Using Holding Structures and What to Watch Out For

Holding as a Tool for Growth and Asset Protection. And What to Watch Out For to Avoid Problems

Creating a holding structure is now a standard tool not only for large corporations but also for family businesses, tech start-ups, or professionally managed medium-sized companies. A properly designed and used holding represents a functional system for asset protection, efficient management, tax planning, and preparation for future growth, investors, or generational succession. However, careful structuring at the very beginning is not the end of the process. Equally important is proper maintenance and utilizing its full potential in the following years. Below you will find a practical overview of the benefits of using a holding structure, how it is applied in practice, and what to watch out for. Most importantly, what is worth setting up so that the structure works effectively in the long term.

Why Companies Consider a Holding

A holding structure is most often a response to these needs:

• Asset protection and risk separation
  Real estate, trademarks, or key assets should not be held in the same company that operates the business and bears commercial risks.
• Group management and stability
  When there are multiple companies, projects, and partners, the need for clear rules grows. Who makes decisions? How are investments approved? What happens if a key person faces an unexpected event?
• Efficient handling of finances
  Holding is often used to manage cash flow, finance projects, and work with profits within the group.
• Preparation for investors, sale of part of the company, or generational succession
  When activities are split into separate companies, it is easier to sell a specific project or set up the shareholding for family members and investors.

These are typical practical reasons. The key, however, is that they are real and verifiable. Tax authorities and courts emphasize that a holding must have economic justification. Formal declarations alone are not sufficient.

How a Holding Works in Practice and Where the Challenges Usually Arise

A holding usually does not start showing effects only at its establishment. It begins to manifest in day-to-day operations—contracts, invoicing, financing, and guarantees. This is where risks arise that often appear only over time.

1) Intra-group Services, Rentals, and Licenses: "It Works, But Are We Doing It Correctly?"

Common activities within a group include:

• rental of real estate and assets,
• licensing of trademarks or know-how,
• management, administrative, or IT services.

Is it set up as if they were independent companies? The law requires that prices between related parties follow the arm’s length principle. If not, the tax authority can adjust the tax base and impose additional tax.

Most common problems:

• missing or outdated contracts,
• prices “estimated” without documentation,
• services that are invoiced but whose scope and benefit are hard to prove,
• documentation that does not reflect reality.

2) Intra-group Financing: "We Lend Within the Group. What About Interest and Taxes?"

Holding is often used to finance subsidiaries: loans, credits, borrowings. Money is moved where it is needed.

The risks here are twofold:

• interest and transfer pricing rules (not everything is treated the same depending on the direction of financing),
• thin capitalization test – even correctly set interest may be non-deductible if the company is “over-leveraged” with debt toward the group above legal limits.

Commonly overlooked in practice:

• no rules on when to finance with debt versus equity,
• loans accumulate and no one monitors debt ratios,
• contracts are brief and lack standard terms.

3) Guarantees and Debt Interconnection: "The Holding Should Protect, But Can Spread Risk."

Holding is often established for protection. But the protective effect weakens if:

• companies lend heavily to each other,
• the parent company or “healthy” companies guarantee risky projects,
• bank financing creates cross-collateralization.

Typical risky situation: when one part of the group fails, obligations are transferred to other companies that together form a business group. This creates a domino effect. Even companies that would otherwise have no problem are affected.

Holding is a Powerful Tool, But It Pays to Plan Ahead:

What are the real goals of the structure and how will they be fulfilled in practice? How will intra-group contracts and money flows look? Who will monitor transfer pricing, documentation, and financing rules? How to prevent asset protection from being “diluted” through guarantees and debts?

If you want to discuss whether a holding structure makes sense for you, how to ideally set it up, or whether your existing holding is working as it should, get in touch.