{"id":5514,"date":"2014-03-26T13:44:29","date_gmt":"2014-03-26T13:44:29","guid":{"rendered":"https:\/\/lacombe-avocats.fr\/haro-sur-les-management-fees\/"},"modified":"2024-09-12T08:07:34","modified_gmt":"2024-09-12T08:07:34","slug":"management-fees-under-attack","status":"publish","type":"post","link":"https:\/\/lacombe-avocats.fr\/en\/management-fees-under-attack\/","title":{"rendered":"Management fees under attack?"},"content":{"rendered":"[vc_row type=”full_width_background” full_screen_row_position=”middle” column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” bg_color=”#ffffff” scene_position=”center” top_padding=”2%” constrain_group_1=”yes” bottom_padding=”2%” text_color=”dark” text_align=”left” row_border_radius=”none” row_border_radius_applies=”bg” overflow=”visible” overlay_strength=”0.3″ gradient_direction=”left_to_right” shape_divider_position=”bottom” bg_image_animation=”none” gradient_type=”default” 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In groups of companies, even small ones, it is common for a parent company to invoice its daughter for management fees, i.e. sums paid for management services provided by the parent company to its daughter. These services may be of an administrative, technical or commercial nature: assistance with management and the determination of strategy, accounting or legal services, advice on human resources, assistance with communication or marketing, etc. Although common, the invoicing of management fees is far from self-evident: recent case law urges practitioners to exercise the utmost caution when setting up agreements of this type.[\/vc_column_text][vc_column_text css=”” el_class=”justify” text_direction=”default”]The invoicing of management fees serves a variety of purposes. Firstly, it is a way for groups of companies to harmonise their internal management and optimise and rationalise their costs: by choosing to centralise some of their activities in one company (often the parent company), which makes its know-how available to the whole group, groups allow each of their companies to concentrate on a core business and a specific role.<\/h2>\n

Less prosaically, the provision of services billed to the other companies in the group is sometimes explained by the desire to \u2018activate\u2019 a holding company, i.e. to ensure that it has the characteristics of a \u2018facilitating\u2019 holding company\u00b9 . This may be done for a number of different reasons, both financial and tax-related. For example, the director of a holding company will seek to have the company considered as a driving force so that he can consider its capital as a business asset exempt from wealth tax. Another example, in the context of leveraged buy-outs, is where a takeover holding company, if it is a facilitator, carries on an economic activity and recovers the input VAT it incurs, which may be sufficient grounds for setting up a management fees agreement.<\/p>\n

Another practice is for the director of a company to outsource management services to a third party that he controls. In this case, the lessee company does not pay any social security contributions on the remuneration paid to the third party, and the partner of the third party then has complete freedom to use this remuneration as and when he wishes (in the form of salary, as a self-employed worker or by receiving dividends).<\/p>\n

Whatever the reason for setting up a management fees agreement, recent case law calls for the utmost vigilance, as the risks for both the companies concerned and their directors are considerable.[\/vc_column_text][vc_row_inner column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” text_align=”left” row_position=”default” row_position_tablet=”inherit” row_position_phone=”inherit” overflow=”visible” pointer_events=”all”][vc_column_inner column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_direction_desktop=”default” column_element_spacing=”default” desktop_text_alignment=”default” tablet_text_alignment=”default” phone_text_alignment=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_backdrop_filter=”none” font_color=”#002643″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” overflow=”visible” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1\/1″ tablet_width_inherit=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid” column_padding_type=”default” gradient_type=”default”][vc_column_text css=”” el_class=”justify” text_direction=”default”]\n

The criminal risk associated with invoicing management fees<\/h2>\n[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_column_text css=”” el_class=”justify” text_direction=”default”]The risks associated with invoicing management fees are essentially based on the obligation imposed on a company to act in its own interests. Thus, from a strictly criminal point of view, expenditure contrary to the company’s interests, even if documented by a management fees contract, is likely to be classified as misuse of company assets\u00b2 and may result in the criminal liability of the directors being called into question\u00b3. The risk is particularly acute where the materiality or price of the services invoiced can be called into question. This risk is exacerbated if the lessee subsidiary is facing financial difficulties\u2074. In this case, the risks associated with the implementation of a management fees agreement include the executive’s liability for a fault that contributed to the cessation of payments (in the event of receivership) or for a management fault that contributed to the shortfall in assets (in the event of liquidation). Lastly, the agreement concluded during the suspect period may be cancelled and, in the most serious cases, the insolvency proceedings may be extended to the parent company providing the service.[\/vc_column_text][vc_row_inner column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” text_align=”left” row_position=”default” row_position_tablet=”inherit” row_position_phone=”inherit” overflow=”visible” pointer_events=”all”][vc_column_inner column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_direction_desktop=”default” column_element_spacing=”default” desktop_text_alignment=”default” tablet_text_alignment=”default” phone_text_alignment=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_backdrop_filter=”none” font_color=”#002643″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” overflow=”visible” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1\/1″ tablet_width_inherit=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid” column_padding_type=”default” gradient_type=”default”][vc_column_text css=”” el_class=”justify” text_direction=”default”]\n

The risk of invalidity of management fee agreements<\/h2>\n[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_column_text css=”” el_class=”justify” text_direction=”default”]On a civil level, case law has long accepted that a management fees agreement may be annulled if it does not comply with the corporate purpose of the lessee company: the Cour de cassation has thus favourably upheld an action for annulment on the grounds of abuse of majority of management fees contracts binding a company to its former directors and majority partners and an action for restitution of sums paid\u2075.<\/p>\n

More recently, the court annulled for lack of cause\u2076 management fee agreements resulting in the outsourcing of functions that are normally those of the company’s director. In a ruling noticed\u2077, the Cour de cassation annulled the agreement providing for the supply of functions – among others – of \u2018management\u2019 (ii) by a service provider company which made available to the lessee company an employee who was … the manager of the lessee company. In other words, the lessee company paid a third party for its director to perform his duties.<\/p>\n

A similar solution was adopted by the Cour de cassation in a case that was less open to criticism\u2078. It concerned an agreement entered into between a SA and a EURL, the manager of which was chief executive of the SA. The purpose of the agreement was to provide services relating to the creation and development of subsidiaries abroad, the definition of sales strategies, participation in trade fairs and the search for new customers abroad. Although these services appear to be far removed from the duties of a corporate officer, the Cour de cassation annulled the management fees agreement on the grounds that it lacked cause. We may legitimately wonder about the room for manoeuvre that remains for a company to outsource certain services that have even an indirect and mediate link with its management, in a situation where the service provider is a company controlled by one of its directors. This analysis has just been confirmed by the Paris Court of Appeal\u2079, in a case where some of the tasks (such as \u2018drawing up legal and financial packages\u2019) entrusted to a third-party company appeared to be quite distinct from those that should normally be carried out by the managing director of the lessee company.[\/vc_column_text][vc_row_inner column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” text_align=”left” row_position=”default” row_position_tablet=”inherit” row_position_phone=”inherit” overflow=”visible” pointer_events=”all”][vc_column_inner column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_direction_desktop=”default” column_element_spacing=”default” desktop_text_alignment=”default” tablet_text_alignment=”default” phone_text_alignment=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_backdrop_filter=”none” font_color=”#002643″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” overflow=”visible” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1\/1″ tablet_width_inherit=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid” column_padding_type=”default” gradient_type=”default”][vc_column_text css=”” el_class=”justify” text_direction=”default”]\n

The tax risk associated with management fees<\/h2>\n[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_column_text css=”” el_class=”justify” text_direction=”default”]It is on the basis of the case law theory of the abnormal act of management (or, if the service provider is a foreign company, its legal corollary of the indirect transfer of profits abroad\u00b9\u00b9) that the tax authorities will most often challenge the invoicing of management fees. The consequences of an abnormal act are manifold: the expenses abnormally paid by the lessee company are reintegrated to increase its taxable income, and the advantage thus granted to the service provider company is regarded as distributed income. The reverse is true, although less frequently: a service provider that does not invoice enough is also guilty of an abnormal management practice.<\/p>\n

The question of the abnormality of the services covered by a management fees agreement is regularly raised by the tax authorities, which sometimes challenge their reality, sometimes their (transfer) price, and sometimes their usefulness to the company invoiced.<\/p>\n

In this respect, it should be noted that as early as 2003, the tax judge adopted a line of reasoning that foreshadowed the one that led the Cour de cassation to annul, on the grounds of lack of cause, agreements relating to functions that duplicate those that are normally the responsibility of the directors. In this particular case, it had been ruled that a subsidiary could not deduct the sums it paid to its parent company for the provision of its own chairman and chief executive officer (an employee of the parent company) in the absence of proof of services distinct from the tasks inherent in the normal duties of a chairman. The Court even specified that the fact that the subsidiary does not remunerate its director is irrelevant, as the decision not to remunerate its director constitutes a management decision that can be enforced against the subsidiary.<\/p>\n

There is no doubt that the case law of the Cour de cassation, which annulled certain management fee agreements on the grounds that they lacked cause, will support the tax authorities in their cautious assessment of the quid pro quos for companies paying management fees.[\/vc_column_text][vc_row_inner column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” text_align=”left” row_position=”default” row_position_tablet=”inherit” row_position_phone=”inherit” overflow=”visible” pointer_events=”all”][vc_column_inner column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_direction_desktop=”default” column_element_spacing=”default” desktop_text_alignment=”default” tablet_text_alignment=”default” phone_text_alignment=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_backdrop_filter=”none” font_color=”#002643″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” overflow=”visible” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1\/1″ tablet_width_inherit=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid” column_padding_type=”default” gradient_type=”default”][vc_column_text css=”” el_class=”justify” text_direction=”default”]\n

Some practical recommendations<\/h2>\n[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_column_text css=”” el_class=”justify” text_direction=”default”]In order to limit exposure to the risks described above, we believe the following precautions should be taken as a minimum:<\/p>\n