Holding, economic substance and cross-border capital

A holding company isn't just a container for shareholdings. It's a center for managing capital, corporate decisions, and asset flows. In an international context characterized by investment mobility, tax transparency, and a growing focus on economic substance, its function cannot be reduced to mere tax efficiency. A holding company can manage shareholdings, protect assets, facilitate generational transitions, and support international expansion. But its solidity depends on the coherence of its structure, function, governance, and documentation. In the new scenario, the question is not simply where the holding company is located, but why it exists, what it governs, and where it actually makes its decisions.

The economic phenomenon

In recent years, the use of holding companies and cross-border investment structures has grown significantly. Family businesses have become internationalized, assets have spread across multiple jurisdictions, investors have begun operating through dedicated vehicles, and entrepreneurial families have recognized the need to separate their operating assets from their financial assets and to manage their shareholdings, real estate, liquidity, and investments more effectively.

A holding company often responds to real needs. It can help consolidate control of multiple operating companies, simplify group governance, manage dividend flows, reinvest profits, facilitate acquisitions or divestments, attract new shareholders, and prepare for generational transitions. In an entrepreneurial family, it can become the tool for distinguishing the role of the business from that of the owner. In an international estate, it can represent the link between assets located in different countries.

The growth of holding companies also reflects a broader shift: capital is seeking legible, stable, and governable structures. It's not just about reducing the tax burden, but also about building structures capable of supporting investments, successions, reorganizations, and relationships with banks, funds, co-investors, and advisors.

At the same time, jurisdictions compete to attract decision-making centers, holding companies, investors, and management positions. Some jurisdictions are perceived as more predictable, efficient, or suited to managing international capital. However, this competition is taking place in a very different context than in the past. Tax transparency, information exchange, anti-abuse rules, regulations on controlled foreign companies, and a focus on economic substance are making purely formal structures increasingly unsustainable.

A holding company, therefore, isn't problematic in itself. It becomes problematic when it lacks a recognizable economic function, when it doesn't make real decisions, when it doesn't have resources commensurate with its role, or when it's located in a jurisdiction without effective coherence between its headquarters, governance, and activities.

In the new international context, form is no longer enough. A capital structure must be able to explain its function.

The legal and fiscal framework

From a legal and tax perspective, a holding company is a company that holds stakes in other companies or assets, assuming a function that may be purely static, dynamic, industrial, family, or patrimonial. The distinction is not merely descriptive: it helps us understand the role a holding company actually plays.

A static holding company may be limited to holding shares. A dynamic holding company may perform coordination, treasury, strategic direction, or administrative support functions. An industrial holding company may be part of an operating group and participate in defining corporate strategies. A family holding company may serve to govern control, regulate relationships between family branches, and foster generational continuity. An asset holding company may centralize financial, real estate, or equity investments.

In any case, the actual function of the holding company must be consistent with its structure. It's not enough for the company to formally exist. It's necessary to assess what decisions it makes, what assets it manages, what risks it bears, what resources it uses, and what autonomy it enjoys.

A first key issue concerns tax residency . The location of the holding company must be consistent with the location of its effective management, day-to-day operations, and relevant decision-making processes. With a foreign holding company, the risk increases when the company is formally located outside of Italy, but strategic decisions, banking relationships, operating instructions, or actual management are attributable to individuals resident in Italy.

A second aspect concerns the dividend and capital gains regime . Holding companies are often used to receive cash flows from investee companies and reinvest them in an orderly manner. However, the tax efficiency of these flows cannot be assessed in isolation. Consideration must be given to the nature of the shareholdings, the location of the investee companies, the status of the shareholders, any applicable agreements, internal regulations, rules on beneficial ownership, and the possible application of anti-abuse regulations.

A third element concerns intragroup relationships . Financing, services, royalties, guarantees, management fees, and treasury policies must have a recognizable economic rationale and be adequately documented. A holding company that coordinates a group can legitimately provide services or finance subsidiaries, but such relationships must reflect actual functions, assumed risks, and consistent conditions.

A fourth aspect concerns CFC rules , where relevant. Holding controlled foreign companies may require a specific assessment of the effective taxation, nature of the income, economic substance, and business activity. Again, this issue cannot be addressed automatically. Each specific case must be assessed.

A fifth aspect concerns the anti-abuse principle . A reorganization through a holding company can be natural and fully legitimate when it meets economic, financial, family, or organizational needs. However, it can become vulnerable when the structure lacks economic substance and appears primarily geared toward obtaining undue tax advantages.

In other words, a holding company should not be evaluated solely for its tax benefits, but for the role it plays within the assets or group. Substance doesn't necessarily mean a cumbersome organizational structure; however, it requires consistency between resources, decisions, assets, and objectives.

Implications for investors and wealth

This is the most relevant dimension for those who manage assets, family businesses and international investments.

A well-designed holding company can improve the clarity of one's assets. By centralizing shareholdings and assets, it allows for a clear distinction between ownership and operations, managing cash flows, reinvesting profits, and organizing control more effectively. For a business family, it can be the place to define governance rules, shareholder rights, distribution policies, family agreements, and succession plans.

A holding company can also facilitate the entry of external investors. A clear ownership structure makes capital more transparent, simplifies capital increases, disposals, acquisitions, or co-investments, and allows strategic assets to be separated from non-strategic ones. When dealing with international investors, a clear structure can become a factor of reliability.

In wealth management, a holding company can be used to separate real estate, financial, and industrial assets, reducing confusion between personal and business assets. It can facilitate the reinvestment of profits, protect the continuity of shareholdings, and reduce the risk that personal events of partners could directly impact the stability of assets.

However, these benefits depend on the quality of the structure. A holding company lacking an economic function can become a source of vulnerability. If it's unclear why it exists, if it doesn't make real decisions, if its cash flows have no discernible logic, if governance is merely formal, or if the company is managed by individuals other than directors, the tax and reputational risk increases.

The issue is even more delicate in international structures. A foreign holding company can be efficient if it has a business rationale, consistent governance, and effective roots in the chosen jurisdiction. Conversely, if the foreign headquarters is merely formal and management remains elsewhere, the holding company can become the weak link in the entire capital structure.

The position of the shareholders is equally important. The shareholders' tax residence, the place where they make decisions, their relationship with the directors, the presence of powers of attorney, delegations, or operating instructions, and coordination with any trusts, foundations, or policies can all impact the overall assessment. A holding company does not exist in isolation: it is part of a system.

For this reason, the use of a holding company must be coordinated with succession planning, family governance, the partners' personal tax regime, monitoring obligations, and banking relationships. In a context of increased compliance, banks, trustees, and intermediaries also require understandable, documented, and consistent structures.

A solid holding company doesn't make assets opaque. It makes them manageable.

Strategic perspectives

Designing a holding company should start with a simple question: what function should it perform?

Only after answering this question does it make sense to choose the jurisdiction, corporate form, governance, flow structure, and relationship with other capital instruments. A holding company established without a clear function risks being perceived as an artificial container. A holding company built around real needs can instead become a stable infrastructure for managing capital.

The choice of jurisdiction should not be guided solely by the tax rate. Regulatory stability, the quality of the legal system, compatibility with the shareholders' residence, the presence of agreements, available assets, management costs, reputation, access to local professionals, and consistency with the investment destination must be considered.

It is also necessary to verify the holding company's tax residence and the location of its effective management. Strategic decisions must be traceable and consistent with the declared location. Directors must have competence, autonomy, and real powers. Meetings must be effective, documented, and not merely memorandum-based.

Intragroup relationships require specific attention. Financing, dividends, services, guarantees, and cash flows must be consistent with the holding company's function and adequately documented. Group treasury can be an efficient tool, but it must reflect economic, not just fiscal, rationale.

It is then necessary to coordinate the holding company with the personal status of the shareholders. The shareholders' tax residency, potential international mobility, generational transitions, shareholder agreements, inheritance regimes, and the presence of heirs in multiple countries can profoundly impact the structure's valuation.

The same applies to interactions with trusts, foundations, policies, or other asset management vehicles. Incorporating a holding company into a larger structure requires a comprehensive approach. Each vehicle must have its own function and be consistent with the others. Overlapping instruments doesn't automatically increase protection; sometimes it just increases complexity.

Finally, the structure must be periodically reviewed. A holding company established for a specific family, corporate, or tax structure may become inadequate when the shareholders' residence, the composition of the assets, the place of decision-making, the applicable legislation, or the business family's objectives change. Asset governance requires maintenance.

The message is clear: a holding company isn't just a tax vehicle. It's a capital governance structure. To function, it must have a business rationale, consistent governance, and adequate documentation.

Conclusion

In the new international context, holding companies are no longer valued solely for their legal form or the tax efficiency they can generate. They are valued for the function they perform, the substance they express, and the consistency between their assets, decisions, and governance.

A well-structured holding company can organize assets, facilitate generational transitions, support international expansion, and make the capital structure more transparent. A holding company lacking substance, however, can become a weak link in the entire capital structure.

Economic substance has become part of asset protection. An international structure is only sound if its form, function, and governance tell the same story.

Holding

About the Author

Edoardo Tamagnone is a lawyer and partner at the law firm Tamagnone Di Marco Avvocati Associati . He focuses on international taxation, investment structures, and wealth planning for investors, family offices, and businesses with cross-border operations.

He works between Turin and international contexts, focusing on the intersection of law, economics, and global capital.