How to structure a multi-jurisdictional group of companies: legal and tax considerations

In international practice, mistakes in structuring a group of companies can be costly: unnecessary taxes, frozen accounts, blocked dividend payments, or even the loss of control over key assets. In most cases, these issues stem from a formalistic approach—companies are created based on templates, without proper analysis of functions, tax implications, or banking compliance requirements. Structures are especially vulnerable when intellectual property, revenue, and operational risks are concentrated in a single jurisdiction. In this article, we will explore how to establish a legally robust and efficient corporate group, from selecting the appropriate holding model to allocating business functions across jurisdictions.

Basic models of international structures

An effective structure for an international group of companies is built around key roles: a holding company, operating companies, IP holding entities, and special-purpose vehicles (SPVs) for specific tasks. Improper allocation of these roles leads to tax risks, difficulties with fund transfers, and loss of control over core assets.

Parent company and subsidiaries

This is a classic model in which the parent company owns a controlling interest (usually >50%) in its subsidiaries and makes strategic decisions. Advantages: centralized governance, control, and simplified reporting (in the EU, through consolidation). Disadvantages: if the parent company becomes the subject of litigation or tax claims, the entire group may be affected. In practice, parent companies are often incorporated in jurisdictions with light-touch regulation and double taxation treaties, such as the Netherlands, Luxembourg, or Cyprus.

Holding structures

In a holding model, a separate holding company owns key assets: equity stakes in other companies, IP rights, and other forms of intellectual property. Common jurisdictions: Cyprus, Malta, Luxembourg, Switzerland. Advantages: asset protection, lower taxation on dividends and capital gains. Important: the presence of substance — such as a real office, staff, and actual operations — is crucial. Without it, tax authorities may classify the holding as artificial.

SPV (Special Purpose Vehicle)

An SPV is a dedicated entity created for a specific purpose: issuing bonds, holding real estate, or financing a venture. Common jurisdictions: UAE (ADGM, DIFC), United Kingdom, Ireland, Luxembourg. Advantages: risk isolation, separate balance sheet, investor protection. Risks: banks and tax authorities increasingly scrutinize the substance and actual function of SPVs.

Permanent Establishment (PE) and taxation risks

One of the key mistakes in building an international group is ignoring the concept of Permanent Establishment (PE). Even when companies are present in different countries, tax authorities may determine that income is actually generated in the customer’s jurisdiction, and tax it accordingly.

According to the OECD Model Convention and bilateral double tax treaties, PE arises if a company has a “permanent activity” in another country, even without registering a legal entity. This may include an office or branch, employees or representatives acting on behalf of the company, regular negotiations or contract signing. If PE is established, the company must pay corporate tax in that country, plus possible penalties and back taxes for previous years.

Typical situations that lead to PE:

• Employees on the client’s territory, even if formally employed in another jurisdiction.
• Managers or agents who conduct negotiations and sign contracts.
• Regular service provision, especially on-site.
• Lack of proper separation of functions between the head office and the subsidiary.

To reduce risks, we recommend limiting the authority of local employees. Contracts and e-mails should clearly state that they are not authorized to enter into agreements. Make sure invoices are issued from the jurisdiction where the activity takes place. Include PE clauses in contracts.

Jurisdictions for core functions: where to register holdings, IP and operations

When building an international corporate structure, it is not enough to simply create formally independent companies - it is essential to allocate functions between them properly. Each function requires a well-justified choice of jurisdiction, taking into account tax rates, double tax treaties, legal stability, and banking infrastructure.

Holding company

Acts as the parent entity and asset management center. It is commonly used to hold shares in other legal entities and receive dividends.

Most suitable jurisdictions:

1. Cyprus: 0% tax on dividends from foreign companies, broad DTT network, flexible corporate law.
2. Netherlands: participation in holding structures with tax benefits (participation exemption), but subject to increased tax authority scrutiny.
3. Switzerland: suitable for groups with high profit margins and stable business, but requires real substance.

Having sufficient substance (office, staff, expenses) is critical to confirming tax residency.

IP holding company

These companies hold rights to trademarks, patents, and software. This enables centralized management of intangible assets and optimizes taxation on royalty income.

Recommended jurisdictions:

1. Ireland: low tax on IP income (6.25% under the Knowledge Development Box).
2. Luxembourg: IP income benefits, though substance requirements tightened since 2021.
3. Cyprus: preferential IP box regime — effective tax rate around 2.5%.

Operating company

Responsible for core business activities: development, production, service provision, and customer support. These companies bear the main risks, personnel, and expenses. Therefore, jurisdictional choice must consider not only tax but also labor laws, operating costs, and the expectations of counterparties.

Recommended jurisdictions:

1. Estonia: 0% tax on retained earnings, streamlined digital infrastructure.
2. Czech Republic: low administrative costs, favorable for IT and service businesses.
3. Poland: convenient for outsourcing teams, especially in IT and e-commerce.

Invoicing company

These entities are used to issue invoices and consolidate revenues. The key is ensuring substance — otherwise, tax authorities may treat it as an artificial arrangement.

Recommended jurisdictions:

1. Malta: opportunity to optimize corporate tax via shareholder refunds (effective tax ~5%).
2. Singapore: strong banking reputation, strategic hub for Asia.
3. UAE (Dubai IFZA, ADGM): 0% tax, residency options, but real office presence is required.

Intragroup taxation: dividends, royalties, services

Intra-group payments between companies registered in different jurisdictions carry significant tax risks. In addition to standard corporate income tax, international groups often face withholding taxes on dividends, royalties, and service fees. Improper structuring of these flows can lead to withholding at source, double taxation, and even the creation of a permanent establishment (PE), which may trigger tax liabilities in the recipient country.

Dividends

Dividends are the most common method of profit distribution within a corporate group. However, if the requirements of Double Taxation Avoidance Agreements (DTAAs) are not met, the withholding tax rate at source may reach up to 30%. Tax authorities are especially cautious with distributions made by passive-income companies, which may be subject to Controlled Foreign Company (CFC) rules.

To reduce tax exposure, groups typically choose jurisdictions with a strong DTA network and apply participation exemption regimes, which provide tax relief for dividends received from companies in which a significant shareholding (usually 10% or more) is held.

Example: when paying dividends from Poland to Cyprus, the withholding tax can be reduced from 19% to 0%, provided the treaty conditions are met and economic presence in Cyprus is substantiated.

Royalties and service payments

Royalty and service payments are less transparent in the eyes of tax authorities and thus more susceptible to requalification. For example, royalty payments can be classified as disguised dividends, and service payments may be deemed fictitious if not properly documented.

Common risks include:

• Withholding tax on royalties (e.g., up to 15% in Germany);
• Taxation of services in the recipient country if a permanent establishment is deemed to exist;
• Transfer pricing challenges, especially where service fees between related entities are undervalued.

According to the Tax Justice Network, approximately 18% of cross-border royalty payments are used for tax evasion. To mitigate these risks, international groups typically execute clear licensing and service agreements that include justification of pricing (in line with the OECD Transfer Pricing Guidelines), a defined scope and timeframe of services, and supporting documentation (e.g., delivery reports, correspondence, logs, and signed acceptance documents).

Legal documentation and internal control

Well-drafted documents and clearly defined procedures within an international group are the foundation of legal stability and operational resilience. Errors or a purely formal approach can lead to tax reassessments, blocked bank accounts, or the invalidation of intra-group agreements.

All transactions between group companies must be supported by legally valid contracts, such as:

1. Loan agreement – when one entity provides financing to another.
2. Service agreement – for IT, marketing, consulting, and similar services.
3. License agreement – when transferring IP rights.
4. Subcontracting agreement – between a contractor and a technical team.
5. Commission or agency agreement – when one company acts on behalf of another.

Important! Contracts must comply with local legislation, be signed by authorized representatives, and reflect commercially reasonable terms.

Transfer Pricing Documentation (TPD)

Most jurisdictions require documentation of intra-group pricing. Without proper TPD, tax authorities may impose penalties, reassess taxes, or reclassify transactions. Typical TPD includes:

1. A description of the group and the roles of its members.
2. Financial performance of the parties involved.
3. The chosen transfer pricing methodology.
4. A list of all controlled transactions.

Internal compliance and controls

The legal robustness of a structure depends not only on external contracts but also on internal corporate governance and control mechanisms:

• A documented intra-group interaction policy.
• Regular updates to corporate governance documents.
• Appointment of responsible officers for contracts and banking operations.
• A centralized registry of intra-group agreements and payments.

We recommend implementing a document management system (e.g., DocuWare, Contractbook, PandaDoc) with access controls and version tracking to ensure legal clarity and audit-readiness.

How can Key2Law help build international corporate structures without tax and legal risks?

Structuring an international group of companies requires not only a well-thought-out architecture but also a deep understanding of the compliance and tax implications in different jurisdictions. The Key2Law team specializes in supporting cross-border structures: from concept to full implementation.

We offer:

1. Compliance and tax audit of your structure. We will review your existing agreements, shareholder composition, and assess risks related to permanent establishment (PE) and inefficient transactions.
2. Drafting of holding agreements and IP licenses. We prepare corporate documentation, allocate roles between entities, and formalize license and intra-group agreements.
3. Support with incorporation in the right jurisdictions. We help you choose a country with an optimal tax regime, ensure substance, register the company, and open a bank account.
4. Tax planning and compliance support. We assist in avoiding double taxation, optimizing the distribution of dividends, royalties, and transfer pricing policies.
5. Negotiations with banks and KYC/AML assistance. We prepare full corporate dossiers, respond to compliance requests, and ensure transparency and reliability for financial institutions.

If you are building a multinational business and want to avoid risks of account blocks, tax liabilities, and shareholder disputes, trust the structuring to Key2Law professionals.