Administration to prevent, as a general principle, any undue reduction of (income) tax liabilities or tax evasion of Luxembourg taxes.
Regarding the information arising from the Panama Papers database, the High Court decision discusses the role of several lawyers and law firms based in Luxembourg which acted as intermediaries between their clients and the Panamanian-based law firm Mossack Fonseca in the design and implementation of offshore structures for their clients. The High Court concluded that the active participation of said Luxembourg lawyers resulted in offshore structures aimed at reducing or eliminating the tax burden of economic beneficiaries resident in Luxembourg.
According to the High Court, such findings shall be considered as concrete and sufficient elements to justify a request of tax information by the Luxembourg Tax Administration to prevent any potential tax evasion for Luxembourg tax law purposes. To reach this conclusion, the High Court relied in the information publicly available at the web site of the International Consortium of Investigative Journalists.
From the decision, it can be concluded that the High Court’s view is that the Luxembourg administrative fiscal procedures do not require the tax administration to pre-determine a potential tax assessment or tax audit to exercise its power to request and gather information from third parties to conduct tax investigations. Conversely, the minimum requirement is to have information about transactions or structures aimed at reducing or eliminating Luxembourg tax liabilities or to evade such taxes and the knowledge of third parties having access to data or information pertaining to such maneuvers.
The High Court also discussed the attorney-client secrecy privilege and made a distinction between, on the one hand, information that is obtained and used by the lawyer in the context of legal representation in judicial or administrative litigation or other forms of representation of a client by its lawyers and, on the other hand, other information that is available to the lawyer in other capacities such as an administrator or director of a corporation or other structures. The court clarified that the privilege does not cover the latter.
Finally, it is interesting to note that the High Court decided to partially confirm the annulment ordered by the decisions of the Lower Administrative Court in one specific aspect., That is, information requested from the Luxembourg-based lawyers and/or law firms shall be limited to information related to offshore corporations and structures that have final beneficiaries resident in Luxembourg and therefore are potentially subject to Luxembourg taxation, and which could potentially benefit from eluding or evading Luxembourg taxes. Other non-related structures should be excluded.
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