In the wake of an ever increasing body of rules and regulations on the exchange of financial information on taxpayers and the significant recent shift from the traditional request-based (limited scope) procedure (typically invoking the relevant provisions of double taxation treaties) to automatic mass exchange of information (with FATCA and the Common Reporting Standard casting waves across the international business community), a recent ruling of the European Court of Justice (ECJ) sets out much-needed guidance on the issue.
In a ruling released on 16 May 2017, in the case Berlioz Investment Fund v. Director of the Direct Taxation Administration, Luxembourg (Case C-682/15), the ECJ has ruled that the courts of one member state may review the legality of requests for tax information sent by another member state. However, that review must be limited to verifying whether the information sought is not – manifestly –devoid of any foreseeable relevance to the tax investigation concerned.
In the course of their review of the tax affairs of a French company, the French tax authorities applied to their counterparts in Luxembourg for information concerning its parent company, Berlioz Investment Fund. In response to the request from the Luxembourg tax authorities, Berlioz provided all the information sought, apart from information on its shareholders which, in its opinion, was not foreseeably relevant to the checks being carried out by the French tax administration. The tax authorities imposed a penalty on Berlioz, which Berlioz disputed.
The ECJ decided that the obligation imposed on tax authorities to cooperate with their counterparts in other member states is limited to the communication of information that is “foreseeably relevant”, the wording used in the relevant EU directive. Member states may not engage in “fishing expeditions” or request information that is not likely to be relevant to the tax affairs of the taxpayer concerned. The taxpayer must be able to argue against the legality of the information order and therefore the court in its home state (the Luxembourg court, in this case) must have the power to review the legality of the request.