In a decision dated October 4, 2023, the French Council of State (Conseil d’Etat) has validated the deductibility of fees paid under a management fees agreement in the case of a common manager.
Management fee agreements are contracts between companies with a common manager or belonging to the same group, defining the services to be provided and the related remuneration.
In general, the services provided include financial, accounting, legal, tax and administrative services.
20 years ago, the Nancy Administrative Court of Appeal, in its decision SA Gamlor (CAA of 9-10-2003, no. 98-2182), established the principle that the payment of fees by a subsidiary to its parent company for management services provided by a common manager of the two companies could not be considered as a regular act of management, since these services could not be considered as distinct from those falling in the scope of the duty of the manager of this subsidiary by virtue of his corporate mandate.
The tax consequences of such reassessment are significant, and in particular, regarding corporate income tax, the exclusion of the deductibility of the sums paid under the management fees agreement on the grounds of an abnormal act of management, and regarding VAT, the exclusion of the deductibility of VAT on the services invoiced.
It emerges from this case law, subsequently followed by numerous courts, that the company manager must exercise his management functions and that the services covered by the agreement must be distinct from those of the corporate mandate.
Consequently, in a management fee agreement, a clear distinction must be made between purely technical services, which may be invoiced, and services that correspond to the duties normally carried out by the manager, which may not.
In a decision dated October 4, 2023, the French Council of State ruled that, provided certain conditions are met, a company may, without committing an abnormal act of management, enter into an agreement whereby it pays a company a fee so that the manager of the latter, who is also the manager of the other company, performs the management functions of the company paying the fee.
In the present case, company C, subject to corporate income tax, paid fees to company S for services provided by a common manager, Mr. A. Mr. A was not paid for his functions as manager in company C and he was a partner and co-manager of company S.
The French tax authorities had challenged the deduction of fees paid by company C to company S on the grounds that their payment constituted an abnormal act of management.
The Marseille Administrative Court of Appeal (CAA Marseille, 23-6-2022, no. 19MA04862) agreed with the French tax authorities, adopting the principles set out in the SA Gamlor decision. The Court concluded that the services provided by company S fell within the scope of the functions inherent to those of a manager, and that it had not provided any services distinct from the activities normally carried out by the manager of company C by virtue of his corporate mandate.
In this case, the French Council of State ruled on the deductibility by a company of fees paid to a second company for management services provided by their common manager.
The French Council of State has ruled that the conclusion by a company of a service agreement with another company for the execution, by the latter’s manager, of missions falling within the scope of his normal duties, does not constitute an abnormal act of management, provided that the company’s decision to remunerate its manager indirectly was deliberate. The company must therefore establish that its competent corporate bodies intended to remunerate the manager indirectly.
The French Council of State also clarified that the choice of an indirect method of remuneration, i.e. the payment of fees to the company providing the services, does not in itself characterize an impoverishment of the paying company for purposes unrelated to its interests, a demonstration that would have been necessary to characterize an abnormal act of management.
In this decision, the French Council of State change its position on long-standing case law, by allowing, subject to certain conditions, the deductibility of fees paid under a management fees agreement in the case of a common manager.
However, the implementation of these agreements requires particular attention in view of the associated risks and uncertainties.
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If you have any questions about management fees, please contact our Tax Law team.
Philippe Schmidt
Johanna Segalis
