Matter note: a holding structure for a family-owned group in the CIS

A family-controlled industrial group with operating assets spread across several CIS (Commonwealth of Independent States) jurisdictions arrived at a straightforward-sounding question. Where should the holding company sit? The answer turned out to be less about jurisdiction selection and more about what the structure would need to do: hold assets, access treaties, survive a change of ownership, and stand up to scrutiny on beneficial-ownership registers in multiple jurisdictions simultaneously.

This matter note describes an anonymised engagement in which Lockhart & Yip advised on the design and implementation of a Hong Kong-anchored holding structure for a family-owned group with CIS-origin assets and cross-border capital movements. The governing instruments included the Companies Ordinance (Cap. 622), Hong Kong's bilateral tax treaty network, and the applicable substance and beneficial-ownership rules across the relevant offshore and onshore layers. The structure moved from concept to implementation in a single financial year.

The note covers the situation, the structural problem, the route chosen, the sequence and the turning point, and the lesson that transfers to other family-owned groups facing similar constraints.

The situation: a family group between jurisdictions

The principals were a family with first-generation wealth built from manufacturing and distribution operations across the CIS. The operating companies were incorporated in several Commonwealth of Independent States jurisdictions under civil-law systems. Ownership was held partly through personal shareholding, partly through an intermediate entity incorporated in a jurisdiction with a rapidly deteriorating treaty position.

The group had reached a size and complexity at which a single offshore holding vehicle – the kind that had served the original structure adequately – was no longer fit for purpose. Three specific pressures had converged.

First, the intermediate jurisdiction had lost, or was in the process of losing, its bilateral double-taxation treaty with one of the principal CIS operating jurisdictions. The withholding tax position on dividends flowing up the chain had become unpredictable.

Second, beneficial-ownership registration requirements had increased in the CIS operating jurisdictions. The existing structure made transparent disclosure difficult without exposing the family to risks they considered unacceptable in their home-country environment.

Third, a potential transaction – either a partial sale to a strategic partner or, later, a generational transfer to adult children – was being planned. The structure as it stood would have created a significant tax and consent friction at any exit point.

The family's existing advisers had done competent work at the operating-company level. The cross-border holding layer was where the problem sat, and that layer required a different kind of analysis.

The structural problem: substance, treaties, and the gap between them

The core issue in this matter was not the choice of holding jurisdiction in the abstract. It was whether any proposed structure could simultaneously satisfy three requirements that, in this configuration, pulled against each other.

Requirement one was treaty access. The group needed reliable withholding tax treatment on dividends from at least two CIS jurisdictions. Hong Kong maintains a network of double-taxation agreements, and several of those agreements are directly relevant to CIS-origin income streams. But treaty access is not automatic: the holding entity must demonstrate genuine substance, and the relevant treaty must provide beneficial coverage for the income type at issue.

Requirement two was beneficial-ownership transparency that the family could live with. The CIS operating jurisdictions required disclosure of ultimate beneficial owners. The structure needed to make that disclosure possible and legally coherent without creating a second layer of exposure through an opaque offshore layer that would itself attract scrutiny.

Requirement three was succession readiness. The family's offshore advisers had suggested a trust, layered above the holding company. That is a legitimate approach in many configurations, and one we regularly see in cross-border wealth structures originating from the CIS. In this matter, however, the interaction between a trust layer and the treaty-access conditions in the applicable agreements created a potential beneficial-ownership question. A trust is not always a "resident" for treaty purposes. The analysis required care.

The gap between requirement two and requirement three is where many family groups get into difficulty. Transparency at the operating level and opaqueness at the holding level create a structural inconsistency that is increasingly visible to local tax authorities and, in some CIS jurisdictions, to law enforcement.

The route chosen: Hong Kong as the holding layer

After reviewing the treaty network and the substance requirements, the route taken was to establish a Hong Kong holding company as the principal intermediate entity above the CIS operating companies, with a separately documented family arrangement at the upper layer designed to be legally coherent with the treaty positions in the applicable double-taxation agreements.

Hong Kong's holding structure advantages in this configuration were specific, not generic. The territorial basis of Hong Kong's profits tax regime – which taxes Hong Kong-sourced profits only – meant that dividends from the CIS operating companies, to the extent they represented foreign-sourced income, would be handled within the foreign-sourced income exemption regime, subject to economic-substance conditions being met. The FSIE (foreign-sourced income exemption) regime, in force from 1 January 2023 as amended, requires a resident entity to satisfy substance or participation conditions to access the exemption on specified foreign-sourced income types.

The Hong Kong company was structured with genuine substance: a local director, regular board meetings documented in Hong Kong, and decision-making that could be demonstrated to take place in the jurisdiction. This is not a paper exercise. In our cross-border practice, we see structures fail treaty and substance tests because the documentation trail places real decisions outside the claimed jurisdiction. The investment in building a defensible substance record from the outset is not optional.

For the upper layer, rather than a trust positioned above the Hong Kong company in a way that would interrupt the treaty residency chain, the family arranged a holding agreement between the family members and the Hong Kong company that preserved the treaty residency of the Hong Kong entity while addressing succession and beneficial-ownership transparency in the CIS operating jurisdictions.

This approach required direct engagement with the beneficial-ownership registration requirements of the CIS operating jurisdictions, coordinated through counsel admitted in those jurisdictions. The Hong Kong entity's directors and the family members who were disclosed as ultimate beneficial owners were consistent across all registers. There were no gaps.

The sequence and the turning point

The implementation ran across several months and involved four distinct phases.

Phase one was treaty and substance mapping. Before any entity was incorporated, the applicable double-taxation agreements were reviewed against the specific income flows the group expected to generate. The question was not whether Hong Kong had a treaty with the relevant CIS jurisdiction – it does, in some cases – but whether the specific income type, the proposed entity structure, and the beneficial-ownership position would qualify for treaty benefits under the terms of the agreement as currently administered.

Phase two was entity design and incorporation. The Companies Ordinance (Cap. 622) governs Hong Kong company formation, and the structure met the applicable requirements for a private company. The Significant Controllers Register – mandatory for Hong Kong-incorporated companies since 1 March 2018 – was prepared from day one, consistent with the disclosures to be made in the CIS operating jurisdictions.

Phase three was the substance programme. This is the phase most frequently underestimated by groups structuring through Hong Kong for the first time. A Hong Kong holding company that exists only on paper does not carry treaty protection, does not access the FSIE exemption, and does not withstand a substance challenge by a CIS tax authority that has increasingly sophisticated tools to identify conduit arrangements. The substance programme covered board composition, meeting cadence, document storage, banking, and operational decision-making. None of this is unusual. All of it requires active management.

The turning point came during phase three. A CIS tax authority in one of the operating jurisdictions issued an information request concerning the beneficial ownership and tax residency of the then-existing intermediate entity – the one the new Hong Kong structure was designed to replace. The request arrived while the new structure was being built but before the transition was complete.

That sequence matters. The response to the information request had to be consistent with both the existing position and the planned position. An inconsistency at that junction – disclosing one structure to the CIS authority while transitioning to another – would have created a documentary record that was difficult to explain. The transition was managed in a way that the information provided to the CIS authority accurately reflected the position at the date of the request, and the new structure was completed and operational before any subsequent request would need to address it.

This is the kind of timing consideration that does not appear in structural diagrams. It is where a cross-border matter can be won or lost.

The qualitative outcome and the transferable lesson

The group exited the prior intermediate structure and consolidated its holding function through the Hong Kong entity within the planned timeframe. The withholding tax position on dividends from the CIS operating companies became predictable. Beneficial-ownership disclosures in the operating jurisdictions were aligned and documentable. The family's succession position – the question of how ownership would move to the next generation without triggering the tax and consent friction they had identified – was addressed through a documented arrangement that was consistent with, rather than in tension with, the treaty position of the Hong Kong holding company.

No guarantees of outcome are made in describing this matter. The result reflected the specific facts, the specific treaties, and the specific timing of the transition. Other configurations will require different analysis.

The transferable lesson is this: for a family-owned group with CIS-origin assets, the centre of gravity in a holding structure exercise is not the chart on paper. It is the interaction between treaty residency, substance, and beneficial-ownership transparency across the jurisdictions actually engaged. A holding company that satisfies one of those three requirements but fails the other two does not solve the problem. It relocates it.

We regularly act on cross-border structures of this kind. The pattern we see most consistently is groups that have built a sophisticated operating layer and an inadequate holding layer. The holding layer carries the treaty access, the succession mechanism, and the beneficial-ownership record. It deserves the same level of attention as the operating companies beneath it.

For a second category of reader – those who have already attempted a structure and found it stalling under regulatory scrutiny or treaty challenge – the analysis does not begin from scratch. It begins with identifying where the existing structure has failed and which routes remain open. That diagnostic step is often quicker than groups expect, and the corrective action is frequently more targeted than a complete rebuild.

To discuss how the approach described here applies to your cross-border position, contact info@lockhartyip.com.

Related practices

• Holding Structures – cross-border design, substance, treaty access and beneficial-ownership coordination
• Tax Positions – FSIE, double-taxation treaties, and Pillar Two for groups with offshore holding layers

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