Management fees and head-office costs
Does a company in your group invoice management, coordination or head-office services to its subsidiaries? These management fees are a classic ground for reassessment: the tax authorities challenge their reality, their consideration or their amount, and the civil courts sometimes strike down agreements that lack genuine consideration. Deductibility is won on the evidence. The firm secures the agreements and defends against reassessments.
- Definition
- Re-invoicing of management, coordination or head-office services between related companies
- Deduction
- Deductible expense if incurred in the interest of the company (French Tax Code art. 39, 1, 1°)
- Tax risk
- Abnormal act of management, or even deemed distributed income, absent genuine consideration
- Civil risk
- Nullity of the agreement for lack of genuine consideration (Cass. com.)
- International
- Transfer pricing where the service is cross-border (French Tax Code art. 57)
What is a management fee?
Management fees, or head-office costs, refer to the re-invoicing, by a parent company or a holding company, of management, coordination or support services rendered to its subsidiaries: strategy, administrative, financial, legal, human-resources and IT management. They allow functions to be pooled and their cost to be allocated within the group.
The principle is legitimate, but their deduction presupposes genuine consideration. It is on this ground, both fiscal and civil, that the disputes concentrate.
The conditions for deduction
To be deductible at the level of the subsidiary, management fees must meet strict conditions:
- A genuine and identifiable service, distinct from the functions already performed by the directors of the subsidiary under their office;
- An effective consideration and a proper interest of the subsidiary in resorting to the service (French Tax Code art. 39, 1, 1°);
- A justified price, proportionate to the service rendered, documented by an agreement and by supporting evidence.
The risk is twofold. On the tax side, the absence of consideration exposes the company to the add-back on the ground of the abnormal act of management, or even to a characterisation as deemed distributed income. On the civil side, the Cour de cassation has annulled management-fee agreements that overlapped with the director's functions, for lack of genuine consideration.
Frequent points of review
The tax authorities look for the overlap between the invoiced service and the duties of the director, who is otherwise remunerated, the absence of evidence of the service rendered (deliverables, time spent, resources), a disproportionate price, or the absence of interest on the subsidiary's part. Where the head office is established abroad, the reassessment also proceeds on the ground of transfer pricing (French Tax Code art. 57). The burden of proof and the economic documentation are, here again, decisive.
Securing and defending
In advance, the firm drafts and secures the agreements (precise subject matter, services distinct from corporate offices, pricing method, deliverables) and organises traceability. During an audit, the defence demonstrates the reality and consideration of the services, the interest of the subsidiary, the consistency of the price, and contests the characterisation as an abnormal act of management as well as the add-back. The firm coordinates the tax aspect, the civil aspect and, where relevant, transfer pricing.
Management fees: your questions
Are management fees deductible?
Yes, provided they correspond to a genuine service, distinct from the director's functions, rendered in the interest of the subsidiary and invoiced at a justified price (French Tax Code art. 39, 1, 1°). Failing this, the deduction is called into question.
Why can a management-fee agreement be annulled?
The Cour de cassation has held void, for lack of genuine consideration, agreements that overlap with the functions the director already performs under their corporate office. The invoiced service must be genuinely distinct.
What is the tax risk in the event of a reassessment?
The add-back of the sums on the ground of the abnormal act of management, or even their characterisation as deemed distributed income at the level of the recipient, with interest and penalties.
And if the head office is abroad?
The reassessment then also proceeds on the ground of transfer pricing (French Tax Code art. 57): the service and its price must comply with the arm's-length principle and be documented.
How can I secure my management fees?
By drafting a precise agreement, by clearly distinguishing the service from corporate offices, by justifying the price and by keeping evidence of the services rendered. A preliminary audit sharply reduces the risk.
Management fees called into question?
A confidential initial consultation to demonstrate the reality of the services, secure the agreements and defend the deduction.
This page presents the regime of management fees for information purposes; each matter calls for a specific analysis. References to the French Tax Code and to the case law in force at the date of writing.