Justifying intragroup management fees in Luxembourg

Management fees paid by a Luxembourg company must relate to services actually provided for its business. The amount must also reflect terms that independent businesses would agree in comparable circumstances. An agreement and an invoice do not, by themselves, establish either point. Other restrictions on tax deductions can still apply.

A foreign parent may provide financial or administrative support to a Luxembourg subsidiary. A Luxembourg holding company may also supply services to subsidiaries abroad. In both directions, the analysis starts with the work performed and the company benefiting from it, before deciding how to allocate expenses or calculate remuneration.

Each charge needs an identifiable service

The term management fees can cover payroll support, accounting, information technology or operational management. These activities have different beneficiaries and may require different pricing methods. A broad description such as group support leaves those differences unexplained.

Under the OECD guidance on intragroup services, the question is whether an independent company would have paid for the activity or performed it itself. The service should provide economic or commercial value to the recipient. A reasonable expectation of benefit can be sufficient. A project does not have to produce the hoped-for profit to have involved a genuine service.

For example, a parent finance team may prepare cash-flow forecasts for a Luxembourg subsidiary’s planned acquisition. The subsidiary, the transaction and the work can be identified. A general charge to every group company needs a different explanation, since each company may have received a different service or none at all.

Shareholder activities remain with the shareholder

Work performed solely because a parent owns its subsidiaries is not a service to recharge to them. Preparing the parent’s own shareholder meetings is an example. Reporting undertaken only to fulfil the parent’s obligations as shareholder also needs to be separated from work serving a subsidiary’s business.

Operational support can still come from the parent. A finance team may manage a subsidiary’s reporting or cash position in addition to preparing reports for the parent’s owners. The functions and beneficiaries determine the distinction. The department’s name does not settle it.

The same distinction applies when work appears to duplicate a local service. An additional charge needs an identifiable contribution, rather than a second description of work already performed. Temporary overlap during a reorganisation or an independent second opinion may have a separate purpose. Merely belonging to a larger group, without any specific activity being performed, does not create a chargeable service.

The cost base and allocation key need to fit the service

An expense attributable to one recipient can be charged directly. A shared service may instead require a pool of relevant expenses and a method for dividing them between its beneficiaries. Shareholder activities, unrelated expenses and amounts already charged directly should not enter that shared pool.

The allocation key should reflect the use of the service or the benefit reasonably expected. Employee numbers may suit payroll support. User numbers may suit a reasonably uniform software support service. Revenue can be relevant in some circumstances, but a company with higher revenue does not necessarily use more of every support function.

In a hypothetical example, the Luxembourg company has 20 of the 100 comparable users receiving a shared software support service. Allocating 20% of the relevant support expenses to it may be reasonable if those users have similar needs. If the Luxembourg operation needs substantially more specialist support, that simple ratio may no longer reflect the service received.

That calculation identifies an allocated expense base. It does not yet establish the final remuneration. Different service categories may need different keys, and the resulting allocation should be reproducible from the underlying figures.

The charge follows the provider’s actual role

Articles 56 and 56bis of the Luxembourg Income Tax Law establish the arm’s-length principle. The agreed conditions must reflect those independent businesses would have accepted in comparable circumstances. The analysis considers the work performed, assets used, risks taken and contractual terms, together with the parties’ actual conduct.

A cost-based method may suit some services. Its suitability and any mark-up need to be supported by the transaction and the available comparable information. Applying the same percentage to administrative support and strategic management can conceal different functions. A defensible percentage cannot make an unrelated expense or a shareholder activity chargeable.

External supplier expenses also need a separate assessment. If a company acts only as an intermediary, its own work may require remuneration while the supplier’s charge passes through without the same mark-up. An external invoice is not automatically a pass-through expense. The company’s actual responsibilities and contribution remain decisive.

Intragroup financing follows its own analysis. A loan or guarantee does not become an administrative service because its remuneration appears on a management fee invoice.

The 5% approach covers a limited category of support

The OECD simplified approach applies to qualifying low value-adding intragroup services. These support the group’s business without forming part of its core activities. They neither require nor create unique and valuable intangible assets, such as proprietary technology, and do not involve significant risk for the provider. Routine payroll administration may qualify.

Examples of excluded activities include financial transactions, sales, marketing and distribution. Research and development is also excluded, apart from software development falling within qualifying information technology services. Senior management is excluded except for supervising support services that themselves qualify. If comparable services are also supplied to independent customers, those transactions should be considered instead of applying the simplified approach.

For eligible services, the approach uses a 5% mark-up on the relevant costs, excluding qualifying pass-through costs. This is an addition to the cost base, rather than a 5% margin on the selling price. The simplified approach does not require a separate comparison with market transactions to justify that particular mark-up. Its eligibility conditions, expense pool, allocation and documentation still matter.

According to the Luxembourg information supplied to the OECD, Luxembourg has no specific domestic rules for this simplified approach. It may be accepted depending on the facts and circumstances of the case. The percentage is therefore not an automatic acceptance rule for Luxembourg management fees.

The OECD released proposed revisions to Chapter VII in June 2026. At 8 October 2026, that discussion draft is not adopted guidance. The meeting announced for 9 November will discuss the proposals and comments received. That meeting date does not itself establish when a revised text will be adopted.

Tax deductibility requires a separate Luxembourg assessment

Article 45 of the Income Tax Law connects deductible business expenses to the business itself. It also restricts expenses economically connected with exempt income. A genuine service at an arm’s-length amount therefore does not guarantee that every Luxembourg recipient can deduct the whole charge.

For a holding company, the activity receiving the service matters. Work relating to exempt investment income needs to be distinguished from work supporting taxable services or other taxable business. The corporate tax reconciliation connects the accounting expense with the amount deductible in calculating taxable profit.

A payment benefiting a shareholder because of that relationship may also fall within Article 164’s rules on hidden profit distributions. This depends on the facts. Calling the payment a management fee does not determine its tax treatment.

Cross-border VAT is a different question

For services supplied to a taxable person acting as such, the general rule in Article 17 of the Luxembourg VAT Law locates the service where the recipient has established its business. A non-taxable legal entity identified for VAT is also treated as a taxable recipient for these rules. A purely passive holding cannot be assumed to qualify simply because it is a company.

Where a fixed establishment receives the service, that establishment’s location can apply instead of the head office’s. Special rules for particular services still need to be considered.

When a foreign supplier not established in Luxembourg provides a service covered by that rule to a Luxembourg taxable recipient, the recipient generally accounts for Luxembourg VAT under the reverse charge. This means declaring the VAT due itself. A Luxembourg supplier providing such a service to a taxable recipient established abroad will generally not charge Luxembourg VAT. The recipient’s status, the establishment receiving the work and any special rule need to be checked.

Accounting for VAT does not establish a right to recover it. Recovery depends on the recipient’s activities, the use of the expenditure and the conditions for deduction. The VAT position of a holding company can therefore differ from its income tax position. A group relationship alone creates neither a VAT exemption nor full recovery.

The year-end file should explain the year’s charge

The service description, evidence of the work and pricing calculation should connect with the period being charged. Useful records may include deliverables, support requests, project reports or staff activity records. The appropriate evidence depends on the service. No single document demonstrates every kind of intragroup support.

The calculation should identify relevant expenses, any direct charges, the beneficiaries, allocation keys and remuneration. Changes in the group during the year may alter those facts. A newly acquired company should not automatically receive a full year’s share of a service provided for only part of that period.

Any year-end adjustment needs to follow the method and the actual figures, rather than simply produce a desired profit for each group company. The corresponding invoices, accounting entries and tax treatment should explain the same transaction. The result is a charge that can be traced from the service performed to the recipient’s share and the provider’s remuneration.