A holding company is one of the most instinctive responses in international corporate structuring. A business expands beyond its home jurisdiction. Assets accumulate. A professional adviser recommends a holding structure. An entity is incorporated, usually in a jurisdiction chosen for its tax treatment or its treaty network. Shares in the operating subsidiaries are transferred upward. The holding company becomes, on paper, the owner of the group.
This arrangement is so common that it has acquired the status of received wisdom. Of course there is a holding company. Every international group has one. The question of whether it is actually doing what it is supposed to do — and whether its presence helps or hinders the business in its dealings with banks, investors, and counterparties — is asked far less often than it should be.
In my experience, holding companies do two things simultaneously. They provide genuine structural benefits that are worth having. And they generate specific, predictable problems that most of the people who set them up never anticipated. Understanding both sides is the only way to use a holding structure intelligently.
The legitimate purposes of a holding structure are well established and genuinely valuable.
Asset protection separates ownership from operations, limiting the exposure of the group's assets to the liabilities of any individual operating entity. Tax efficiency — a holding company positioned in the right jurisdiction — can reduce withholding tax on dividends, optimise the treatment of capital gains, and provide access to a treaty network that the operating entities could not access directly. Structural clarity creates a single ownership hierarchy that is easier to present to banks, investors, and counterparties than a web of separately held companies.
These purposes are real. They justify holding structures in the right circumstances. The problem arises when the holding company is put in place to achieve one of them — and then the business changes, or the regulatory environment shifts, or the entity never had the economic substance needed to achieve the purpose in the first place — and the holding company remains, serving no clear function, attracting questions it cannot easily answer.
A few years ago I worked with a group that had been structured around a holding company in a well-known offshore jurisdiction. The structure had been set up a decade earlier, on solid advice, for entirely defensible reasons. At the time, it worked. By the time I became involved, the world had changed considerably — and the holding company had not changed with it.
It had no employees. No genuine management activity took place in its jurisdiction. Its board met once a year, by written resolution, to approve decisions that had already been made elsewhere. Its costs were minimal. Its presence in the structure was, in practical terms, a formality that everyone had stopped questioning.
That formality had become a serious liability.
The concept of economic substance — the principle that a legal entity should have genuine activity in the jurisdiction where it is registered, with real people making real decisions and real costs being incurred — has been progressively hardened into law across every significant holding jurisdiction over the past decade. It runs through the OECD's work on base erosion and profit shifting, through EU anti-avoidance directives, through substance requirements introduced across offshore centres. The letterbox entity — present on paper, absent in reality — is no longer a manageable grey area. It is a target.
A holding company with no substance cannot credibly claim the tax benefits it was designed to access. It attracts scrutiny from tax authorities in the jurisdictions where the real activity happens. It generates questions from banks trained to look for substance indicators and to treat their absence as a risk signal. And when the group is reviewed by an investor or acquirer, the holding company's inability to demonstrate substance raises an uncomfortable question: is the tax position this structure was built around actually defensible?
The holding company that looked like protection, when it was set up, has become a source of exposure.
Banks approach holding companies with a specific and fairly predictable set of questions. A compliance officer reviewing a group with a holding structure wants to understand three things: what does the holding company actually do, what economic activity justifies its presence in its chosen jurisdiction, and does the overall structure make sense from a legitimate business perspective?
When a holding company has genuine substance — a board that meets and makes real decisions, management costs incurred in the jurisdiction, a genuine flow of dividends and returns reflecting real business activity — these questions are answerable. The compliance officer can document the answers and close the review.
When the holding company is a formality — when the honest answer to "what does it do?" is "it holds shares" and the honest answer to "what economic activity justifies it?" is "not much" — the compliance officer cannot close the review satisfactorily. The structure looks, from the outside, like a device. It may not be one. But it looks like one. And that appearance is enough to create a serious banking problem.
I have seen this happen to groups with perfectly legitimate operating businesses — real revenues, real clients, real commercial substance at the operating level. The holding company sitting above them made the whole structure unreadable. When they applied to a new bank, or when an existing bank conducted a KYC refresh, the questions the holding company generated could not be answered well. The relationship became difficult or was refused, not because anything was wrong with the business, but because the holding company had turned a readable structure into an opaque one.
Due diligence conducted by an investor or acquirer tests holding structures with the same rigour as a banking review — and often with greater resources.
An investor will want to understand whether the holding company actually achieves the tax benefits it was designed to achieve, or whether it has lost those benefits through a failure of substance. They will want to understand whether the board makes real decisions or exists only on paper. They will want to understand whether intercompany payments — dividends, management fees, loans — reflect genuine economic activity or are paper transactions designed to move funds through the structure.
If the answers are unsatisfactory, the holding company becomes a priced risk. The transaction value is discounted. An escrow is required. Representations and warranties shift the tax exposure to the seller. Or a restructuring requirement is imposed that delays the transaction and generates costs.
The cost of a holding company that does not work is not the cost of setting it up. It is the cost of what it does to the structure when that structure comes under scrutiny.
None of this means holding companies are a mistake. In the right circumstances, they provide real benefits that justify their cost and complexity.
The right circumstances are those where the holding company has genuine substance and a purpose that can be stated plainly.
I work with several groups that hold through Cyprus — and for those groups, the structure is entirely defensible. Not because Cyprus is Cyprus, but because the management function genuinely sits there. Decisions are made there, by people who are there. The costs of management are incurred there. The board meets and exercises real authority. The treaty network that Cyprus offers is being accessed through genuine activity, not through a letterbox that happens to have a Nicosia address.
That is a defensible holding structure. The test is simple: if a compliance officer, a tax authority, or an investor's due diligence team asked "why does this entity exist and what does it actually do?" — could you give a clear, honest answer that would satisfy them? If yes, the holding company is working. If the honest answer is "we'd need to think about how to explain it," there is a problem that is not going away on its own.
When a holding company is not working — when it cannot demonstrate substance, when its purpose is no longer clear, when it generates more questions than it resolves — the answer is one of two things.
The first is to genuinely substantiate it. That means introducing the management activity, the board governance, the costs, the physical presence that are needed to make a real substance case. This is not a cosmetic exercise. It requires people, costs, and genuine decision-making authority to be located in the holding jurisdiction. Done properly, it transforms the holding company from a liability into an asset.
The second is to remove it. If the holding company no longer serves a purpose that justifies its cost, its complexity, and the compliance burden it creates, the cleanest answer is to collapse the structure. This is not always straightforward, and it has tax implications that need careful management. But a simpler structure that can be clearly explained is almost always preferable to a complex one that cannot.
The choice between these options depends on the specific situation. What it does not depend on is inertia. A holding company that nobody can explain clearly is not a neutral element in a corporate structure. Every time it comes under scrutiny — from a bank, from a regulator, from an investor — it costs something. The only question is whether those costs are acknowledged and addressed, or whether they are left to accumulate until the moment when there is no longer a quiet choice between options.
Vladimir Shuvalov works with international businesses and private clients on corporate structure, banking acceptability, and cryptocurrency architecture from Nicosia, Cyprus.
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