If you operate multiple business entities , especially across states or internationally , and charge management fees between them, Texas wants to ensure these are arm’s-length and not being used to reduce Franchise Tax improperly. Here’s how to structure intercompany fees to withstand scrutiny from the Texas Comptroller in 2025.
What Are Intercompany Management Fees?
These are fees paid by one business entity (e.g., an operating subsidiary) to another related entity (e.g., a holding company or parent) for:
- Executive oversight
- Accounting and legal support
- IT infrastructure
- Brand management or licensing
- Shared HR or admin services
In Texas, these are deductible expenses only if they meet arm’s-length standards.
Legal Framework in Texas
Under Texas Tax Code §171.1011(k) and Rule 3.587, the Texas Comptroller may adjust margin calculations if:
- Transactions between affiliated entities do not reflect fair market value
- Management fees are inflated to reduce margin tax
- The arrangement is not properly documented or justified
Texas applies transfer pricing principles similar to IRC §482.
When Intercompany Fees Become a Problem
Fees are flagged or denied when:
- They exceed industry benchmarks without support
- There’s no formal agreement or breakdown of services
- They represent a significant portion of total expenses
- They involve out-of-state affiliates with no tax presence in Texas
Texas auditors will disallow deductions that appear non-substantive or inflated.
Example: Good vs Bad Management Fee Structure
Scenario A (Proper Structure):
- Company A (TX entity) pays $150,000/year to Company B (DE parent)
- Written management agreement exists
- Fee is based on actual time logs, employee cost + markup
- Transfer pricing report supports the amount
- Deduction allowed on Form 05-158-A
Scenario B (Improper Structure):
- No written agreement
- Fee is flat 30% of revenue
- No explanation of services
- All profits shifted to DE entity
- Likely to be disallowed or adjusted by Texas
Step-by-Step: Structuring Arm’s-Length Fees in 2025
- Draft a written intercompany service agreement
- Define scope: services provided, employees involved, costs covered
- Use cost-plus method or benchmark pricing from similar firms
- Maintain time sheets, invoice details, and supporting memos
- Report fees on Franchise Tax Long Form (05-158-A) and prepare for audit review
Conclusion
Management fees between related entities are common, but poorly documented or excessive charges can lead to denied deductions and penalties under Texas Franchise Tax law. Ensure your intercompany structure is substantive, arm’s-length, and audit-ready.
Call to Action
Schedule an intercompany compliance review with Anshul Goyal, CPA, EA, FCA to assess whether your management fees are properly structured, documented, and defensible under Texas and federal tax rules.
Disclaimer:
This blog is for educational purposes only. Intercompany fees must meet transfer pricing and state-level requirements under Texas Tax Code §171.1011 and Rule 3.587. Always consult a professional before deducting related-party expenses.
Top 5 High-Searched FAQs
1. Are intercompany management fees deductible in Texas?
Yes, but only if arm’s-length and properly documented.
2. What is an arm’s-length transaction?
A transaction priced as if the parties were unrelated and acting in their own interest.
3. Can Texas disallow deductions for inflated fees?
Yes. The Comptroller can adjust or deny them under Rule 3.587.
4. Do I need a transfer pricing study?
It helps. Especially for fees over $250K or cross-border charges.
5. Where do I report these fees?
On Form 05-158-A (Franchise Tax Report) as part of total deductions.
About Our CPA
Anshul Goyal, CPA, EA, FCA helps founders and CFOs structure intercompany arrangements to be tax-efficient and legally sound. With experience in IRS and Texas audits, he ensures your management fees and related-party deductions stand up to scrutiny.