Trusts, Holding Structures, and Special Purpose Vehicles (SPVs): Designing Layered Governance for Complex Family Business Structures

Introduction

Modern family businesses in India are now using structured setups like family trusts, holding companies, and Special Purpose Vehicles (“SPVs”) to manage ownership, control, and succession within their complex family. As these businesses grow over time and across different sectors, family relationships, ownership rights, and business operations often start overlapping, which can lead to confusion and conflicts. A properly designed layered structure helps separate these roles clearly, while also ensuring smooth continuity, better accountability, and long-term protection of family wealth which can be easily passed from generation to generation.

Earlier, most family businesses in India were run through closely held companies where ownership remained within the head of the family and decisions were taken informally. However, with increasing regulations, global expansion, and involvement of many generations, such informal systems are no longer sufficient and often lead to confusion and governance issues. Because of this, many family businesses are now moving towards more structured models that use a mix of trusts, companies, and investment entities to manage ownership and operations more effectively. These structures are not only adopted for better business management but are also influenced by legal and regulatory requirements.

I. The Need for Layered Governance Structures

When family businesses start growing, mostly three important areas start overlapping. These three areas are family relationships, ownership of the business, and day-to-day operations. When these are not clearly separated, it can lead to conflicts, confusion in decision making, and overall governance issues within the business. To avoid this, many businesses adopt layered structures where ownership and management are kept separate, and risks from different business activities are also isolated. At the same time, increasing legal and regulatory requirements around disclosures, taxation, and anti-money laundering have made it important for businesses to follow more formal and structured systems. Laws such as the Prevention of Money Laundering Act, 2002 and the Companies (Significant Beneficial Owners) Rules, 2018, require transparency in ownership and control, which further makes structured governance necessary for better management of business and family.

II. Family Trusts as the Apex Ownership Layer

At the top of a family business structure, family trusts are commonly used to hold and manage family wealth in an organised way. They help ensure that ownership stays within the family and is passed on smoothly from one generation to the next, without unnecessary complications. In India, trusts are governed by the Indian Trusts Act, 1882, which lays down the legal rules for how trusts are created and managed. Under Section 3, a trust basically means a relationship where one person “the trustee” holds property for the benefit of others “the beneficiaries”. The law also clearly sets out the responsibilities of trustees under Sections 11 to 20 of the Indian Trusts Act, 1882, such as acting honestly, protecting the trust property, and making decisions carefully. Additionally, Section 88 ensures that if a trustee gains any personal benefit while managing the trust, it must be passed on to the beneficiaries. For family businesses, trusts are very useful because they prevent ownership from getting divided among too many family members, which can otherwise weaken the control of the business. They also make succession easier, avoid lengthy probate processes, and help maintain stability in the business even during disputes or generational changes.

III. Holding Companies as the Strategic Control Layer

Below the trust level, holding companies act as the main control point for the entire business structure[1]. They help in managing different companies under one group by bringing ownership and decision making into one place. In India, the relationship between a holding company and its subsidiaries is governed by the Companies Act, 2013. Under Section 2(46), a holding company is defined as a company that has control over another company, while Section 2(87) explains what a subsidiary company is[2]. Holding companies make it easier to take important strategic decisions at one level, while still allowing each subsidiary to run its day-to-day operations independently. At the same time, directors of these companies are required to follow certain duties under Section 166 of the Companies Act, 2013, which means they must act honestly, carefully, and in the best interest of the company, while avoiding conflicts of interest. In addition to this, the law also strengthens governance and transparency through provisions such as Section 129 of the Companies Act, 2013, which deals with financial statements, Section 134 on Board’s report, and Section 177 on Audit Committee.

IV. SPVs as the Operational and Risk Segregation Layer

At the operational level, SPVs are usually set up as private limited companies to carry out specific projects, investments, or joint ventures. These entities are useful because they help keep risks limited to a particular project, so that any losses or liabilities do not affect the entire business group.[3] This is why SPVs are widely used in sectors like real estate, infrastructure, and private equity investments. This concept is legally supported by the principle of limited liability, which means that shareholders are only responsible for the amount they have invested in the company[4].

This concept is also supported by the principle of separate legal entity, established in the case of Salomon v. A Salomon & Co. Ltd[5]. According to this principle, a company is treated as a separate legal person, distinct from its owners or directors. Because of this, liabilities of the company do not automatically become liable for the fault of its shareholders.

When SPVs are used for foreign investments or cross border transactions, additional compliance requirements come into picture as there is an involvement of foreign entity. In such cases, the SPV must follow the provisions of the Foreign Exchange Management Act, 1999 along with the FEMA (Non-Debt Instruments) Rules, 2019. These laws regulate how foreign and overseas investment can be made, how funds can move in and out of India, and ensure that all such transactions are properly monitored by regulatory authorities.

V.  Entity Rationalisation and Structural Efficiency

In layered business structures, especially those owned by family groups, it is common for multiple companies to be created over time for different purposes such as investments, tax planning, or operations. However, as the structure grows, it can become overly complex, with many inactive or unnecessary entities. This is where entity rationalisation becomes important, it simply means simplifying the group structure by removing redundant entities and consolidating ownership to make the structure more efficient[6]. If not managed properly, having too many entities can lead to higher compliance costs, duplication of work, and lack of transparency. It may also make decision-making slower and more complicated. Therefore, businesses often restructure their group entities to make operations smoother and governance more effective.

The Companies Act, 2013 permits such restructuring under Sections 230–232 (compromises, arrangements, mergers, and amalgamations), subject to NCLT approval. Entity rationalisation improves transparency, reduces compliance burden, and strengthens group governance.[7]

VI. Beneficial Ownership and Regulatory Transparency

In complex, multi-layered structures, it can sometimes be difficult to identify who actually owns or controls the business. This lack of clarity can create risks, including misuse of corporate structures for unlawful purposes. To address this, Indian law requires companies to disclose their ultimate beneficial owners. Individuals who ultimately hold or control a company (even indirectly) must declare their ownership.[8] This ensures that the real persons behind the company are identified and recorded. Failure to comply with these disclosure requirements can result in penalties and increased scrutiny from regulators. In addition, the Prevention of Money Laundering Act, 2002 requires businesses and financial institutions to identify and verify beneficial owners, particularly in complex structures.

VII. Taxation Considerations in Layered Structures

Under the Income Tax Act, 2025, which replaced the 1961 Act with effect from 1 April 2026, the taxation of trust and holding structures follows a coherent framework.

1. Trustee and Representative Assessee Taxation: Under Sections 303 to 309 of the ITA 2025, the successor provisions to the old Sections 160 to 166, trustees are treated as representative assessees, assessed on behalf of beneficiaries in respect of trust income. Where beneficiaries have determinate and identifiable shares, income is taxed at applicable slab rates. Discretionary trusts generally attract the maximum marginal rate, making the structure of beneficiary entitlements a meaningful design decision.

   
   

2. Clubbing of Income: Section 99 of the ITA 2025, which carries forward the substance of old Section 64, governs situations where income from assets transferred within a family structure is attributed back to the transferor. In layered structures involving family members across multiple entities, this provision requires careful navigation. The allocation of income-generating assets and the terms on which they are transferred need to be structured so that clubbing provisions do not undermine the intended tax efficiency of the arrangement.

   
   

3. Capital Gains on Internal Restructuring: Section 67 of the ITA 2025 — the successor to Section 45, governs capital gains arising on the transfer of assets, including shares within a group. Internal restructuring, consolidation of entities, or transfers of shareholding between layers of the structure can trigger capital gains liability if not structured carefully. Section 70(iii) of the ITA 2025 provides that transfers under gift, will, or irrevocable trust by an individual or HUF are not treated as transfers for capital gains purposes, a provision of significant relevance when moving assets into trust structures.

   
   

4. Income from Other Sources: Section 92 of the ITA 2025, the successor to Section 56, covers receipts that do not fall neatly within the other heads of income, including certain transfers of property at undervalue between group entities. Where transactions between related entities within a layered structure do not reflect arm's length consideration, this provision can apply.

VIII. The Soft Architecture: What the Documents Cannot Provide Alone

The legal structure is the skeleton. But the governance of a family business group also requires the muscle: clearly defined roles for trustees, directors, and senior management, grounded in documented accountability frameworks. Section 184 of the Companies Act, 2013 requires directors to disclose interests in any transaction. Section 188 regulates related party transactions, a particularly important provision in family business groups where the boundaries between personal and corporate interests can easily blur. Directors who discharge these obligations conscientiously provide the board-level governance that external parties, auditors, regulators, and lenders rely upon.

Alongside these statutory obligations, the most durable family business structures also invest in private governance instruments: family constitutions that articulate values and decision-making principles across generations; shareholders' agreements that define rights and obligations at the ownership level; and board charters that clarify the mandate of each governance body within the group.

Way Forward

The increasing use of trusts, holding companies, and SPVs shows that Indian family businesses are becoming more structured and sophisticated. A well-planned layered governance system helps in smooth succession, protection of assets, and better management of the business. Going forward, businesses should focus on aligning their legal structures with strong governance practices, ensuring compliance with changing regulations, and maintaining enough flexibility to adapt to future needs. When implemented properly, such structures can help preserve family wealth and ensure long term continuity of the business across generations.

[1] OECD, G20/OECD Principles of Corporate Governance (2023) available at https://www.oecd.org/content/dam/oecd/en/publications/reports/2023/09/g20-oecd-principles-of-corporate-governance-2023_60836fcb/ed750b30-en.pdf

[2] Section 2 (46) and 2 (87) of the Companies Act, 2013

[3] Forbes Business Council, How Trusts, SPVs and Cross-Border Banking Are Evolving for Family Offices (2026), https://www.forbes.com/councils/forbesbusinesscouncil/2026/01/23/how-trusts-spvs-and-cross-border-banking-are-evolving-for-family-offices/

[4] Section 2 (21), Section 2 (22), Section 3, Section 4, Section 10 and Section 38 of the Companies Act, 2013

[5] Salomon v. A. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.).

[6] Samuel Lalthanliana, GST 2.0: Assessing Structural Reforms and Their Impact on Businesses in India, 1 Scriptora Int’l J. Res. & Innovation (SIJRI) 52 (Oct. 2025).

[7] Section 90 of the Companies Act, 2013

[8] Section 90 of the Companies Act, 2013, read with the Companies (Significant Beneficial Owners) Rules, 2018

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

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AK & Partners

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