Management fees and indirect compensation for executives: what start-ups and innovative companies need to know.
When an executive receives direct compensation (fixed, variable, or in shares), the legal and tax situation is relatively well-defined. Things become complicated when it comes to "management fees," which is a form of indirect compensation for executives, often established through agreements between related companies.
This practice, often used in groups to structure general management, strategy, or certain support functions, raises many questions from a tax perspective. Recent case law has reignited these debates.
In this article, we offer a pragmatic and concrete analysis of the current rules, in light of the recent Sté Mandarine Gestion ruling of May 15, 2025, as well as major decisions that have marked this area (Gamlor, Collectivision…). The goal? To enable you, as an entrepreneur, start-up executive, or head of an innovative company, to understand the opportunities and risks associated with implementing management fee agreements.
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Management fee agreements: what are we really talking about?
The practice of management fees involves one company charging another—usually a subsidiary—for management, strategic guidance, administrative, or technical services, often provided by common executives.
Often used in groups, these agreements can allow:
- pooling certain functions (general management, CFO, HR, etc.) without creating a costly central entity;
- indirectly compensating certain executives through a management company they control;
- optimizing tax flows between related entities, thanks to the deductibility of services from the perspective of the beneficiary company.
However, and this is where things get complicated, this mechanism is closely scrutinized by the tax administration.
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Reminder: the Gamlor case and tax control of management fee agreements
The tax administration took an early interest in management fee agreements (CAA Nancy, April 16, 2002, No. 98-480, aff. Gamlor). It considers that when the agreement concerns the compensation of a common executive between two related companies, there is a risk of double compensation or "disguised" compensation.
Thus, it regularly challenges the deductibility of the amounts charged, on the grounds that it would constitute an "abnormal management act," a legal concept at the heart of tax doctrine. In other words, a company cannot deduct an expense it would not have agreed to bear under normal market conditions.
Since this case, the red line is clear: as soon as a billed service resembles an indirect compensation for an executive already paid elsewhere, the litigation risk increases significantly.
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The Collectivision turnaround: towards cautious easing?
Twenty years later, the Council of State reshuffled the cards in its Collectivision ruling (CE, December 8, 2022, No. 460.435).
It states that if a company has transparently agreed to indirectly compensate its executive through a service agreement with another company it controls, this sole intention is no longer sufficient to automatically qualify the act as "abnormal management."
This turnaround is decisive. It does not validate all management fee agreements, but it establishes an essential principle: it is no longer the structure that is suspect in itself. It is the lack of serious justification, the reality of the services, and legal transparency that is.
For start-up executives and founders, this decision can be interpreted as an "opening": it becomes possible to imagine more flexible structures, provided that evidence and the form of compensation are secured.
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The Mandarine Gestion case: the limits of poorly documented structures
But beware, this new framework requires rigor and documentation. The ruling of the Administrative Court of Paris on May 15, 2025 (No. 2226165, aff. Mandarine Gestion) serves as a reminder that not everything passes.
In this case, Mandarine Gestion accounted for nearly 3.5 million euros in expenses related to intellectual services provided by a closely related company, MG Participations, for the fiscal years 2015 and 2016.
The problem? The tax administration, and then the judge, consider that:
- the services are insufficiently distinct from the management functions directly exercised by the individuals concerned;
- the service provider does not have its own material and human resources to carry out these missions;
- the corporate bodies did not clearly validate the principle of indirect compensation for executives.
The court thus confirms the tax reintegration of the amounts, considering that the company committed an abnormal management act.
This ruling highlights the importance of the double requirement posed by the judge: the services must actually exist, be useful to the beneficiary company, and be distinct from the management functions exercised elsewhere.
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What start-ups and innovative companies should remember
Many young companies structured in groups have several entities: a holding company, one or more operational subsidiaries, and sometimes a personal company of the founder(s). In this context, the question of indirect compensation—via management fees—naturally arises.
In light of the aforementioned decisions, here are the key principles to keep in mind.
1. Justify the reality of the services
The service provider must have its own resources: premises, tools, employees, and be genuinely capable of providing the claimed consulting services (strategy, organization, communication, etc.).
This is the key point: if the service provider is a shell company or if the services are actually rendered by the same individuals already in position in the subsidiary, double compensation is suspected.
🔎 Example to avoid: a company A pays a salary to its executive. At the same time, it pays a company B (controlled by the same executive) for "strategy" services that are not justified. This scheme will very likely be challenged.
2. Specify corporate deliberations
The beneficiary company of the service must expressly record, through its corporate bodies (assembly, board, etc.), the use of the service, the exact nature of it, and, if applicable, the decision to indirectly compensate its executives.
This is a requirement that clearly emerges from the Mandarine Gestion case: the minutes of the board of directors must be consistent with the content of the contract.
📌 Tip: clearly state in the agreement and in the minutes that the management fees include a portion of the indirect compensation for executives, and that this has been validated with full knowledge of the facts.
3. Ensure consistency with market conditions
Even if the service is documented, it must remain economically rational. The billed amount must correspond to a service rendered and to market price. Otherwise, the administration may invoke "abuse of rights" or "benefit without consideration."
This sometimes requires a study of external comparables or the use of an independent expert to assess the value of the services.
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What risks arise from poorly structured agreements?
The consequences of a poorly framed management fee agreement can be severe:
- Tax reintegration of amounts (non-deductibility) and corporate tax adjustments;
- Tax penalties for abuse of rights or abnormal management acts;
- Sometimes requalification as distributed income, thus taxed in the hands of the executive;
- Criminal risks in case of concealment of compensation.
For start-ups, often fragile in cash flow and seeking credibility with investors, it is crucial to avoid these pitfalls.
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Towards securing structures: what can a lawyer do?
Despite the mentioned risks, management fee agreements can be relevant, under two conditions: that they serve a real economic purpose and that they are properly formalized.
A lawyer specialized in business law, working with start-ups and young companies, can assist on several essential points:
- Drafting or ensuring compliance of service agreements;
- Advising on group structures and executive compensation;
- Pre-audit or support during a tax audit;
- Implementing necessary corporate deliberations.
At PRAX Avocats, we regularly support innovative companies on these complex issues, providing tailored legal-strategic advice.
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Conclusion
The latest decisions, particularly Collectivision and Mandarine Gestion, clearly illustrate the current tension between management flexibility and the requirement for transparency in the indirect compensation of executives via management fees.
For start-ups and innovative structures, it is not about avoiding this type of arrangement, but about framing them rigorously: legal compliance, appropriate documentation, social validation, economic coherence.
Any poorly designed or poorly motivated scheme can be requalified for tax purposes. Conversely, in a well-structured environment, management fees remain an interesting tool for management and optimization.
For personalized legal support for your business project, contact PRAX Avocats.