Where a holding structure for a family-owned group in Mainland China stands now

A holding structure for a family-owned group operating in Mainland China does its real work at three points: when profits are extracted upward, when the family's ownership is tested by a revenue authority, and when the structure must produce a result under enforcement pressure. The chart on paper – a BVI or Cayman entity above a Hong Kong intermediate holding company above the Mainland operating group – has been the default for two decades. What has changed is the rigour with which each layer is scrutinised, and the consequences of failing that scrutiny.

This analysis is written for a principal or general counsel who already has a structure in place, or who is building one now, and who wants a clear read on where the risk sits in 2026. The cross-border interface is Hong Kong and Mainland China. The governing instruments are the common-law trust and company regimes, the domestic tax rules on both sides of the boundary, the treaty network that the Hong Kong holding company is meant to unlock, and the mutual-enforcement mechanism that took full effect on 29 January 2024.

The analysis moves in four parts: the commercial stakes; the governing instruments and how the interface bites; the comparative read across the two systems; and our view on where the risk sits now.

What is actually at stake commercially for a family-owned group

The holding structure is not a filing exercise. It is the legal architecture that determines how much of the group's profit survives its journey to the family, which family members have enforceable rights over which assets, and whether the group can raise capital, be sold, or be passed to the next generation without the transaction being blocked or taxed into irrelevance.

For a family-owned group in Mainland China, the commercial stakes divide into four categories. First, dividend flow: the Mainland operating entities generate renminbi profits. Moving those profits offshore requires navigating the State Administration of Foreign Exchange (SAFE, the Mainland's foreign-exchange regulator) and the withholding-tax rules that apply when dividends cross the boundary. A qualifying Hong Kong holding company should attract a reduced withholding-tax rate under the Mainland–Hong Kong Double Taxation Arrangement (the DTA). That reduction is real money at scale. Whether it is available depends on whether the Hong Kong intermediate company genuinely qualifies.

Second, asset protection: the family's personal exposure to business risk, regulatory action, or civil liability from counterparties depends on the integrity of the corporate separateness the structure provides. A holding layer that has been run as a pass-through – no substance, no independent decision-making, no local directors who actually direct – may not provide the protection the family thinks it does.

Third, succession: for a family with concentrated ownership of a Mainland group, the question of how control and economic interest pass to the next generation, and on what terms, cannot be answered by Mainland law alone. The structure above the boundary determines which succession law applies, whether a trust can receive the holding-company shares, and whether forced-heirship claims from any relevant jurisdiction can reach the assets.

Fourth, exit and capital events: a listing on a recognised exchange, a sale to a strategic or financial buyer, or a capital raise from a third-party investor will all require the structure to withstand due diligence scrutiny. A structure that has been operated without substance, or whose beneficial ownership cannot be cleanly documented, will produce a material problem at the worst possible moment.

In our cross-border practice, we see all four categories arise simultaneously when a family group reaches a critical event. The structure that was adequate during the growth phase often reveals its weaknesses at the point of exit or succession.

How does the governing framework apply across the Hong Kong–Mainland interface?

The governing framework for a typical Hong Kong intermediate holding company sitting above a Mainland group spans at least four distinct instruments, each administered by a different authority, each capable of producing a different adverse result.

The first is the Mainland–Hong Kong Double Taxation Arrangement, the DTA. Under the DTA, dividends paid by a Mainland resident enterprise to a Hong Kong company are subject to withholding tax at a reduced rate, provided that the Hong Kong company is the beneficial owner of the dividends and meets the conditions the Mainland tax authorities apply. The concept of beneficial ownership under Mainland tax practice has been the site of significant enforcement activity. A Hong Kong company that receives dividends and passes them upward to an offshore entity without exercising any genuine economic function will face scrutiny under the beneficial-ownership test. The Mainland's domestic anti-avoidance rules reinforce this: where the principal purpose of an arrangement is to obtain treaty benefits, those benefits may be denied. This is not a theoretical concern. Counsel on our desk regularly advise on cases where a DTA claim has been challenged or denied in practice.

The second is the Hong Kong profits tax regime. Hong Kong taxes profits on a territorial basis: profits arising in or derived from Hong Kong. A holding company that is genuinely managed and controlled in Hong Kong, and whose investment and financing activities generate Hong Kong-sourced income, operates within a well-tested framework. The corporate profits tax rate is 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above that threshold. The foreign-sourced income exemption (FSIE) regime, in force from 1 January 2023, means that dividends, interest, gains and royalties received from offshore can no longer be treated as automatically outside Hong Kong tax without satisfying economic-substance conditions. This is a material change. A Hong Kong holding company that previously relied on the offshore character of its income now needs to demonstrate substance in Hong Kong or satisfy alternative conditions under the FSIE rules.

The third is the Mainland's enterprise income tax regime and the rules on resident enterprise status. A Mainland tax authority may assert that a Hong Kong holding company is a Mainland tax-resident enterprise if its place of effective management is in the Mainland. Where the directors of the Hong Kong company are all based in the Mainland, where board meetings are held only in the Mainland, and where all decisions are made by the Mainland family principals without any meaningful participation by Hong Kong-based personnel, the risk of an effective-management challenge is real. If the challenge succeeds, the Hong Kong company loses its treaty-resident status and the DTA benefits disappear.

The fourth is the mutual-enforcement mechanism. The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance – in force since 29 January 2024 – means that a Mainland civil or commercial judgment can now be registered and enforced in Hong Kong, and vice versa, under a connection-based test that replaces the old exclusive-jurisdiction requirement. This is directly relevant to family groups: a creditor with a Mainland judgment against the family or an operating entity can now pursue enforcement against assets held by the Hong Kong holding company, without needing to re-litigate the underlying claim. The holding layer that was meant to insulate offshore assets from Mainland liability exposure may provide less insulation than was assumed, depending on how the corporate-separateness analysis runs.

For an in-depth assessment of the substance requirements that a Hong Kong intermediate company must satisfy, see our guide to substance, management and control for a Hong Kong holdco.

The comparative read: what the Hong Kong and Mainland systems each demand

The most useful analytical move for a family group at this juncture is to read the two systems in parallel, because the conditions each imposes pull in different directions, and satisfying one without the other produces a structure that is vulnerable at the boundary.

From the Hong Kong side, the Companies Ordinance (Cap. 622) sets the baseline corporate requirements. Every Hong Kong-incorporated company must maintain a Significant Controllers Register (SCR), a requirement in force since 1 March 2018. For a family-owned group, this means the ultimate beneficial ownership chain – from the Mainland family principal through the offshore entities to the Hong Kong holdco – must be documented in a form that satisfies the register. The SCR obligation interacts directly with the FSIE substance conditions: a company that cannot produce a clean beneficial-ownership record is unlikely to satisfy the substance inquiry that follows a dividend or gain.

From the Mainland side, the beneficial-ownership standard under DTA practice and the effective-management test under enterprise income tax law together require that the Hong Kong company demonstrate genuine economic substance in Hong Kong. What does that mean in practice? The Mainland authorities look at where the senior personnel who have the authority and responsibility for day-to-day operations of the entity are located; where important management decisions are made; where the company's accounting records and principal assets are kept; and where the meetings of the board of directors are held. These are not abstract criteria. They are the questions a Mainland examination team will ask when auditing a DTA claim.

The divergence arises because Hong Kong company law requires relatively little to maintain a valid corporate existence, while Mainland tax practice demands considerably more to validate treaty access. A structure that satisfies Hong Kong's statutory minimums – a registered address, at least one director, annual filing – will not automatically satisfy the Mainland's beneficial-ownership and effective-management conditions. Bridging that gap is the central structural task.

What does that bridging look like? At minimum: at least one director resident in Hong Kong with genuine decision-making authority; board meetings held in Hong Kong at which material investment decisions are actually made and minuted; a Hong Kong-based bank account through which the company's financial flows pass; and staff or contracted service providers in Hong Kong who perform functions proportionate to the company's activity. The functions must be real, not nominal. A director who signs resolutions prepared in the Mainland without exercising independent judgment is not providing the substance the analysis requires.

There is a further layer for groups where the offshore tier – the BVI or Cayman parent – has its own substance requirements. The offshore economic-substance regimes that apply in both the BVI and the Cayman Islands require that entities in certain categories demonstrate core income-generating activities in their place of incorporation. For a pure holding entity, the requirements are lighter, but they are not zero. A holding structure that has been designed with Hong Kong substance in mind but has not addressed the offshore tier may find that the uppermost layer of the chart is the weakest.

Where does the beneficial-ownership risk actually sit in practice?

Beneficial ownership is the concept that does the most work in this analysis. It is also the concept that is most often misunderstood by foreign principals – including those who have received advice from counsel in other jurisdictions who are not familiar with Mainland tax enforcement practice.

The Mainland's approach to beneficial ownership under the DTA is not satisfied by formal legal ownership. The question is whether the Hong Kong company has the right to enjoy and dispose of the income it receives, or whether it is acting as a conduit for another person or entity. A conduit is, in essence, an entity that lacks the independent capacity to decide what to do with the income: it is obligated, contractually or in practice, to pass the income upward. An entity that holds shares in a Mainland operating company, receives dividends, and has no discretion over what to do with those dividends – because the family principal in the Mainland controls every movement – is a conduit in the relevant sense.

The practical implication is that the analysis of a family-owned group's holding structure cannot stop at the corporate chart. It must trace the actual decision-making process for each material transaction: who decided to pay the dividend, who received and reviewed the notice, who gave the instruction to move the funds onward, and who had the authority to say no. If that authority consistently rests with a Mainland-based individual who does not hold a formal role in the Hong Kong company, the structure has a beneficial-ownership problem regardless of what the constitutional documents say.

A mid-market manufacturing group with Mainland operations and a BVI–Hong Kong two-tier offshore structure came to us in late 2025. The immediate trigger was a DTA audit by the Mainland tax authority. On examination, the Hong Kong company had a single director, resident in Hong Kong, who had signed every board resolution for three years – but who had taken no independent position on any of them, because the resolutions were drafted and approved in the Mainland before transmission to Hong Kong for signature. We worked with the family to restructure the governance model: a Hong Kong-based advisory board with genuine investment authority, a quarterly board meeting programme with substantive agendas, and a recalibration of the banking and treasury function. The DTA audit was managed through the revised substance position. The matter resolved without a formal assessment, though we make no representation that this outcome is predictable in other circumstances.

What foreign counsel commonly get wrong about this structure

The most common error we see when a family group arrives with a structure designed by counsel outside Hong Kong and the Mainland is a category confusion between legal form and tax substance. The structure may be legally valid in every jurisdiction in which it operates – the BVI company is properly incorporated, the Hong Kong company is properly registered, the Mainland operating entities are properly licensed – without any layer of the structure being capable of sustaining a DTA claim or resisting an effective-management challenge.

A second error is the assumption that the holding structure's risk profile is static. The FSIE regime, which took effect on 1 January 2023, changed the substance conditions for Hong Kong companies in ways that many structures established before that date have not yet addressed. A structure designed under the pre-FSIE position may now be producing taxable income in Hong Kong that the family's advisers have not identified, because the income that was previously offshore is now within the FSIE perimeter.

A third error – and this is specific to family groups, as distinct from institutional investors or listed corporate groups – is the failure to integrate the succession and asset-protection analysis with the tax and corporate-governance analysis. A family may have a trust in place above the BVI holding company, with the trust governed by the law of an offshore jurisdiction. But if the trust instrument has not been designed to work with the Mainland's approach to asset transfers, or if the trustee has not been given genuine discretion over the Hong Kong company's governance, the trust layer may fail to provide the protection that was its purpose. For family groups where a listing or exit event is in view, see also our guide to holding structure ahead of a CIS listing or exit, which addresses the structural preparation that investors and underwriters typically require.

The practical question a general counsel or family principal should ask is not "is the structure valid?" but "does the structure work under examination?" Those are different questions, and the answer to the second requires a detailed, jurisdictionally specific analysis that most generic corporate-advisory engagements do not perform.

The sequence above describes the standard analytical position. Your structure turns on the documents, the jurisdictions actually engaged, the decision-making record, and the order in which each layer is examined – which is where the outcome is determined. To discuss how the current cross-border position applies to your group's structure, contact us at info@lockhartyip.com.

How does the mutual-enforcement regime change the enforcement-risk calculation?

The enforcement dimension of this analysis has become more immediate since the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance took full effect on 29 January 2024. The change deserves a careful read for family groups, because it alters the risk profile of the holding structure in a direction that is not always intuitive.

Before the new regime, a Mainland judgment creditor – a counterparty with a successful civil claim against the family or a Mainland operating entity – faced significant practical obstacles to reaching assets held by the Hong Kong intermediate holding company. The old regime required an exclusive-jurisdiction agreement pointing to the Mainland courts. Without that agreement, enforcement in Hong Kong of a Mainland judgment was an uncertain and lengthy exercise.

The new regime replaces the exclusive-jurisdiction requirement with a connection-based test. A Mainland judgment in a civil or commercial matter – monetary or non-monetary, subject to the exclusion list – can now be registered with the Court of First Instance and enforced against assets in Hong Kong. The exclusion list covers insolvency matters, certain intellectual property and patent matters, certain arbitration-related matters, succession, and matrimonial proceedings. Commercial contract claims, tort claims, and claims arising from operating-company activity are within scope.

What does this mean for a family holding structure? If a Mainland operating entity is the subject of a civil judgment – a supplier dispute, a regulatory-related civil claim, a breach-of-contract matter – and that judgment is obtained against the family principal as guarantor or co-defendant, the judgment creditor now has a more direct route to assets held by the Hong Kong holdco. The corporate separateness between the operating entity and the holding company remains relevant, but the enforceability of the Mainland judgment in Hong Kong is no longer the obstacle it once was.

The practical implication is that the holding structure must be evaluated not only for its tax efficiency but for its resilience under enforcement pressure. A Hong Kong intermediate holding company that holds shares in Mainland operating entities, and that has itself been named as a co-defendant or guarantor in Mainland proceedings, is directly in the path of the new enforcement route. This is a structural-design question that should be revisited for any family group with material Mainland commercial exposure and a Hong Kong holding layer.

Our read: where the risk sits now, and the decision the structure must make

The holding structure for a family-owned group in Mainland China is under pressure from three directions simultaneously, and the pressure is not easing.

The first direction is substance enforcement. The FSIE regime, the beneficial-ownership standard under the DTA, and the effective-management test under Mainland enterprise income tax law are each becoming more rigorously applied. A structure that passed examination two or three years ago may not pass today, because the examination itself has changed. The Mainland tax authorities have developed more sophisticated documentation requirements. The Inland Revenue Department in Hong Kong is more active in substance inquiries under the FSIE framework. The offshore registries in the BVI and Cayman Islands have their own substance-reporting obligations. Every layer of the structure is now capable of triggering a review, and a weakness in any single layer affects the whole.

The second direction is the enforcement regime. The new mutual-enforcement ordinance means that a Mainland commercial judgment can reach Hong Kong assets more readily than before. For a family group that has been using the Hong Kong holding layer as a buffer against Mainland commercial risk, this represents a material change in the buffer's effectiveness.

The third direction is succession and control. The family groups that established their offshore structures in the early years of this century are, in many cases, approaching the first or second generational transfer. Succession planning for a Mainland family group operating through a Hong Kong holding structure requires decisions about trust law, trust residence, the choice of trustee, the allocation of voting and economic rights between family members, and the Mainland's own approach to offshore trust arrangements. These decisions interact with the tax and corporate-governance analysis in ways that can produce unexpected results if they are not co-ordinated.

In our view, the decision a family group must make now is not whether to have a holding structure – the commercial case for an offshore holding layer above a Mainland operating group remains sound for groups of any material scale. The decision is whether the existing structure, in its current state of documentation and governance, can withstand the examination it will face over the next three to five years. For most of the structures we review, the answer requires at least some remedial work, and in a proportion of cases it requires a more fundamental reconfiguration.

The groups that are best positioned are those that have treated the holding structure as a living governance arrangement – one that requires annual review, genuine board activity, and a maintained record of decision-making – rather than as a filing that was completed once and then set aside. The groups that are most exposed are those where the Hong Kong holding company has existed on paper but has not been operated with the independence and substance the current examination environment demands.

If an earlier structuring, filing, or enforcement attempt has produced an adverse or stalled result, a second review can identify the point of weakness and the routes still available. To discuss your group's current position across the relevant jurisdictions, write to us at info@lockhartyip.com.

For a broader view of the holding-structures service, see our Holding Structures practice.

What the evidence-aware adviser looks for: a practical decision matrix

The analysis above can be translated into a working decision matrix. The relevant variable is not the form of the structure but the current state of its operation and documentation.

Situation A: the Hong Kong holding company has at least one genuinely active director resident in Hong Kong; board meetings are held in Hong Kong at regular intervals; the company has a dedicated Hong Kong bank account through which material flows are processed; and the FSIE conditions have been assessed and documented. In this situation, the treaty access is defensible, the FSIE position is managed, and the principal risk point is the offshore tier's substance obligations. The action is to verify the BVI or Cayman substance position and ensure the documentation is current.

Situation B: the Hong Kong company has a director, but that director has acted only on instructions from the Mainland without exercising independent judgment; board meetings have been held nominally or not at all; the FSIE position has not been analysed since the regime commenced in 2023. In this situation, the beneficial-ownership claim under the DTA is at risk, the FSIE position may be producing unrecognised taxable income, and the effective-management challenge is possible. The action is an immediate governance review, a restructuring of the board composition and process, and an FSIE analysis. The remediation should be completed before a DTA claim is next made, because a claim made in a structurally deficient state is harder to defend than one deferred pending remediation.

Situation C: the family is approaching a succession event, and the trust above the holding structure has not been reviewed against the current FSIE and DTA position, or against the new enforcement regime. In this situation, the interaction between the trust's terms, the trustee's governance of the holding company, and the Mainland's own approach to offshore trust arrangements is the critical variable. The action is a co-ordinated review of the trust instrument, the holding-company governance, and the Mainland estate-planning position, ideally before the succession event is triggered by health or regulatory developments that reduce the options available.

Situation D: a Mainland civil or commercial judgment has been obtained against the family principal or an operating entity, and the judgment creditor is examining enforcement options. In this situation, the new mutual-enforcement regime is the immediate concern. The action is to assess the corporate-separateness position of the Hong Kong holding company, review whether any guarantee or cross-default obligation extends to the holding layer, and prepare the response to a potential registration application in the Court of First Instance.

Related practices

Related practices

• Private Wealth – succession planning, trust structures and asset protection for family principals across jurisdictions
• Tax Positions – FSIE compliance, DTA access, beneficial-ownership documentation and Pillar Two assessment for cross-border groups

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.