As a family business grows and goes international, consideration needs to be given to where assets should be held and owned, and how to pass control to the next generation. As a manufacturing business, you may have a manufacturing company in 3 different countries, IP held in another country, investments elsewhere and family members living in different legal jurisdictions. Your structure can have implications on your tax position, liability and availability of funding, and can impact on how a succession dispute is resolved.
There is no one-size fits all approach to choosing a jurisdiction for your international family business. If you choose a jurisdiction with favorable tax rates for your company, you may get issues with limited certainty in the courts relating to ownership, high compliance requirements from the banks and conflicting inheritance rules. You may also find that a complex holding structure will cause unnecessary costs due to lacking commercial rationale.
The key consideration is to ensure you have a structure that reflects how you want to own your business, based on how you operate, make decisions and wish to protect your assets.
Separate Business Assets
Firstly, you need to consider separating the assets used to run your business from those amassed. This can include your operating companies. These companies will have employees, contracts, debt, stock and take on business risk. The family wealth could include shares in these operating companies, investments, property, cash and IP. By ensuring these are legally separated, you can limit risk and easily manage ownership.
Generally it would be best to have the assets and liabilities held by your operating company. For example, if you have a trading subsidiary this may own the stock and employees. However, your property may be held by a separate property company. The shares may be owned by your parent company. Whether this is suitable will depend on your local laws, funding requirements, tax implications and the commercial relationship between your companies.
By separating property or other valuable assets from your trading company, you can reduce some of the risks associated with trading. However, this may not always be the case. You may have guarantees, security, intercompany loans and contractual obligations which mean that there are still liability issues. The courts may also look at transactions which are designed to frustrate creditors and insolvency laws may allow certain transfers to be challenged.
If you are looking to move assets when there has been a financial dispute or when insolvency is likely to occur, this will be looked at closely. Ideally you should put in place your ownership structure when your business is in a strong financial position.
Choose a Holding Company with Purpose
Having a holding company can give you one place to own your subsidiaries across multiple countries. This can include receiving dividends, owning shares, IP and managing your investments whilst your day-to-day operations are run by locally incorporated companies. If you have interests in the Gulf, Asia and Europe, having a parent company can make reporting easier and allows you to easily make changes to your ownership.
When choosing a jurisdiction, you should consider more than just the tax rates. Consider how dividends and capital gains are treated, the level of withholding tax, access to tax treaties, foreign controlled entity rules, corporate governance requirements and how easy it is to distribute funds to shareholders. There may be exemptions to tax; however there may be restrictions on ownership levels, time held, qualifying income and other requirements.
Consider the legal structure of your holding company. The shareholders may benefit from limited liability; however the parent company will have obligations to fulfill from their activities and assets. Directors will have duties to fulfill in accordance with the law governing the entity. Transactions between related companies should be well documented and commercially justified.
Whilst you may want to hold shares in a jurisdiction that is attractive, you may not want to employ people, develop products or have regional management there. Whilst you can create an entity, this does not automatically mean the entity will have a tax residency status or benefit from tax treaties. Increasingly authorities will look to see where strategic decisions are being made, who controls the company and if there are substantive activities.
Generally for international families the best structure is one that can clearly explain the legal and commercial rationale to regulators, banks, tax authorities and business partners.
Jurisdiction in Relation to Assets
Real estate is generally governed by the laws of the country where it is located. This can include rules around registration, transfer, inheritance and security. If your foreign holding company owns property through a local subsidiary, this can affect how you fund, tax and succeed.
IP can create issues. A group may choose to have a dedicated company own their trademarks, patents or software. This needs to be carefully considered as there are considerations around transfer pricing, where development and management occur and the legal ownership. If you move IP to a low tax jurisdiction but it lacks economic substance, this can cause issues with tax authorities.
Investments and cash should be considered. The bank where the account is held, legal ownership and tax residency of the beneficial owner can be relevant. Payments across borders may cause reporting requirements, withholding tax and be looked at under anti money laundering rules. Banks may ask for evidence relating to the source of wealth, source of funds and purpose of transactions. If there are multiple entities and family members involved, they may ask for this information.
While not all assets will fit into one jurisdiction, the aim is to have a clear structure.
Trusts & Foundations
Whilst having a holding company can help you with the corporate ownership, it may not address your family wealth, incapacity or succession concerns. Having a trust or foundation can help with the management of assets across generations. However there can be significant legal differences between jurisdictions.
A trust generally occurs when assets are transferred by the settlor to trustees. The trustees will hold and manage the assets for the benefit of the beneficiaries or for specific purposes outlined in the trust deed. Depending on the governing law and terms of the trust, this can provide continuity of management, specify conditions for distributions and avoid splitting assets between individual heirs. This will depend on the trust being valid, assets being properly transferred and the provisions being enforceable.
A foundation is typically a standalone legal entity created under legislation which allows for assets to be used for specific purposes or beneficiaries. The foundation will have a constitution or charter setting out how it operates and how benefits can be distributed. This can be attractive for families who want a formal structure to manage their family.
Not all trusts and foundations will guarantee that information will remain confidential, neutral on tax and protected from creditors. There could be disclosure requirements, beneficial ownership registers, tax reporting requirements and court orders requesting information. There could also be issues with forced heirship, matrimonial claims and insolvency.
It is important to consider the difference between legal ownership and control. When assets are moved into a trust or foundation, the founder may no longer have the same ownership over the assets. If they have significant control over the distribution of assets, investment decisions or removal of fiduciaries, this may have implications under the relevant law or tax. Families should understand the implications of this before moving control.
Plan for Succession
Often the ownership structure will be revealed to have issues when succession occurs. The founder may own the shares personally, with the children working in different areas of the business or in different countries. Some may wish to grow the business, whilst others want dividends or to sell in the future. Splitting equally may not provide a viable business structure.
You should consider separating economic rights from management control. One family member may be better suited to hold a management role, however other family members may have an interest in the shares. Shareholder agreements can be used to clarify voting rights, transfer, pre-emption rights, deadlock situations and exit. This should be reflected in your company articles and other constitutional documents.
Wills, trusts and foundations can be used alongside your corporate documents. However you should ensure they are carefully drafted. Assets may be governed by your will, however if the shares are held in a separate vehicle they may fall under different rules. If you have property in a foreign jurisdiction, it may be subject to local succession rules. Movable assets may be governed by domicile, habitual residence, nationality and other factors.
If you have family members in the UAE or other jurisdictions with specific succession rules, you should consider what applies. Foreign instruments may not be recognised, there may be registration requirements and there could be conflicts with the governing laws.
A strong plan should also consider incapacity, disputes and unexpected deaths. By having clear appointment processes, independent professionals and agreement on how to resolve disputes, you can ensure you maintain continuity in your business.
Tax, Substance & Transparency
With increasing scrutiny, tax authorities will look at beneficial ownership, related party transactions, cross border payments and profit allocation. Reporting requirements and information exchange requirements have reduced the ability to hide assets behind foreign ownership.
Your holding company should meet the requirements of the tax residency it claims to be and any reliefs sought. If there are transfer pricing requirements, related party transactions should be at arm’s length. The OECD have developed an international tax framework which has influenced national legislation and practices. However the requirements will depend on how the countries implement it.
If your entity is claiming to be providing financing, management or IP functions, this is an important consideration. Considerations could include staffing, decision making, spend, property and activities carried out. Just having a registered office and annual filings may not be enough to show a company is carrying out the activities it is said to.
Consider the cost of compliance. Having multiple entities will mean you will have accounting, tax, company secretarial, banking oversight and regular reviews. Whilst you may save tax in one jurisdiction, you may incur extra costs and reporting requirements in others. Consider the overall impact.
Create a Structure that Will Last into the Next Generation
The most efficient international family business structures are usually not the most complex. Each entity should have a clear purpose, the ownership should be easily tracked and the documents should reflect the true intentions of the family. A holding company should not be created purely because a jurisdiction is popular. A trust should not be set up without understanding the rights being passed on. A foundation should not be seen as a replacement for good corporate governance.
Start by identifying what assets you have, countries you operate in, tax residencies, funding requirements and succession aims. Speak to legal and tax advisors to understand what structures may be suitable. Conflicts with the different jurisdictions can be identified. Consider what the costs will be to implement and manage. Consider what will happen if you need to exit or restructure in the future.
Regular reviews are a key consideration. As family members move, businesses grow, tax laws change and younger generations take on responsibility, your structure may no longer be suitable. A structure which was suitable for your founder in one country may not be suitable for your business now it has foreign subsidiaries.
Ultimately you need to consider how you want your family to own their global assets. You want to mitigate risk, make decisions efficiently and pass wealth between generations without creating unnecessary legal complexity. Whilst the jurisdiction is important, your structure should be of a high quality. This means the companies, trusts, foundations and succession will all work well together.
Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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