Constitutional Court upholds constitutional protection of legal professional privilege in tax proceedings

The case concerned a company that had claimed fees for legal services provided by an external lawyer as a tax-deductible expense. The tax authority questioned whether the services had in fact been provided and, if so, to what extent, and requested more detailed information on the specific legal services performed, their content and their link to the fees charged. The taxpayer argued that providing further details would disclose information protected by legal professional privilege and therefore refused to provide the requested information. The law firm from which the tax authority requested the information took the same approach.

The tax authority concluded that the company had failed to bear its burden of proof and treated the expense as non-deductible. This conclusion was subsequently upheld by the appellate authority. It was only from the appellate decision that the company learned that it could have discharged its burden of proof by other means, without providing the tax authority with documents protected by legal professional privilege.

The administrative courts subsequently agreed with the tax authorities’ conclusions. They rejected the legal professional privilege argument on the grounds that this protection did not relieve the taxpayer of the obligation to demonstrate the tax deductibility of the expenses and that the tax authority had requested only the information necessary to verify the existence and scope of the services provided.

The case reached the Constitutional Court, which, in its judgment No. IV. ÚS 925/26, emphasised that the specific nature of legal professional privilege must be taken into account when assessing the burden of proof. Its protection is guaranteed by the Charter of Fundamental Rights and Freedoms and also applies in tax proceedings. Although the tax authority may raise serious and well-founded doubts about the taxpayer’s assertions and require them to be dispelled, it may not insist on a means of evidence that would effectively result in the disclosure of communications between a lawyer and client.

A taxpayer must therefore not be forced to choose between preserving legal professional privilege and discharging its burden of proof. The tax authority must allow the taxpayer to demonstrate that the services were provided, for example, by submitting documents not covered by legal professional privilege, providing redacted versions of the relevant documents or giving a neutral description of the services provided.

The judgment thus confirms that, in tax proceedings, legal professional privilege constitutes a constitutional limit on the taking of evidence which the tax authority must respect when exercising its powers. At the same time, however, legal professional privilege does not in itself establish the tax deductibility of expenses. The taxpayer must be able to prove the relevant facts by other means without having to waive that protection.