Charging too much, or too little, in brand royalties to a foreign subsidiary exposes the group to indirect profit transfer and abnormal act of management.
An international group has its French subsidiaries remit to the foreign parent an annual royalty, calculated as a percentage of turnover, in consideration for the use of the group's brand. The operation seems innocuous, almost administrative. Yet it sits at the centre of an increasingly active tax dispute, in which the authorities scrutinise, royalty by royalty, the reality of the consideration obtained by the paying subsidiary. The finding of recent case law is stern: the use of a so-called umbrella brand, which overlays a subsidiary's own operating brand without replacing it, justifies at best a symbolic remuneration, for want of real and demonstrated economic consideration.
The subject is doubly treacherous. On the one hand, a royalty that is too high, devoid of consideration, constitutes an indirect transfer of profits abroad, non-deductible and reassessed on the basis of article 57 of the French General Tax Code. On the other, the failure to invoice a royalty nonetheless provided for in a licence agreement may, conversely, characterise an abnormal act of management. Between excess and default, the margin of safety is narrow, and it is won only through rigorous documentation of the value actually provided by the brand.
We first present the framework of indirect profit transfer and the abnormal act of management (I), then the question of the umbrella brand, at the heart of recent litigation (II), before turning to the failure to invoice and the structuring of a defensible royalty policy (III).
I. Indirect profit transfer and the abnormal act of management
A. Article 57 and the arm's length principle
Article 57 of the French General Tax Code (CGI) allows the authorities to reintegrate into a French company's results the profits indirectly transferred to a foreign company connected to it by a relationship of dependence. These transfers may take many channels: the raising or lowering of purchase or sale prices, but also the payment of excessive or consideration-free royalties, the granting of interest-free loans, debt waivers, or any advantage out of proportion with the service obtained. The device is the expression, in French law, of the arm's length principle (principe de pleine concurrence) that runs through international tax law and the OECD transfer pricing guidelines.
A shared burden of proof, and two distinct mechanics. On the ground of the abnormal act of management, it falls first on the taxpayer to justify the amount of the charge and the very principle of its deductibility, by any sufficiently precise elements bearing on the nature of the charge as well as on the existence and the value of the consideration it derived from it; only if it discharges that obligation does it fall on the authorities to establish that the charge is not deductible by nature, that it is without consideration, that the consideration is of no interest to the taxpayer, or that its remuneration is excessive. To apply article 57, the authorities must establish the existence of a relationship of dependence between the companies and that of an advantage, after which it is for the French company to justify that this advantage had for it consideration at least equivalent to its cost. This evidentiary mechanism is decisive: a brand royalty will be regarded as an indirect transfer of profits as soon as it exceeds the remuneration of the services actually rendered, where the subsidiary cannot establish the economic advantage it derives from it.
B. The abnormal act of management and article 238 A
Alongside article 57, which specifically targets cross-border flows between dependent companies, the theory of the abnormal act of management allows a charge devoid of consideration for the company's interest to be challenged. The two bases largely overlap in brand-royalty matters, the authorities often invoking them together. A subsidiary that pays its parent a royalty without concrete benefit commits, from a tax standpoint, an act contrary to its interest, the deduction of which is refused. The boundary between the two bases is thin, and the court may, where appropriate, substitute one for the other.
The additional lock of article 238 A. Where the company receiving the royalty is established in a State where it benefits from a privileged tax regime, within the meaning of article 238 A of the CGI, an additional lock applies. Charges paid to a person subject to taxation more than half lower than it would bear in France are covered. The deduction of these charges is then allowed only if the debtor proves that they correspond to real operations and do not present an abnormal or exaggerated character. A parent company benefiting, for instance, from a substantial allowance on its royalties in its State of establishment falls within the scope of this device, which shifts the burden of proof onto the French subsidiary and makes the justification of the royalty all the more demanding.
II. The umbrella brand at the heart of the dispute
A. A remuneration at best symbolic for want of real consideration
The notion of umbrella brand (marque ombrelle) designates the group's brand that overlays a subsidiary's operating brand, without replacing it. The subsidiary exploits its own brand, recognised on its market, and adds the group's brand, which comes in support. The Paris administrative court of appeal so held on 10 December 2025 (CAA Paris, 2nd ch., no. 25PA00451, ArcelorMittal France): the royalty of 1 % of turnover realised with third parties, paid by Industeel Creusot and Industeel Loire to their Luxembourg parent for the use of the ArcelorMittal brand, its logo and its advertising concept, was without consideration and constituted an abnormal act of management. Following the opinion of the national commission for direct taxes and turnover taxes, the authorities had retained only a symbolic royalty of 0.1 % of turnover, corresponding to the outward expression of group membership, the surplus being reintegrated. The court draws a decisive procedural consequence: since paying royalties without consideration is by its very nature an abnormal act of management, the authorities were not required to refer to comparables. The judgment is unreported and open to appeal on points of law.
The reasoning rests on a precise factual analysis. The court notes the coexistence of brands, the subsidiary's operating brand being recognised on its niche market while the group's brand comes only in support. It finds the absence of demonstrated commercial impact of the umbrella brand, and the absence of decisive influence of that brand on sales, given the technical nature of the products and the modes of marketing. It observes, finally, that quality control remains ensured by the subsidiary, which has its own clientele and sells products distinct from those of the other group entities. From all these elements, it infers that the umbrella brand justifies, at best, a symbolic remuneration.
B. What must be proved to justify a royalty
The central lesson of this case law is that a brand royalty above the symbolic is not presumed: it is demonstrated. To secure a significant rate, the subsidiary must establish and document a tangible economic advantage directly linked to the group's brand, whether an increase in sales, an effect on volumes or prices, facilitated access to new markets or customers, or measurable cost savings. Failing such a demonstration, the royalty is deemed devoid of consideration and reduced to a symbolic remuneration, the surplus being reintegrated and taxed.
The requirement of coherence and reputation. The review also bears on the coherence of the brand and on the reality of its reputation among the targeted clientele. An umbrella brand used for heterogeneous activities or products, without overall coherence, and for which no proper reputation is established, cannot justify a royalty. Likewise, the absence of any commercial, marketing or advertising development carried out by the licensing parent to enhance the brand deprives the royalty of foundation. The licensing of a brand presupposes, in short, that the licensor provides and maintains a value that the licensee actually exploits to its benefit; failing that, the flow is only a disguised transfer of profits.
III. Failure to invoice and structuring the royalty policy
A. The failure to invoice as an abnormal act of management
The risk is not only that of excess. The failure to invoice a royalty nonetheless provided for in a licence agreement may, conversely, be characterised as an abnormal act of management. Where a French company, holder of intellectual property rights, licenses the use of those rights to a foreign subsidiary under a licence agreement providing for a royalty, and refrains from invoicing it, it waives a claim without consideration, which unduly impoverishes its taxable result for the benefit of the foreign subsidiary. The most telling indicator here is the internal comparison: a company that invoices royalties to its other foreign subsidiaries placed in a comparable situation, yet refrains from doing so towards one of them without justification, exposes itself to that abstention being regarded as a waiver of income contrary to its own interest.
This symmetry is instructive. The same group may be reassessed for having charged too much, on the ground of indirect profit transfer, and for having charged too little, or nothing at all, on the ground of the abnormal act of management. The coherence of the royalty policy across the group thus becomes a central issue: treating differently subsidiaries placed in comparable situations, without economic justification, exposes the group to reassessment, whether for excess or default of invoicing. Arbitrariness, in either direction, is sanctioned.
B. Practical recommendations: document, benchmark, harmonise
Document the real value of the brand. Before setting an intragroup brand royalty, the group must build a file establishing the economic value actually provided by the licensed brand: its reputation among the clientele, its influence on sales, volumes and prices, the promotion and development actions undertaken by the licensor. Without this demonstration, any royalty exceeding the symbolic is exposed. The documentation must be contemporaneous with the establishment of the royalty, and not reconstructed at the time of an audit.
Support the rate with a benchmarking analysis. The royalty rate must be justified in the light of the arm's length principle, by a benchmarking analysis and a transfer pricing study consistent with OECD standards. This analysis must distinguish, where appropriate, the remuneration of the subsidiary's own operating brand from that of the group's umbrella brand, whose added value is, by nature, more limited. Transfer pricing documentation, mandatory for groups above certain thresholds, is the first bulwark in the event of an audit.
Harmonise the royalty policy across the group. Because the differentiated treatment of comparable subsidiaries is a risk factor, the group must ensure the coherence of its royalty policy across jurisdictions. Invoicing a royalty to some subsidiaries and not to others, or applying disparate rates without economic justification, weakens the whole arrangement. Where the parent benefits from a privileged tax regime, vigilance must be heightened, article 238 A requiring all the more demanding proof. We assist groups in designing, documenting and securing their intragroup royalty policy.
Conclusion
Intragroup brand royalties have become a favoured ground of audit, where the authorities and the courts assess, with growing exigency, the reality of the consideration obtained. The use of an umbrella brand, overlaid on an own operating brand, justifies at best a symbolic remuneration, unless a tangible economic advantage directly attributable to the group's brand is demonstrated. Symmetrically, the failure to invoice a contractually provided royalty exposes the company to the abnormal act of management.
Our conviction is that the security of a royalty policy lies neither in excess nor in abstention, but in coherence and documentation. A royalty supported by proof of the value actually provided by the brand, justified by a benchmarking analysis and applied homogeneously across comparable subsidiaries, withstands an audit; a royalty set by guesswork, in either direction, succumbs to it.
Our recommendation is clear: have your brand royalty policy audited, document the economic value of your brands and the coherence of their invoicing across jurisdictions, and support your rates with a transfer pricing study. This is the price at which the upstreaming of royalties ceases to be a risk and becomes a secured flow.
Frequently asked questions
What level of intragroup brand royalty is deductible?
There is no reference rate: the royalty is deductible only up to the real economic consideration it remunerates. The use of an umbrella brand, overlaid on a subsidiary's own operating brand, justifies at best a symbolic remuneration, of the order of a few tenths of a percent, linked to group membership. To justify a higher rate, the subsidiary must demonstrate a tangible economic advantage directly linked to the group's brand, failing which the surplus is reintegrated as an indirect transfer of profits.
What is an umbrella brand in transfer pricing?
It is the group's brand that overlays a subsidiary's operating brand without replacing it. The subsidiary exploits its own brand, recognised on its market, and adds the group's brand, which comes only in support. Case law considers that such a brand, for want of demonstrated decisive influence on sales, justifies at best a symbolic remuneration. The coexistence of brands, the retention of quality control by the subsidiary and the existence of an own clientele are indicia of limited consideration.
Is not invoicing a royalty to a subsidiary risky?
Yes. The failure to invoice a royalty provided for in a licence agreement may be characterised as an abnormal act of management: the company waives a claim without consideration, which unduly impoverishes its result for the benefit of the subsidiary. The risk is increased where the group invoices royalties to some comparable subsidiaries but not to others, without economic justification. The coherence of the royalty policy across jurisdictions is therefore essential, both excess and default of invoicing being sanctioned.
How can a royalty paid to a foreign parent be secured?
By documenting the real value of the brand and supporting the rate with a benchmarking analysis consistent with OECD standards. One must establish the brand's reputation, its influence on sales and the development actions undertaken by the licensor, and distinguish the operating brand from the umbrella brand. Where the parent benefits from a privileged tax regime, article 238 A of the CGI further requires proof that the royalties correspond to real operations and are neither abnormal nor exaggerated.