Tax Treaty Case Law around the Globe 2021

S. 272I. Facts of the Case

A Spanish private limited company (the Spanish subsidiary) and a German joint stock company (the German subsidiary) are under common control of another Spanish private limited company (the Spanish parent). Both Spanish companies were managed and controlled by Mr N. The German subsidiary was managed by Mrs W – the wife of Mr N. The business of the German subsidiary was selling products while the Spanish subsidiary provided marketing services to the German subsidiary. The German subsidiary deducted the fees for the marketing services as business expenses while the Spanish subsidiary included these fees in its tax return. During an audit of the German subsidiary, the German tax administration regarded the amount of the fees as excessive and denied a deduction for the excessive part of the fees. As a result, the tax liability of the German subsidiary was increased. The tax administration in Spain, however, did not make any corresponding adjustment.

Due to the excessive fees for the marketing services, Mr N was sentenced for tax evasion. The criminal proceeding against Mrs W was discontinued, and she only received a fine as her contribution was regarded as minor. Duri...