Management fee agreements: what changes based on the director's situation

‍Whether your holding company and subsidiary are managed by the same person, have separate directors, or the holding company acts as president: The validity of your management fee agreement depends not only on how it is drafted, but also on the governance structure in which it operates.

This is precisely the point that most content on the subject fails to address, by presenting the agreement in a general way, regardless of who actually manages each company in the group.

This guide covers every management configuration and details, for each one, what your management fee agreement must include to withstand an audit.

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What you need to know before drafting a management fee agreement

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What a management fee agreement is

A management fee agreement is a service contract entered into between a holding company and one or more subsidiaries, through which the holding company charges for management, administrative, accounting, legal, or strategic support services. The subsidiary records a deductible expense, while the holding company recognizes taxable income.

The three conditions for validity common to all situations

Regardless of your group's structure, a management fee agreement must always meet three requirements: actual and identifiable services (rather than vague terms like "general assistance"), a price proportionate to the actual cost of the services provided, and precise written documentation, accompanied by detailed invoices and proof of activity.

The cost-plus method, adding a reasonable margin, remains the most widely accepted approach by tax authorities.

The regulated agreement procedure to follow

In almost all cases, a management fee agreement is considered a regulated agreement under corporate law, since the holding company is a shareholder of the subsidiary.

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The procedure varies depending on the legal form of the company: ex-post review with a report from the statutory auditor or the president in an SAS, a report from the manager in an SARL, or prior authorization from the board of directors in an SA. Failure to follow this procedure can lead to the agreement being declared void, regardless of whether the services billed were actually performed.

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Drafting a management fee agreement with separate executives for the holding company and the subsidiary

This is the simplest configuration to secure and the one that presents the lowest risk of reclassification.

Why is this the simplest situation?

When the person managing the holding company is not the same person managing the subsidiary, there is no risk of overlap between the invoiced services and a corporate office already held by the same person in both companies. The boundary between each person's roles is naturally clear.

What the agreement must nevertheless specify

Even in this favorable scenario, the agreement must precisely describe each service provided (accounting, legal, human resources, IT), without relying on generic wording. The method for calculating remuneration must be explicit, and each invoice must be accompanied by an activity report detailing the work actually performed during the period.

The point of caution specific to this configuration

The risk here is not overlap, but a lack of economic substance: if the holding company invoices for services it lacks the human or material resources to provide,the agreement remains vulnerable, regardless of the absence of a common manager.

When the same executive manages both the holding company and the subsidiary, the management fee agreement becomes sensitive

This is the most common situation in SMEs and the one that accounts for the majority of tax and civil disputes regarding management fees.

Why is this setup the primary risk area?

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When the same individual manages both the holding company and the subsidiary, they are already vested with the authority to direct the subsidiary by virtue of their corporate office.

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If the agreement bills for services that overlap with these management functions, there is a duplication of duties: the same person is being paid twice for the same tasks. Case law has already invalidated agreements on these grounds, due to a lack of real consideration.

What the agreement must strictly exclude

In this scenario, the agreement must never include general management, strategy definition, or operational steering services: these are precisely the duties the executive already performs under their corporate mandate in the subsidiary. Billed services must be limited to clearly identifiable technical and operational functions.

Enhanced documentation to prepare

Maintain a file of evidence that explicitly distinguishes between the two roles: meeting minutes, deliverables, email correspondence, and timesheets. In the event of an audit, this file must demonstrate that the billed services are materially different from the functions performed under the corporate mandate.

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Holding company appointed as subsidiary manager: an alternative way to structure management fee agreements

This solution structurally reduces the risk of overlapping roles identified in the previous configuration.

What does this solution involve?

Instead of appointing an individual as the subsidiary's manager, the holding company itself is appointed as president (or manager, depending on the legal structure). The individual executive then acts as the legal representative of the holding company, which receives compensation for its own corporate mandate within the subsidiary.

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The agreement can then be limited to supplementary technical services, without the risk of overlapping with management functions.

The legal limitation to consider before choosing this solution

This solution assumes that the subsidiary's legal form allows for a legal entity to be appointed as a manager. This is the case for a SAS, but not for a SARL, where the manager must be an individual. For groups structured as SARLs, this security option is therefore not available.

What the agreement must contain in this configuration

In this case, the agreement must clearly distinguish between compensation for the corporate office, paid to the holding company in its capacity as manager, and the management fees themselves, which only cover technical and support services. The total of the two must remain economically consistent and documented separately.

Multi-subsidiary group: adapting the management fee agreement to each holding-subsidiary relationship

When a group includes several subsidiaries, some with a manager shared with the holding company and others without, the agreement must be adapted to each relationship.

Why does this configuration require a differentiated approach?

It is common for a multi-subsidiary group to have mixed situations: a shared manager for some subsidiaries and separate managers for others. Applying a single, identical agreement to all subsidiaries exposes subsidiaries with a shared manager to the same risk of double charging mentioned above.

What the agreement must specify in this case

Ideally, each holding-subsidiary relationship should be covered by an agreement tailored to its specific situation, with an objective cost-allocation key (proportional to revenue, headcount, or time spent on each subsidiary). The holding company must also demonstrate that it has sufficient internal resources to justify all the services billed.

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An arbitrary or disproportionate allocation key between subsidiaries can, in itself, raise suspicions of profit shifting from one subsidiary to another via the holding company, regardless of whether there is a common manager.

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Why entrust the drafting of your management fee agreement to the Virtus Group team?

Securing a management fee agreement requires a nuanced understanding of corporate law, tax law, and the operational reality of your group's governance.

Virtus Group is built on an organizational structure designed for this cross-disciplinary approach : every client has a single point of contact, supported by a supervisor, who can coordinate the accounting, tax, employment, and legal matters specific to structuring a group of companies.

This continuity of service allows us to identify high-risk configurations, such as the presence of a common manager, early on, rather than discovering them during a tax audit. Our teams also leverage real-time management tools, such as Pennylane, to precisely document the economic reality of cash flows between the holding company and its subsidiaries.

Regardless of your group's structure, a management fee agreement that is poorly calibrated to your actual governance exposes you to tax, civil, and sometimes criminal risks that are difficult to anticipate on your own. Professional guidance ensures the agreement is precisely tailored to your structure and secures its implementation. Request a callback from a Virtus Group expert.