International holding structures for family business

Mainstream

Creating an international holding structure for a family business is not just registration of a company in a convenient jurisdiction. It is a strategy for preserving, managing and transferring capital to the next generations.

The main question is not where to register the holding. The main question is what kind of task the family is solving through this structure today, 10 years from now and after the generational change.

Effective international structuring begins with three checks:

1. What is the commercial and family purpose of the structure?
2. Which jurisdiction will ensure impeccable compliance and tax efficiency?
3. How the structure will work at the time of inheritance or exit from the business.

If these three issues are not resolved in advance, the family risks obtaining a non-functioning instrument that does not protect the assets or is not recognized by the tax authorities of the beneficiaries.

When there is a need for an international holding structure

International structuring is necessary if:

• The family’s operating companies are located in different countries;
• Business owners are planning to relocate or already live in several jurisdictions
• It is necessary to protect assets from the commercial risks of the operating business;
• You are planning to attract an external investor or are preparing the company for a pre-IPO.
• The objective is to optimize taxation of dividends, royalties and interest within the EU;
• the Parent and Subsidiary Directive or the Interest and Royalties Directive is applicable;
• M&A transactions involving family businesses should be structured.
• Asset consolidation is required to facilitate management through the Family Office.
• A strategy for inheritance and capital transfer without loss of corporate control is developed.

The mistake most business owners make

Many families start with the question:

Which country has the lowest income tax rate?

That's the wrong first question.

The right question is:

What structure will ensure impeccable legal protection, economic substance and resilience to changes in legislation?

Sometimes the best result is the classic Luxembourg SOPARFI. Sometimes a Dutch holding company with access to investment protection agreements. Sometimes a multi-level structure with a private trust or foundation at the top level. Sometimes a holding company in Switzerland with a principal in the EU.

International structuring requires not tax optimization, but a systemic architecture of family capital.

Step 1. Determine the objectives of the structure

The first thing to analyze is not taxes, but family goals.

Key questions:

• Maintaining control over operating assets;
• consolidation of dividend flow;
• Protection from creditors of operating business;
• preparation for the sale of part of the assets;
• Intellectual Property Ownership (IP-Box Mode)
• structuring of funding within the group;
• entering the stock market;
• equal distribution of economic rights between the heirs without blurring voting rights;
• Protection against forced inheritance in the country of civil domicile;
• Confidentiality of beneficial ownership (within the law).

If the goals are vague, the structure will be complex, expensive and inefficient.

Step 2. Gather facts about assets and beneficiaries

For international structuring, what matters is not wishes, but facts.

Preparation should be made for:

• a list of operating companies and their jurisdictions;
• ownership structure before the implementation of the holding;
• financial flows: dividends, royalties, interest, management payments;
• tax residency of the beneficiaries;
• family composition and inheritance plans;
• Current corporate contracts and options;
• Marriage regimes of owners;
• current banking and investment infrastructure;
• the presence of trusts, funds or personal holding companies;
• Business plan and investment strategy for 5-10 years.

Particularly valuable are the facts indicating real economic activity: Operational offices, key personnel, regular board meetings, strategic decisions made in a particular jurisdiction.

Step 3. Selecting a jurisdiction for the holding

The jurisdiction of the holding answers the question: where the family capital management center will be located.

This has an impact on:

• Application of the EU directives (Parent-Subsidiary, Interest & Royalties)
• withholding tax rates on dividends, interest, royalties;
• Possibility of tax consolidation;
• Access to agreements on avoidance of double taxation;
• Investment protection through BIT (Bilateral Investment Treaty)
• regulation of trusts and private funds;
• Substance requirements;
• political stability;
• reputation of jurisdiction and banks.

Classic choices for family holdings in the EU include Luxembourg, the Netherlands, Ireland, Malta, Cyprus, as well as non-EU but closely integrated Switzerland and Liechtenstein.

An error at this stage may result in the structure not being recognised by the tax authorities of the beneficiary country or the operating company country.

Step 4. Check for compliance with substance requirements

Substance determines whether a holding company will be perceived as a real business or as a “paper” layer.

Within the EU and beyond, it is critical that:

• the real office;
• qualified directors (not nominees);
• Key decisions taken in this jurisdiction;
• Banking account and financial function;
• accounting and tax accounting;
• HR functions, if there are staff.

If a holding company does not own substance, it will not be able to claim the benefits of EU directives or investment protection agreements. Moreover, beneficiary countries (especially those with CFC rules) would simply ignore such a company and tax its retained profits.

Step 5. Select the holding level: sole, trust or private foundation

Holding company

Classic instrument. Suitable if:

• Operational flexibility is required;
• IPO or attracting an investor is planned;
• Maximum simplicity for banking is important;
• Beneficiaries are ready to own shares directly.

SOPARFI (Luxembourg), BV (Netherlands), Holding Company (Cyprus), AG or GmbH (Switzerland) are often used.

Private trust

A trust can be effective if:

• The family wants to separate legal ownership from economic ownership.
• It is necessary to protect assets from personal creditors of heirs;
• the applicable law of the beneficiary country does not recognise trusts, which creates a level of isolation;
• We need privacy.

Trusts are often used in conjunction with holding companies. The holding shares are transferred to the trust, and the operational management remains at the family office.

Private Foundation (Stiftung/Fondation)

The fund is operational if:

• The family wants to fix the rules of management for generations to come.
• A mechanism is needed where heirs benefit but cannot destroy the business.
• Succession is important without inheritance law.

Liechtenstein, Luxembourg, Switzerland, the Netherlands provide various options for private funds for family holdings.

Step 6. Structure financial flows

This is a key stage.

Before the implementation of the structure, it is necessary to model:

• How dividends will rise from operating companies to holding companies
• Is there a tax rate at source and how to reduce it?
• Whether the EU Parent and Subsidiary Directive can be applied
• whether funding is to be structured through the holding;
• whether there will be intra-group loans, royalties or management payments;
• how will the withdrawal of beneficiaries – individuals;
• How the structure interacts with the rules of thin capitalization;
• Is there a risk of reclassification of payments?

To build a holding company and forget about modeling cash flows means to create an expensive “box” that does not perform any commercial tasks.

Step 7. Consider protective mechanisms

Protective mechanisms help to preserve assets when circumstances change.

These may include:

• Multi-level structure with separation of voting and non-voting shares;
• deadlock resolution mechanisms in case of a dispute between heirs;
• appointment of a protector of a trust or fund;
• Compulsory procedure for resolving family disputes;
• restrictions on the transfer of shares to third parties;
• Assigning key positions to family members;
• the family constitution;
• reserve mechanisms in case of political instability in the country of the operating company.

Protective mechanisms are especially important if the heirs are not involved in the business or there is a potential conflict of interest between them.

Step 8. Implement structure and compliance

Once you have selected the jurisdiction, type of structure and flow modeling, you can start implementing.

The process should include:

• corporate registration of the holding;
• opening a bank account;
• transfer of shares of operating companies to a holding company (often through a capital contribution or a sale transaction);
• assessment of the tax consequences of transfer of assets;
• creation of substance;
• registration with tax authorities;
• notification of banks and counterparties;
• updating of intra-group contracts;
• setting up accounting and management accounting;
• implementation of KYC, AML and CRS/FATCA procedures;
• informing the beneficiaries.

Imperfect execution and documentation are particularly important in international structures. Weak implementation at the start almost always leads to claims at a tax audit.

Step 9. Provide regular services

A working structure is not the result of a one-off transaction, but a process.

It's important regularly.

• to hold meetings of the Board of Directors and document them;
• confirm the substance;
• Update the intercompany documentation;
• monitor changes in legislation;
• Check whether compliance with CFC rules is maintained;
• Update the valuation of assets;
• interact with the bank and auditors;
• Adapt the structure to changes in the family.

Service errors can give tax authorities reason to claim the structure is artificial.

Step 10. Preparing for capital transfer

The transfer of capital is a separate project.

This may include:

• transfer of shares of the holding through a trust or fund;
• Giving with preservation of usufruct;
• phased transfer of management;
• use of a family investment partnership;
• Training the next generation of structure management;
• development of a family agreement;
• Emergency replacement of directors and protector;
• mechanisms for measuring the fair value of shares.

In practice, the stage of inheritance is often more important than all previous stages. It is here that capital is either maintained and multiplied, or it is disintegrated.

Private trust or holding company: pick

The choice does not depend on the overall reputation of the tool, but on the specific goals of the family, its composition, assets and plans for the future.

How to strengthen your position before creating a structure

The best structure begins with an analysis of the current situation.

Before the introduction of an international holding, it is desirable:

• conduct due diligence of the current ownership structure;
• Analyze the tax residency of the beneficiaries;
• Model the tax burden when leaving the business;
• Check corporate contracts and asset seizures;
• Ensure that there are no hidden obligations of operating companies;
• discuss the expectations of family members;
• Develop a roadmap for 3, 5 and 10 years;
• Prepare a family constitution or memorandum of principles of governance.

The structure should be designed not only for the current moment, but also for crisis scenarios.

Common Mistakes in International Structure

1. Create a structure without substance

The tax authorities will deny the benefits and the whole design will become useless.

2. Ignore the CFC rules

The profit of the holding can be forcibly included in the taxable base of the beneficiary.

3. Considering a low tax rate sufficient

The commercial purpose and substance are more important than the tax rate.

4. Not to consider the beneficiary's exit

In divorce, death, or conflict, the unprepared structure collapses faster than it was built.

5. Not to check the tax consequences of transferring assets

The transfer of shares to a holding is a transaction. It can trigger a capital gains tax at the start.

6. Not to be taken into account by automatic exchange of information (CRS)

Privacy within the law requires separate elaboration, but not its concealment.

7. Do not update intercompany documentation

Transfer pricing is a common cause of claims against family holdings.

8. Choose jurisdiction by advertising, not analysis

What worked for another family may not work for yours.

Checklist for Family Office

Before structuring, you need to answer 15 questions:

1. Who are the ultimate beneficiaries?
2. What are their tax residency and matrimonial regimes?
3. Where are the operating companies and what is their legal form?
4. Are there arrests, options or encumbrances on stocks?
5. What does the current financial flow of dividends, royalties and interest look like?
6. What Double Taxation Agreements Are Applicable?
7. Do you need a structure for M&A or long-term ownership?
8. Are there any heirs who are not involved in the business?
9. What will the tax rate look like when you leave business?
10. Can you provide real substance in your chosen jurisdiction?
11. Is there a risk of CFC or other anti-avoidance rules being enforced?
12. What will the structure look like in terms of banking compliance?
13. Is it necessary to protect investments through international treaties?
14. How will the transfer of control occur when death or incapacity occurs?
15. What is the best long-term outcome for the family?

What a Strong Structuring Strategy Looks Like

A strong strategy usually includes five levels:

1. Family & Business Purpose

Determination of family goals, planning horizon, composition of heirs, commercial plans.

2. Asset & Flow Mapping

Inventory of assets, flows and risks. Identify vulnerabilities in the current structure.

3. Jurisdictional Architecture

Selection of optimal jurisdictions for holding, trust, fund, taking into account substance, taxes and investment protection agreements.

4. Implementation & Substance

Corporate implementation, tax migration of assets, substance and compliance setting.

5. Succession & Governance

Development of rules for the management, inheritance and resolution of conflicts. Integration of the family constitution.

Without the fifth level, the first four may not work as generations change.

FAQ

Can you use a single holding company for assets in different countries?

Yeah. This is a classic solution for consolidating dividend flow and applying EU directives, but the tax implications for each stream need to be carefully analysed.

Which is better: Private trust or holding company?

There is no universal answer. Trust is better for asset protection and inheritance, holding - for operational flexibility and investor attraction. They are often used together.

Can a business be structured without disclosing the beneficiary?

Full anonymity is now illegal and impossible. However, there are legitimate ways to ensure a high level of confidentiality in the registers of beneficiaries.

What if the company is in a country with foreign exchange controls?

It is necessary to design a structure compatible with capital outflow restrictions in advance and to consider financing mechanisms that do not violate local legislation.

Can an existing business be transferred to a holding company without taxes?

This is usually a taxable event. But restructuring with tax deferral or the use of EU directives (e.g. merger directive) is often possible.

Can I protect my personal assets through a holding company?

Yes, the separation of operating and investment assets through a holding structure is one of the key tools for protecting against commercial risks.

What if the heirs don’t want to run the business?

The structure should provide for professional management (through the Family Office or independent directors) while maintaining economic benefits for heirs through different share classes or trusts.

Can the holding’s jurisdiction be changed in the future?

Yes, but it is expensive and complicated (company migration or new structure creation). It is better to make the right decision at the start.

More importantly: Tax rate or substance?

Substance. Without it, even a zero rate would not matter, as the structure is not recognized.

Related services

• Family Office, Private Wealth & Cross-Border Wealth Management
• International Holding Structures, Corporate & M&A
• Private Trusts, Foundations & Fiduciary Structures
• Succession Planning & Multi-Generational Wealth Transfer
• International Tax Planning & EU Tax Directives
• Corporate Governance & Family Constitutions

Related material

• How to choose a jurisdiction for a family holding in the EU
• Luxembourg vs Netherlands: comparison of holding regimes
• Trusts and private foundations: What is suitable for family business
• Asset protection through multi-level holding structures
• How to Prepare a Family Constitution
• Tax aspects of intragroup financing
• CFC Rules and How They Affect Family Holdings
• Private Equity in Family Office

Conclusion

Creating an international holding structure for a family business does not require standard company registration, but rather the design of a family capital management system for decades to come.

A strong structure is built on clear family objectives, impeccable legal and tax analysis, real economic substance, thoughtful protective mechanisms and a clear inheritance plan.

In international structuring, it is not the one who finds the lowest tax rate that wins. The winner is the one who understands from the outset how the structure will work under stress, generational change and the scrutiny of tax authorities and banks.