Key points
- Management fees pay for management or support services invoiced by the holding company to its subsidiaries, but their tax deductibility is subject to precise conditions.
- The services invoiced must be real: they must be distinct from the normal role of a shareholder and must not duplicate the subsidiary’s in-house teams.
- The price must be proportionate to the services and in line with market conditions: the excess portion may be treated as distributed income.
- The agreement must be in writing and the services actually provided must be documented (minutes, reports, deliverables); a lack of evidence generally leads to the fees being disallowed.
- A challenge leads to additional tax, interest and penalties; in an SA (public limited company) or an SAS (simplified joint-stock company), these agreements may also qualify as related-party agreements (conventions réglementées).
Management fees are charges invoiced by a company (generally the holding company) to its subsidiaries in return for general management services and administrative, legal, financial or commercial support. They are a tool for organising intra-group financial flows and, when properly structured, they make it possible to pay for the central functions performed at group level. But the tax authorities examine them closely, and the conditions for their deductibility are precise.
See also: intra-group cash management agreements.
Are the services real?
The first and most fundamental condition is that the services invoiced must be real. The tax authorities may challenge the deductibility of management fees if they establish that the services allegedly provided by the holding company do not exist, are indistinguishable from the normal role of a shareholder (monitoring one’s investments and exercising one’s shareholder rights is not a billable service), or duplicate functions already performed by the subsidiary’s in-house teams.
Examples of services that can genuinely be invoiced: assistance in preparing financing applications, provision of expertise in law, finance or human resources, coordination of support functions pooled at group level, business development provided by the holding company.
Is the price proportionate?
The price of the management fees must be proportionate to the services provided and in line with the terms that independent parties would have agreed for equivalent services. An excessive price falls within the abnormal management act doctrine (acte anormal de gestion): the excess portion is not deductible from the subsidiary’s profits and may be treated as a hidden benefit, and therefore as distributed income (Article 111 of the French General Tax Code (Code général des impôts) (in French)). Where the invoicing company is established outside France, the tax authorities may also add back the profits transferred on the basis of Article 57 of the General Tax Code (in French).
The method for calculating the price (a percentage of turnover, an hourly rate, a fixed fee) must be justified and consistent from one financial year to the next. Large variations without economic justification are a warning sign for the tax authorities.
How should the services be documented?
The agreement must be in writing and precise as to the nature of the services, how they are valued and how they are invoiced. In addition, the services actually provided must be documented: minutes of meetings, reports, deliverables, traceable exchanges. This documentation is essential in a tax audit: a lack of tangible evidence of the services generally leads to the fees being disallowed.
What are the risks if the fees are challenged?
When the tax authorities challenge management fees, the consequences are significant. In the subsidiary’s accounts: the expenses are added back to taxable profit, with additional corporate income tax, late-payment interest and penalties. The amounts added back may also be treated as income distributed to the holding company, with a withholding tax where the holding company does not have its registered office in France (Article 119 bis of the General Tax Code (in French)), subject to tax treaties. In the event of a deliberate breach, a 40% penalty applies (Article 1729 of the General Tax Code (in French)).
Related-party agreements (conventions réglementées)
In public limited companies (SA) and simplified joint-stock companies (SAS), a management fee agreement concluded with a shareholder holding more than 10% of the voting rights or with the company that controls the subsidiary may qualify as a related-party agreement (for the SAS, Article L. 227-10 of the French Commercial Code (Code de commerce) (in French)). Ordinary agreements concluded on normal terms are excluded (Article L. 227-11 of the Commercial Code (in French)), as are, in an SA, agreements between a company and its 100%-owned subsidiary. This classification, often overlooked, may expose the corporate officers to bearing the harmful consequences of an agreement that has not been approved.
For assistance with structuring your management fee agreements or making them legally sound, see our dedicated pages on management fees lawyers and tax audit lawyers.
