By Feroz Hematally, Head of Tax, Africa, India and Middle East, IQ-EQ and Director of Taxand Mauritius
Management fees are a common feature in investment fund structures, but from a transfer pricing (TP) perspective, they present significant challenges. With related-party service providers often spanning jurisdictions, fund sponsors must ensure fees are arm’s length, especially amid rising regulatory scrutiny, evolving OECD standards, and heightened expectations around value creation and economic substance.
How different management services impact TP outcomes
- Investment management services: These typically cover portfolio construction, asset selection, trading decisions, risk monitoring and compliance. As these functions are central to value creation, they may warrant a higher return. If the manager bears performance-related or market risk, remuneration may include performance-based fees or profit splits. Characterisation as a routine manager or entrepreneur significantly affects TP outcomes
- Investment advisory services: These involve non-discretionary support, market analysis, or recommendations. Due to limited decision-making authority and risk exposure, these services often qualify as support functions. TP analysis may use transactional net margin method (TNMM) with a low mark-up or external benchmarking. In low-substance environments, benefit tests are critical
- Portfolio management services: These include trading execution and compliance with mandates. Remuneration should reflect the scope and risk profile. If functions are automated or tightly supervised, value creation is limited, and TP outcomes should reflect that
Key TP principles and compliance triggers
Several TP concepts come into play in the proper structuring and documentation of these fees:
- Accurate delineation: Identify the actual service, the performing entity and the beneficiary. Legal contracts are a starting point; OECD guidance emphasises alignment with conduct, substance, and risk control
- Benefit test: Fees must correspond to services that provide identifiable economic or commercial benefits. Multiple charges for overlapping services increase the risk of duplication
- Benchmarking and method selection: Depending on the service, TP methods may include TNMM, CUP (comparable uncontrolled price) or profit splits. Investment services may require qualitative adjustments due to limited comparables
- Substance alignment: Fees paid to entities in low-tax jurisdictions must reflect actual substance. Tax authorities may challenge fees to entities lacking the staff or infrastructure. Documentation must reflect the location of decision-making and risk management
Common TP pitfalls and how to mitigate them
Authorities are increasing scrutiny of intercompany service arrangements. Risk indicators include:
- Large recurring fees with no performance link
- Similar services charged to multiple entities without clear allocation
- Fee recipients with minimal local presence
- Inconsistencies between contractual and operations
Failure to document these arrangements can lead to denied deductions, profit reallocation or increased tax exposure. Indirect consequences include audit triggers under OECD’s Country-by-Country Reporting and Pillar Two rules.
Fund managers should consider:
- Commissioning updated TP functional and economic analysis
- Reviewing contracts for consistency with actual conduct
- Establishing clear cost allocation mechanisms
- Benchmarking fees using tailored comparables
These steps help build a robust defence file and enhance confidence during audits or investor due diligence. In Mauritius, the Finance Bill 2025 introduces mandatory documentations for related party transactions.
As global TP enforcement becomes more sophisticated, aligning management fee policies with substance and value creation is not just good governance, it’s a strategic imperative. Fund sponsors should act now to align their TP policies with global best practices before regulators do it for them.
Contact our Mauritius team today to discuss how we can support your fund’s transfer pricing documentation, substance planning and compliance with the Finance Bill 2025 requirements.
*Article originally published in the October 2025 edition of Mauritius Finance Magazine*
