Cross-border management fee models under fire: Luxembourg x Spain - Two sides of the same coin

Management fees are the backbone of asset management groups 

This pressure arises in both the holding and management jurisdiction invoicing the fee [Luxembourg] and the investment jurisdiction paying it [Spain]. 

Why? This has significant consequences for: how asset managers design, document and defend their fee models, especially in structures where input VAT is not fully deductible, or when a TP adjustment triggers VAT.

How it works: Management fees remunerate the entity that structures the platform, oversees investments, manages risk and ensures regulatory compliance. Unsurprisingly, they are also one of the most scrutinized intra-group flows by tax authorities. In structures linking Luxembourg and Spain, this scrutiny is particularly intense. 

Value creation: two jurisdictions, but two realities…

The starting point is always the same: where is value really created, and how is it priced? 

This is where the Luxembourg–Spain comparison becomes striking. Luxembourg looks at where value is created. Spain looks at how it is justified. Same fee, but two very different angles.

From a TP standpoint, management fees must align with where value is created, looking beyond legal form to operational reality: investment decisions, risk control, senior personnel, platforms and processes. 

From a methodological perspective, international standards consistently stress that remuneration must follow the accurate delineation of transactions, rather than contractual labels alone. 

How it works: The Organisation for Economic Co-operation and Development (OECD) TP Guidelines, particularly in their guidance on intra-group services, emphasize the need for demonstrable benefit to the recipient, and pricing mechanisms aligned with value creation. These principles, long familiar to TP practitioners, increasingly resonate beyond corporate tax and into VAT audit.

In practice, fees often combine a variable component linked to assets under management with cost-based remuneration for support services. Year-end adjustments are commonly used to align annual profitability with an arm’s length range. 

The end of automatic VAT neutrality

In investment jurisdictions, service charges received from abroad are typically subject to VAT under the reverse-charge mechanism applied by the recipient company. That assumption is no longer safe.

For taxpayers, this has practical consequences:

• Tax authorities increasingly ask whether an adjustment reflects a genuine pricing mechanism or merely an ex-post profit allocation. More importantly, VAT deduction may be challenged if the taxpayer cannot demonstrate that the services were actually received and used for its taxable activities: an issue that is particularly sensitive in sectors such as financial services, where VAT recovery is structurally limited. 
• Similarly, tax authorities can assess output VAT when the recipient company wrongly determined that the adjustment did not reflect the actual consideration for the services received. 

In any case, whether a VAT audit ends up adjusting deductions or assessing output VAT, penalties and late-payment interests are usually applied, breaking the neutrality of the tax.

Inconsistent TP vs VAT pricing? Risk indicators.

In holding jurisdictions, VAT law allows the administration to substitute the agreed price with an Open Market Value (OMV) in certain related‑party scenarios. In Luxembourg, VAT law requires the taxpayer to apply the OMV.

The practical implication is that fee structures must be transparent. When services are bundled, taxpayers should be able to break down the fee by activity and demonstrate how the valuation was determined, whether based on comparables or cost‑based rationale.

The underlying message is clear: inconsistencies between arm’s length pricing and VAT valuation are now viewed as risk indicators. This case guides administrations on how to deploy OMV rules without defaulting to single supply or full cost shortcuts. 

Across Europe, the Arcomet and Högkullen rulings are pushing tax authorities toward a single unified audit logic: substance + pricing + evidence = one coherent narrative.

VAT x Transfer Pricing: the evidence has become the decisive filter

In our example, this is where Luxembourg and Spain finally meet:

• Both expect proof.
• Both challenge weak documentation.
• Both deny VAT recovery or deductibility if the story doesn’t hold.

Authorities expect taxpayers to maintain documentation, proving not only the rationale for pricing, but also the reality of the underlying services. Contracts, work plans, deliverables, meeting notes, system logs: everything must align with the fee mechanism. 

This evidentiary pressure is as strong in Spain (for VAT deduction) as in Luxembourg (for arm’s length charge/OMV and service reality).

How it plays out in practice? 

In many investment jurisdictions, disputes over management fees often turn less on the level of the fee than on evidence and pose an additional challenge to investments or subsidiaries that paid the management fee to platforms or parent companies. Authorities expect taxpayers to show that services were requested, —actually provided— and economically useful. And sometimes, the legal support behind the charged fee is simply non-existent or is not clearly and well set up. 

Furthermore, when input VAT is not rightly calculated by the investment company, the analysis cannot be objected to on the basis that the remuneration payable to the holding jurisdiction is merely intended to adjust the operating profit margin of the subsidiary.

Asset managers must therefore ensure that functions attributed to each entity. These frameworks must also establish detailed rules for the determination of the remuneration and must be laid down in advance in the contract and according to precise criteria.

And for mixed activities?

"If an entity claims to recover VAT under reverse-charge mechanism, it must be able to demonstrate how the services relate to its taxable activity.’’ When the service supports both exempt and taxable outputs, the taxpayer must document an allocation method that reflects actual use. 

Well-designed management fees are not about complexity, but consistency. Cross‑border structures should ensure that functional analyses, contractual terms, invoicing practices and internal reporting are aligned. Fee segmentation should match actual service flows and anticipate how services should be remunerated, and how this interacts with VAT.

Conclusion: the duel becomes a convergence

Luxembourg and Spain may follow different routes, but they increasingly land on the same point: fees that lack real functions, clear valuation and solid evidence simply don’t survive scrutiny. The challenge is no longer technical complexity: it’s coherence. Groups must be able to demonstrate what services were provided, by whom, and for what consideration, with the same clarity on both TP and VAT sides.

In practice, this means unbundling where the economics require it, ensuring contracts and invoices mirror the actual work, and maintaining an evidence file that tells one consistent story. Only then can asset management groups protect the efficiency of their cross-border setups while facing a new audit reality: one where tax authorities and policymakers across Europe are clearly converging.