Indirect remuneration of directors: recent judgment raises the bar on proof of management fees

By a judgment dated April 3, 2025 (No. 23MA02484), issued following the “Sté Collectivision” ruling by the Conseil d’État, the 3rd Chamber of the Marseille Administrative Court of Appeal refined the conditions under which a company may validly indirectly remunerate its director through a service agreement. In this case, due to the absence of evidence of an explicit corporate decision and a genuine benefit for the company, the payment of fees was reclassified as an abnormal management act.

The court applied the analytical framework established by the Conseil d’État with strict rigor and reiterated the requirement for conclusive justification — both in form and in substance — to avoid the characterization of an impoverishment without consideration.

This decision clearly illustrates the very strict standards imposed by the administrative courts regarding indirect director compensation through service agreements between related companies. While such a structure is legally permissible, it is only valid if:

• there is an explicit resolution by the shareholders or the board of directors, formally recorded;
• the company can provide documented proof of specific services rendered, distinct from duties inherent to the director’s corporate mandate;
• there is particular vigilance in situations involving conflicts of interest or shared management between the companies.

Failing this, the company exposes itself to corporate tax reassessments, penalties, and potentially VAT adjustments.

In the case at hand, Collectivision, a French limited liability company (SARL) managed by Mr. A., entered into a service agreement in June 2013 with Sonely, a company in which Mr. A. was also co-manager and shareholder. The agreement covered a broad scope of administrative, financial, and strategic tasks (including updating management tools, operational coordination, and group development).

However, the services were actually performed by Mr. A. himself, through Sonely. The French tax authorities considered that the fees paid to Sonely were in reality an indirect form of compensation for Mr. A., not duly approved by the competent corporate bodies and without any consideration separate from his duties as manager. The tax authorities therefore reintegrated these expenses into taxable income for the 2013 fiscal year, treating them as an abnormal management act (acte anormal de gestion, AAG).

The company challenged the reassessment, first before the Administrative Tribunal, and then before the Marseille Administrative Court of Appeal, following a partial annulment by the Conseil d’État (Sté Collectivision, CE, October 4, 2023, No. 466887).

According to the Conseil d’État, a company may, through a contract, indirectly remunerate its director via another company, and this does not necessarily constitute an AAG. However, such indirect compensation is only admissible if:

• the competent corporate bodies have explicitly intended to compensate the director in this manner; and
• the company can demonstrate that it received an actual benefit, namely, services that are distinct from the director’s duties under the corporate mandate.

Otherwise, the payment is deemed to constitute an impoverishment without consideration for the company and is thus characterized as a transaction unrelated to normal business management (Articles 38 and 209 of the French Tax Code).

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In this case, the Marseille Administrative Court of Appeal, following the referral from the Conseil d’État, found that:

• No valid corporate decision was proven. The sole reference to the agreement in the management report — including mention of the amounts paid and the fact that the same person was a shareholder in both companies — was insufficient to demonstrate a collective decision by the shareholders approving the indirect remuneration of the manager. The mere reference to Article L. 223-19 of the French Commercial Code was deemed inadequate.
• No specific technical service was established. The content of the agreement was considered generic, and there was no evidence that Mr. A. had acted in any capacity other than that of manager of the SARL, whose powers, moreover, were not limited by the bylaws.
• The claim that the presence of a second co-manager at Sonely improved efficiency was found to be too vague and lacking in substance. In fact, the tax authorities had accepted the deduction of fees corresponding to that co-manager.

The court upheld the reassessment: the fees paid to Sonely, insofar as they corresponded to the compensation of Mr. A., were reclassified as an abnormal management act, due to the lack of evidence of a genuine service rendered and formal approval by the competent corporate bodies.