How to approach a holding structure for a family-owned group in the CIS

A family business built across the CIS (the Commonwealth of Independent States – the grouping of former Soviet republics that includes Kazakhstan, Uzbekistan, Azerbaijan, Armenia, Georgia and others alongside Russia) faces a structural question that many European or American advisers handle poorly. The assets sit in one legal order. The family sits in another. The capital flows across a third. And the question of who actually controls what – and what a foreign court or tax authority will make of that control – is rarely answered by the organisational chart alone.

A well-built holding structure for a CIS family-owned group requires three things to work in practice: genuine economic substance in the holding jurisdiction, treaty access that is defensible under the governing anti-avoidance rules, and a beneficial-ownership chain that survives scrutiny by local tax authorities and offshore registries alike. Hong Kong meets each of these requirements in ways that matter for the Greater China and Asia-Pacific corridor; for European-facing CIS structures, Cyprus or a comparable treaty jurisdiction is typically paired with a Hong Kong or BVI intermediate layer. The Trustee Ordinance (Cap. 29), the Companies Ordinance (Cap. 622) and the network of double-taxation agreements available through Hong Kong are the principal instruments at work.

This guide sets out the decision the family and its counsel face, the sequence of steps in order, the gate at each step, and the common mistakes that cause structures to fail at enforcement or on review. It is instructional, not promotional.

What decision does the CIS family group actually face?

The starting point is not the chart. It is the purpose the structure must serve. For most CIS family groups, three purposes compete: protecting assets from political or creditor risk in the home jurisdiction; accessing treaty-based dividend and capital-gains treatment on profits moving offshore; and preparing for succession across multiple family branches and residences.

Those three purposes do not always point to the same holding jurisdiction. A Kazakhstan operating group distributing profits to a Netherlands or Hong Kong holding company will reach a different treaty outcome than the same group routing through Cyprus. A family with members resident in the UAE, the United Kingdom and Hong Kong requires a holding layer that does not inadvertently trigger residence-based taxation in any of those jurisdictions.

So the first decision is the purpose hierarchy. Which of the three – asset protection, treaty access, or succession planning – is primary? The answer drives every subsequent choice. Our cross-border practice sees this decision made wrongly more often than any other: advisers build the treaty-access layer first and discover, at a later stage, that the holding entity is now an obstacle to the succession plan.

A second, prior decision is the relevant jurisdictional perimeter. CIS operating companies sit under local company law, with local transfer-pricing rules and CFC (controlled foreign company – a regime that taxes resident shareholders on undistributed foreign profits) regulations that have tightened materially across Kazakhstan, Russia, Uzbekistan and others over the past decade. Any holding structure that ignores the CFC regime in the home country of the majority shareholder is incomplete before it starts.

What does the sequence of steps look like, and what is the gate at each?

Building a holding structure for a CIS family-owned group runs in six steps, each with a defined gate before the next step opens.

Step 1: Map the beneficial-ownership chain from the operating company upward to the natural persons. The gate here is completeness. Every intermediate layer – existing BVI companies, trust-held shares, nominee arrangements – must be disclosed and documented before any new structure is added on top. The Significant Controllers Register requirement that applies to Hong Kong-incorporated companies (in force since 1 March 2018 under the Companies Ordinance) sets the standard: the beneficial owners who ultimately own or control more than 25% must be identifiable by name. If the existing chain cannot be mapped cleanly, the new layer will face the same opacity problem, now one step higher.

Step 2: Establish the residency position of the key family members. This is the gate that most structures skip. A Hong Kong holding company whose board meets entirely in Kazakhstan – because the majority shareholder is there and directs all decisions – will be treated as resident in Kazakhstan for CFC purposes by many CIS tax authorities. The concept at stake is place of effective management (the place where key management decisions are actually made, as distinct from where the company is registered). Genuine board-level decision-making in Hong Kong requires directors who are present, who deliberate, and who maintain board minutes that record that deliberation.

Step 3: Select the holding jurisdiction and verify treaty access. Hong Kong's position in the holding-structure field rests on its territorial tax system, its capital-gains exemption, its absence of withholding tax on dividends, and its network of comprehensive double-taxation agreements. Those agreements are bilateral instruments that govern the taxation of income and capital between Hong Kong and the counterparty jurisdiction. The specific treaty in force between Hong Kong and the relevant CIS state must be checked against its limitation on benefits or principal purpose test (anti-avoidance provisions in modern treaties that deny treaty benefits where the principal purpose of the arrangement was to obtain them). Where no Hong Kong treaty exists with a given CIS state, a Cyprus or Netherlands intermediate layer may be appropriate – but that layer itself must satisfy the substance and beneficial-ownership requirements of the relevant treaty. It is at this step that a common mistake occurs: advisers assume the treaty rate applies without verifying that the holding entity meets the LOB or PPT test in the relevant treaty's text.

Step 4: Design the substance plan for the holding entity. Substance is not a bureaucratic requirement. It is the factual foundation for the treaty claim. For a Hong Kong holding company, substance means: a qualified management team making decisions in Hong Kong; board meetings held in Hong Kong; bank accounts maintained and operated from Hong Kong; and a registered office and records kept in Hong Kong. Under the foreign-sourced income exemption regime (the FSIE regime, in force from 1 January 2023), passive income received by a Hong Kong entity from foreign sources – including dividends and interest – is subject to specific economic-substance conditions. The gate at Step 4 is that the substance plan must be costed, staffed and operational before the first dividend or interest payment flows through the structure.

Step 5: Address the succession layer. For a family-owned group, the holding structure without a succession plan is a liability rather than an asset. The question is which instrument governs the transfer of the holding shares on the death or incapacity of the patriarch or matriarch. A Hong Kong law trust – governed by the Trustee Ordinance (Cap. 29) as substantially reformed with effect from 1 December 2013 – offers distinct advantages: Hong Kong law has no forced-heirship regime, the 2013 reform abolished the rule against perpetuities for Hong Kong trusts, and the firewall provisions protect a Hong Kong trust against foreign forced-heirship claims. For CIS families, where succession law at the operating level may be mandatory and overriding, placing the holding shares in a properly constituted Hong Kong discretionary trust severs the forced-heirship exposure at the top of the structure. The gate at Step 5 is that the trust must be settled with genuinely transferred assets – a trust over which the settlor retains unfettered control is at risk of being set aside by creditors or challenged by tax authorities as a sham arrangement.

Step 6: Build and maintain the compliance and documentation file. The structure's first test is not a dispute or a sale – it is the annual review by the home-country tax authority. The documentation file must include: board minutes for every material decision; evidence of substance (travel records, communication logs, bank statements); transfer-pricing documentation for intercompany transactions; and disclosures required by the CFC regime in the relevant CIS jurisdiction. The gate at Step 6 is ongoing. A structure that is well-built on day one but poorly maintained in year three will fail the PPT or substance test when it matters most.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how this sequence maps onto your group's existing structure, write to us at info@lockhartyip.com.

How does Hong Kong sit alongside the CIS in a typical structure?

The cross-border interface between Hong Kong and the CIS is not a single line. It is a set of bilateral and multilateral arrangements that interact with each other in ways that depend on the specific facts of the group.

Consider a structure that is common in our practice: a Kazakhstan mining or logistics group with operating subsidiaries in Kazakhstan and Uzbekistan, a BVI holding company that has accumulated historic profits, and a family whose members are resident in the UAE and the United Kingdom. The immediate question is what happens to the BVI layer. A BVI company sitting between Uzbek and Kazakh operating companies and a family trust has several problems: it has no treaty access; it attracts economic-substance requirements under BVI legislation; and it is increasingly transparent to home-country tax authorities as information-exchange arrangements between offshore centres and CIS states have expanded.

In that scenario, a Hong Kong intermediate holding company above the BVI layer – or in place of it, if the BVI entity can be wound down cleanly – serves several functions. It provides a common-law forum with strong courts and a well-developed company law. It provides potential treaty access where a Hong Kong treaty exists with Kazakhstan or Uzbekistan. And it provides a platform from which the family trust at the top of the structure can be administered in a neutral, well-regulated environment.

The BVI layer is not automatically redundant. Where the BVI entity holds assets other than operating-company shares – intellectual property, real estate held through a vehicle, or a portfolio investment – the structural question is different and requires separate analysis. Our desk regularly advises on the interaction between BVI holding vehicles and Hong Kong intermediaries in the context of CIS restructurings. See also our briefing on Hong Kong holding companies and BVI investments for a treatment of that specific interface.

For CIS groups with a European-facing business – sales into Germany, logistics through Poland, contractual counterparties in the Netherlands – a Cyprus holding layer above the Hong Kong entity is sometimes appropriate. Cyprus has a wider treaty network with CIS states than Hong Kong and participates in EU tax directives. The Cyprus-over-Hong Kong structure is addressed in our separate guide on Cyprus holding companies over Hong Kong operating entities. The principle in both cases is the same: the structure must serve a non-tax commercial purpose, and that purpose must be documented.

What do CIS groups get wrong, and how does the correct route avoid those mistakes?

Four mistakes recur in the cross-border practice when CIS family groups approach holding-structure work for the first time.

The first is building the structure in the wrong order. The company is incorporated, the bank account is opened, and the dividend is paid – before the substance plan is operational. At that point, the entity is a shell receiving passive income, and it cannot satisfy the FSIE conditions or the treaty's substance test. The correct approach is to establish the substance platform before the first payment flows.

The second mistake is conflating beneficial-ownership disclosure with actual transparency of the ownership chain. A group may file its Significant Controllers Register correctly with the Companies Registry and still have an opaque chain at the operating level – because the CIS operating companies are owned by nominees, or by a layer of entities whose ultimate beneficiary is undisclosed in that jurisdiction. When a home-country tax authority runs a substance inquiry or a transfer-pricing audit, the opacity at the operating level invalidates the treaty claim at the holding level. The structure is only as transparent as its weakest link.

The third mistake is treating the trust as an afterthought. Families that build a holding structure for asset-protection and treaty purposes, and then add a trust layer years later when succession becomes urgent, typically find that the trust is underfunded, the settlor has retained excessive control, and the firewall is ineffective because the jurisdictional connections to the settlor's home country are too strong. The correct approach is to design the trust layer at the same time as the holding company layer, even if the trust is settled with a nominal initial amount and funded progressively.

The fourth mistake – and the one most likely to produce an enforcement failure – is ignoring the CFC regime in the CIS home jurisdiction. Several CIS states have CFC legislation that taxes resident shareholders on undistributed profits of foreign companies they control. If the family patriarch is tax-resident in Kazakhstan and controls a Hong Kong holding company, the undistributed profits of that company may be taxable in Kazakhstan even if they are never repatriated. The structure must account for this, either by distributing profits in a tax-efficient sequence or by ensuring that the holding entity does not meet the CFC control test under local law.

A mid-market CIS manufacturing group came to our desk after an earlier structure had failed on precisely this combination of issues: the holding company had been incorporated in Hong Kong but managed from the home jurisdiction; the CFC rules had triggered an assessment on the family's undistributed Hong Kong profits; and the trust that was meant to hold the shares had been settled without genuinely relinquishing the settlor's control. We re-sequenced the steps: management was moved to Hong Kong with resident directors, the CFC exposure was addressed at the operating level, and the trust was restructured with independent trustee oversight. The group's position stabilised within one annual reporting cycle.

If an earlier filing, structure or enforcement attempt produced an adverse or stalled result, a second review can identify the strategic error and the routes still open. Write to us at info@lockhartyip.com to discuss your position.

What is the decision checklist before proceeding?

Before instructing counsel to build or restructure a holding structure for a CIS family-owned group, a principal or their in-house counsel should be able to answer the following questions. Where the answer is unclear, that gap is the first thing to address.

• What is the primary purpose of the structure – asset protection, treaty access, or succession planning – and in what order?
• Where is each key family member tax-resident, and does any of them have a reporting obligation in their jurisdiction of residence for foreign-controlled companies?
• Is the beneficial-ownership chain from the natural persons down to the operating companies fully documented and internally consistent?
• Does the CIS home jurisdiction have a CFC regime, and if so, does the proposed structure trigger it?
• Is there a double-taxation agreement in force between Hong Kong (or the proposed holding jurisdiction) and the relevant CIS operating jurisdiction, and does the holding entity meet the LOB or PPT test in that agreement?
• Is the substance plan – board composition, meeting location, management records – capable of being maintained operationally, not just described on paper?
• Has the trust (if any) been designed to sever the settlor's control sufficiently to withstand a challenge by creditors or a home-country tax authority?
• Is the compliance file – board minutes, transfer-pricing documentation, CFC disclosures – maintained annually and reviewed before each distribution?

A "no" or "unclear" answer to any of these is a structural gap. Gaps identified before the structure is built cost far less to address than gaps identified in enforcement, a tax assessment, or a succession dispute.

For a full treatment of the holding-structures practice, including the range of jurisdictions and instruments available, see our Holding Structures practice page.

How does enforcement risk interact with the structure?

For CIS family groups, enforcement risk has two distinct faces. The first is the risk that a creditor or state authority in the home jurisdiction obtains a judgment or order and then seeks to enforce it against assets held through the holding structure. The second is the risk that the family cannot enforce its own rights – a dividend obligation, a loan repayment, a joint-venture exit – because the counterparty is in a jurisdiction where the group's judgment or award is unrecognised.

On the first face: a properly constituted Hong Kong trust, holding shares in a Hong Kong company that in turn holds CIS operating shares, interposes layers of common-law protection between the CIS creditor and the family's assets. A CIS court judgment against a family member personally does not automatically reach assets held by a trust over which that family member does not retain legal ownership. The firewall provisions of the Trustee Ordinance – strengthened in the 2013 reform – provide specific protection against foreign forced-heirship claims and, in certain circumstances, against foreign law claims that would otherwise unwind the trust.

On the second face: Hong Kong's common-law courts and its institutional arbitration through the HKIAC (Hong Kong International Arbitration Centre – the principal arbitral institution in the city) offer a forum that is recognised and enforced across a wide range of jurisdictions. Mainland China and Hong Kong operate mutual-enforcement arrangements for both arbitral awards and civil and commercial judgments. The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance came into force on 29 January 2024. That arrangement is primarily relevant where CIS group assets or counterparties include Mainland China exposure, which is increasingly common for Kazakhstan, Uzbekistan and other Central Asian members of Belt and Road connected investment corridors.

What enforcement risk means practically for structure design is this: the holding entity should be in a jurisdiction whose courts and arbitral awards travel. A BVI entity with assets in Kazakhstan and a dispute with a Mainland Chinese joint-venture partner faces a recognition problem at every step. A Hong Kong intermediate holding company in the same position has a functional enforcement route to the Mainland through the 2024 Ordinance and a functional arbitral route through the HKIAC and the New York Convention.

Related practices

Related practices

• Private Wealth – trust structuring, succession planning and family-office arrangements across jurisdictions
• Tax Positions – treaty access, FSIE analysis and cross-border tax structuring for holding entities

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