Management fees are part of everyday life for most structured groups: support functions are centralized at headquarters, costs are rebilled to subsidiaries, and an agreement governs the whole process. (If this is not yet the case for you, call us before reading on.)
In practice, it is rarely the concept of re-invoicing itself that raises issues during an audit, but rather the soundness of the process. Here is what an auditor will examine, and where companies most often fall short. For comprehensive support on these matters, our transfer pricing law firm provides assistance at every stage.
First question: was the service really provided, and who benefits from it?
Before even addressing the price, the administration seeks to establish that each service billed brings an identifiable economic or commercial benefit to the subsidiary paying for it. This is the benefit test set out in the OECD Principles (OECD Transfer Pricing Guidelines, 2022 edition).
The reference question is simple: would an independent company in the same situation have agreed to pay for this service? If the answer is no, the service should not be billed, or at least not to this subsidiary.
In practice, two cases account for most of the difficulties.
- Services imposed without real need. A subsidiary that receives a service it did not request and does not need (because it already has the expertise in-house, or because the service does not correspond to its activity) should not bear the cost. This is a frequent area for adjustment, particularly when a rebilling policy is applied uniformly to all entities within the group without analyzing its relevance for each one.
- Duplicate services. If a subsidiary already pays locally for a function identical to the one that headquarters claims to provide, re-invoicing is difficult to justify. The auditor will look for evidence of redundancy.
To establish the reality of the service, it is necessary to be able to produce concrete evidence: deliverables, exchanges, intervention reports, time spent. A well-written agreement is not sufficient if it is not accompanied by proof of performance.
Second question: Have you properly established your cost base?
The most commonly used method for setting management fees is cost plus: the costs incurred by headquarters to provide the service are identified and a margin is applied. The basis for this calculation can be analyzed from two perspectives.
On the service provider side, the base must reflect the full cost of producing the service. This includes direct costs—personnel expenses for the teams providing the service, dedicated tools and licenses, travel expenses where applicable—but also a share of indirect costs: rent, overhead, cross-functional support functions. Excluding indirect costs underestimates the base and exposes the company to an adjustment. Conversely, including shareholder costs—expenses related to group governance, the holding company structure, and consolidated reporting to investors—is a symmetrical error: these expenses are incurred in the interest of the group as such and do not constitute a service provided to subsidiaries. They must be identified and excluded before applying the margin.
From the lessee's perspective, the question refers back to the benefit test mentioned above: did the services for which the subsidiary incurred the cost actually provide it with any benefit? Anything that does not pass this test must be removed from the billable base.
Third question: Is your margin justified?
For services considered to be of low added value, the OECD Principles provide for a simplified approach allowing a profit margin of 5% to be applied to eligible costs. These provisions, accepted by the French tax authorities, allow a presumed arm's length margin to be applied without having to carry out a specific economic analysis to justify this margin level.
However, the services in question must actually fall into this category. Low value-added services are defined as support services that are not part of the group's core business, do not generate significant intangible assets, do not require the use of unique and valuable intangible assets, and do not expose the provider to significant risks. The OECD Principles cite, in particular, HR, accounting, legal, routine IT, and communications support services.
In practice, many groups apply the 5% margin to all of their support services—for the sake of simplicity. This is often a mistake. Some services fit the definition perfectly (legal support, finance, payroll). Others, however, do not: strategic consulting, business development, provision of sector-specific expertise. The latter should be covered by a specific economic analysis, with an ad hoc margin level. Mixing the two in a single 5% base exposes you to an adjustment on services outside the scope.
Fourth question: How did you allocate costs among subsidiaries?
This is undoubtedly the most underestimated point in the files. The allocation key is not a secondary technical parameter; it is a central element in justifying the price.
The starting point is direct allocation. Whenever it is possible to identify the subsidiary or subsidiaries benefiting from a service and allocate the cost directly to them, this approach should be used. It is more robust and easier to defend because it reflects the economic reality of the service provision.
Indirect allocation is only used as a second option, when direct allocation is not feasible because the service benefits the entire group in a diffuse manner, or because the costs cannot be attributed to identified beneficiaries. In this case, a distribution key is used (turnover, number of employees, assets, depending on the nature of the service).
Both approaches can coexist within the same agreement: direct allocation for certain categories, indirect allocation for others. This is known as mixed allocation, and is often the solution that most closely reflects reality.
In practice, many groups opt for indirect allocation from the outset because it is easier to administer. In doing so, they expose themselves to challenges over services that they could easily have allocated directly, and miss an opportunity to strengthen their position.
The key selected must be documented, consistent with the nature of the service, and applied consistently over time. A key that changes from one fiscal year to the next without explicit justification is an immediate red flag for the auditor.
What you need to have prepared for your management fees
A group that charges management fees to its subsidiaries should be able to produce the following items without waiting for an audit.
- An up-to-date agreement: Not just signed—kept up to date. An agreement drafted ten years ago that does not cover entities that have joined the group since then, no longer reflects the services actually provided, or does not mention changes in scope is, as it stands, difficult to defend.
- Proof of performance: The agreement establishes a framework; it does not prove that the services have been rendered. It is the deliverables, exchanges, intervention reports, and time spent that prove this. Operational teams do not generally have this reflex—yet this is what the inspector will ask for first.
- A documented analysis of the cost base: Direct and indirect costs identified, shareholder costs excluded and documented as such, breakdown by service category.
- Justification of the margin: Services covered by the simplified 5% approach on the one hand, and services outside the scope with their own economic analysis on the other. Combining the two in a single database is one of the most common points of weakness.
- Documentation of allocations: The key used for each service category, the rationale for choosing between direct and indirect allocation, and the resulting amounts for each subsidiary. Without this, the auditor cannot reconstruct the reasoning—and will not attempt to do so on your behalf.
- Formal transfer pricing documentation: if the group falls within the scope ofArticle L. 13 AA of the LPF (French Tax Procedure Code) – i.e., annual turnover excluding tax or gross assets greater than or equal to €150 million (threshold applicable since January 1, 2024, Finance Act for 2024, Art. 116). It must explicitly cover management fee flows and be provided to the administration upon request within a period of thirty days, which may be extended.
These checks can and should be conducted preventively. That is where they are most valuable: not to manage a deteriorated situation, but to prevent it from occurring.
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Sources: OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 edition, Chapter VII; Article 57 of the General Tax Code; Article L. 13 AA of the Tax Procedure Code; Article 1735 ter of the General Tax Code; BOI-BIC-BASE-80-10-40.
Need an expert opinion? Our firm, which specializes in transfer pricing, can assist you in structuring and documenting your management fees.
FAQ: Management Fees and Transfer Pricing
What is a management fee in transfer pricing?
A management fee is a service charged by a group entity (typically the parent company or a shared services center) to its subsidiaries in exchange for support functions such as general management, human resources, accounting, legal, IT, etc. In terms of transfer pricing, these transactions must comply with the arm’s length principle set forth in Article 57 of the French General Tax Code and the OECD Principles (Chapter VII, 2022 edition).
How can management fees be justified during a tax audit?
The auditor reviews four key areas: the substance of the services provided (benefit test), the composition of the cost base (excluding shareholder expenses), the justification for the margin applied, and the consistency of the allocation formulas among subsidiaries. The documentation must include concrete deliverables, up-to-date agreements, and an economic analysis that complies with the requirements of Article L. 13 AA of the LPF.
What margin should be applied to management fees?
For so-called low-value-added services (HR support, accounting, routine legal services, IT), the OECD Principles provide for a simplified approach using a 5% margin on costs. In contrast, higher-value-added services (strategic consulting, business development, specialized expertise) require an external benchmark to determine an arm’s-length margin.
Do SMEs need to document management fees?
The formal documentation requirement (Article L. 13 AA of the LPF) applies to companies with annual revenue excluding VAT or gross assets of 150 million euros or more. However, any company engaging in intra-group transactions, including SMEs, may be subject to an audit pursuant to Article 57 of the CGI. It is therefore recommended to document management fees regardless of the group’s size.
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