Intragroup services:
the benefit test that decides deductibility.

The benefit test

It is the question that precedes any pricing discussion: did the service rendered by a related party confer on the recipient economic or commercial value — to the point that an independent company, in comparable circumstances, would have paid for it or performed it in-house? This is what Law 14,596/2023 codified in art. 23, §2, in line with the OECD (ch. VII, §7.6). If the answer is no, there is no basis for a deduction — regardless of any contract or invoice.

The analysis looks not at the expense label but at the actual benefit. Three categories fail the test by definition and deserve attention: shareholder activities (done in the parent's interest, not the subsidiary's), duplicated services (which the recipient already performs in-house) and the incidental benefits of mere group association. The foundation in Brazil is art. 23 of Law 14,596/2023, which codified the benefit test (§2), shareholder activities (§§3-4), duplication (§3, II) and incidental benefits (§6). (IN RFB 2,161/2023 carries the LVAS shortcut in art. 53; the benefit test and the other service rules are in the Law itself, art. 23.) Without proof that the service was rendered and generated value, the adjustment falls on the IRPJ and CSLL base (art. 23, §5).

In practice, the test breaks down into two questions, following the OECD (ch. VII): was the service actually rendered? (there is activity, not just a contract) and did it add value that an independent party would have paid for? On-call services — in which the parent keeps a team on standby — are only chargeable if an independent party would pay for that availability; a mere potential for help, never triggered, fails the test. It is this double question that separates a real service from a label.

The 5% shortcut (LVAS)

For low value-adding services (LVAS), IN RFB 2,161/2023 (art. 53) allows a simplified approach: the remuneration carries a gross profit markup over total direct and indirect costs of at least 5% when the provider is the Brazilian legal entity (service export) and at most 5% when the provider is the related party abroad (import). It is a safe harbour that waives the search for margin comparables.

It is worth separating the sources to avoid confusion: the benefit test and the other intragroup-service rules are in the Law (art. 23); the simplified 5% shortcut for low value-adding services is in IN RFB 2,161/2023 (art. 53). It is the IN itself that defines the LVAS criteria and the list of exclusions — which is what waives the search for comparables for that specific margin.

LVAS are support services that do not form part of the group's core business, do not create unique and valuable intangibles, and do not involve economically significant risk (art. 53 criteria, aligned with OECD ch. VII). In practice: HR, accounting, internal audit, legal, support IT, general administrative services.

What falls out

The regime's own regulation excludes from the LVAS concept, among others: services the group also provides to unrelated third parties; the group's core activities; research and development; manufacturing and production; raw-material purchasing; sales, marketing and distribution; financial transactions; extraction and processing of natural resources; insurance and reinsurance; corporate senior management; and international transport. These services follow the general rule — most appropriate method and comparability analysis — not the 5% shortcut. The practical risk is classifying as "low value" a service that, by being part of the core business or creating relevant value, should bear a higher margin — and having the 5% challenged on audit.

The exclusion list is not a formality. Each excluded category exists because it carries the kind of function, risk or intangible that the simplified margin was never meant to price. A treasury function that pools and lends cash across the group, for instance, sits squarely in financial transactions and is governed by its own arm's length analysis, not a 5% support margin; the same is true of a centralized procurement desk that negotiates volume on behalf of the whole group, or of marketing that builds the brand. The boundary question to ask before electing the LVAS route is always the same: does this service merely support the operating businesses, or is it itself one of the group's value drivers? Where the answer is the latter, the safe harbour is unavailable and the charge must stand on a full comparability analysis — and a fee that was priced at 5% on a service that should have borne a higher margin is precisely the mismatch the tax authority looks for. For related-context, see the pillar on financial transactions and the page on intangibles.

Shareholder activities: what cannot be charged

Not every cost the parent allocates to subsidiaries is chargeable. Shareholder activities — performed by the parent solely in its capacity as shareholder, such as group corporate-reporting costs, shareholder meetings, fundraising to acquire participations and compliance with the shareholder's own obligations — do not pass the benefit test and are not deductible at the subsidiary (Law 14,596/2023, art. 23, §3, I and §4, I to IV; in line with the OECD TPG, ch. VII, §§ 7.9-7.10).

The same applies to duplicated services — which the recipient already performs internally, save for justified temporary duplication or a demonstrated additional benefit (art. 23, §3, II) — and to the merely incidental benefits of belonging to the group, the passive association (art. 23, §6; OECD §§ 7.11-7.13). It is the most sensitive frontier of the management fee: the portion remunerating the parent's governance is not deductible; only the portion delivering an actual service to the recipient passes the test.

The duplication test is more nuanced than it first appears. A service is not duplicated simply because the recipient has a department with a similar name; what matters is whether the activity actually overlaps and adds nothing the recipient did not already have. Temporary duplication during a merger, a system migration or a short transition can be legitimate, provided it is time-bound and documented as such. Likewise, a second opinion that genuinely reduces a business risk — a centralized legal review of a high-stakes contract, say — may add value even though the recipient has its own legal team. The dividing line, again, is the independent-party benchmark: would an unrelated company in the recipient's position have paid an outside provider for that same second layer? Where the honest answer is no, the charge is duplicated and falls out of deductibility, and a management fee that bundles such layers into a single round figure invites the tax authority to disallow the whole.

In a typical management fee, then, three buckets coexist: real, chargeable services that pass the test; shareholder activities that must stay at the parent; and duplicated or incidental items that are not chargeable. The discipline the new regime demands is to unbundle them in advance — to price and document the first bucket on its own merits, and to leave the other two out of the Brazilian deduction — rather than defending an undifferentiated lump sum after an assessment has already drawn those lines for you.

How to remunerate: base, key, markup

Once the test is passed, the arm's length price of an intragroup service combines three elements: the cost base (direct and indirect costs attributable to the service), the allocation key (the criterion distributing cost in proportion to each member's expected benefit — headcount, revenue, assets, depending on the nature of the service) and the markup (5% for LVAS via the simplified route, or the most-appropriate-method margin otherwise). The law itself details how to apply the cost plus method (MCL) and the net margin method (MLT) to services (art. 24): all costs of provision are considered, with direct charging where the service is individualizable and indirect charging (via an allocation key) where it benefits several parties — and, importantly, it bars a markup on mere pass-through of third-party costs, allowing a margin only on the provider's economically significant functions.

Illustrative example: a shared service center costs BRL 10 million/year and serves five entities; if the key is headcount and the Brazilian entity concentrates 20% of the users, BRL 2 million is the allocated base — on which the markup applies. Documenting the key is what the tax authority scrutinizes most: an allocation without a defensible criterion is the weakest link of the Local File.

The choice of key follows the nature of the service: headcount for HR and payroll; number of users or tickets for IT and support; revenue for commercial services; assets for services tied to property. What matters is that the key be proportional to the benefit each entity expects and have a calculation memo — a fixed formula inherited from prior years, with no adherence to the current benefit, is what the tax authority strikes down first.

A practical case: the management fee and the 35% withholding tax

Take an illustrative case, as if it were a client of the firm. A Brazilian subsidiary pays its parent abroad a management fee of BRL 400 thousand per month — BRL 4.8 million/year — labelled "corporate services", a fixed and round amount, with no documented deliverables. It is the profile that most attracts audit: a remittance to a related party, an identical monthly amount, a generic label and no proof of provision.

If the company does not prove that there was an actual service and benefit (the test of art. 23, §2), the bill does not stop at IRPJ and CSLL. A payment without cause or without proof of the transaction attracts, on top of the disallowed expense, the exclusive 35% withholding tax (IRRF) with gross-up (Law 8,981/1995, art. 61), because the remittance is treated as a payment to an unidentified beneficiary / unproven transaction. Add to that the 75% statutory penalty (art. 44 of Law 9,430/96, up to 150% in fraud) and Selic interest.

The result is a cascade: the intended tax saving from the deduction (~BRL 1.6 million over the three-year period, at 34%) turns into an exposure that can exceed BRL 13 million in the same period — because the 35% IRRF falls on the amount remitted, not on the saving. It is the classic case in which the cost of not documenting far exceeds the benefit that was sought.

There is also the risk of requalification: a management fee without substance may be treated as a royalty (with its own rules) or as a disguised distribution of profits, aggravating the non-deductibility. The defense is the same one transfer pricing now demands — prove the provision and the benefit (art. 23, §2), document the allocation key and have a dated, prior contract. Faced with a round and generic fee, the best course is often to restructure the charge (separating what is a real service, chargeable with a markup, from what is a shareholder activity, not chargeable) before the tax authority makes that split with a penalty attached.

What CARF shows: the management fee in the crosshairs

The management fee is among the most disallowed expenses in tax litigation — and the body of CARF decisions on cost-sharing and intragroup services is vast (hundreds of cases). The logic of the disallowance is constant: the tax authority starts from art. 311 of the RIR/2018 (an expense is deductible only if necessary, usual and normal to the activity) and presumes a shareholder activity or a remittance without cause when proof of provision and an allocation criterion are missing.

One example: in CARF Decision 1201-005.626, the disallowance of a management fee was upheld together with the assessment of the 35% IRRF on the remittance, for lack of proof of the actual provision and of the cause of the payment. The pattern of the cases always points to the same points of failure — and therefore the same points of defense.

The case law is not only unfavorable: there are lines that allow the deduction when the taxpayer demonstrates the actual provision, the benefit and a consistent allocation criterion — confirming that the outcome depends less on the thesis and more on the evidence. That is why the work begins before the audit: building the evidentiary file by area (IT, legal, HR, controllership), with a contract, an allocation key, deliverables and segregated accounting, is what separates a disallowance from an accepted deduction.

What fails: a generic contract or one signed after the start of the provision; a fixed, round amount unrelated to deliverables; an allocation with no calculation memo; no demonstration of the benefit to the Brazilian entity. What protects: a dated, prior contract, evidence of provision (reports, deliverables, emails, time sheets), the allocation key with a calculation memo proportional to the benefit, and segregated accounting. The new law (art. 23) loosened none of this — on the contrary, it added the transfer pricing benefit test to the deductibility requirements CARF already enforced. (The cited decision judges facts under the prior regime; each case requires verification in the full text.)

Cost-sharing × CCA

Cost-sharing contracts within the group must be reviewed under the new rules: the allocation criterion must assign the cost of services in proportion to the benefits each member expects. Old criteria based on fixed formulas tend to be challenged.

Not to be confused with Cost Contribution Arrangements (CCA) under OECD TPG, ch. VIII, in which participants share contributions and risks in the joint development of intangibles or services — a distinct instrument, with its own requirements of proportionality between contribution and expected benefit.

The difference is one of nature: in service cost-sharing, one party provides and the others pay for the benefit received; in a CCA, all participants contribute and share the results and risks of a common effort (typically the development of an intangible). In both, the yardstick is proportionality to the benefit — but the CCA also requires a balance between what each party contributes and what it extracts, failing which the difference is treated as a taxable transfer.

In practice, the review of a group's cost-sharing arrangement under Law 14,596/2023 follows a short checklist. First, confirm that what is being shared is genuinely a service the members consume, not a shareholder cost dressed up as a charge. Second, verify that the allocation key tracks the benefit each member actually expects, with a calculation memo that can be reproduced — not a percentage frozen from a prior year. Third, separate any pass-through of pure third-party cost, on which no markup is due, from the provider's own significant functions, on which a margin is. Where the arrangement is in truth a CCA — joint development of an intangible, with shared risk — the documentation must additionally show that each participant's contribution is commensurate with its expected share of the results, because an imbalance there is read as a transfer between the parties and taxed accordingly. The two instruments are easy to conflate on paper and very different on audit, which is why the classification should be settled, and evidenced, before any charge crosses the border.