Governance in cross-border groups: aligning local directors with parent control

International corporate groups inevitably face the challenge of coordinating governance between the parent entity and local subsidiaries. However, formal hierarchy does not always align with legal reality: a local director is required to act in the best interests of the company they serve, even if it forms part of a larger group. Excessive influence from the parent company may give rise to risks of control recharacterisation, tax consequences, and regulatory scrutiny. Aligning group interests with directors’ fiduciary duties therefore becomes essential for the sustainability of an international structure. In this article, we examine the legal constraints, the risks of excessive control, and the practical mechanisms for building an effective cross-border governance model.

Legal status of a local director in an international group

Within an international corporate group, a local director of a subsidiary is often perceived as an executor of the parent company’s strategy. However, from a legal perspective, the director’s status is considerably more complex. Regardless of the corporate hierarchy, a director is required to act in the best interests of the company to which they are appointed, rather than exclusively in the interests of the group as a whole.

In many jurisdictions, directors’ duties include a fiduciary obligation to act in good faith, with due care, and in the best interests of the company itself. This means that even where strategic instructions are issued by the parent company, a director is not entitled to follow them automatically if they conflict with the interests of the subsidiary or with local law.

Fiduciary duties and local legal framework

A local director is accountable to the company, its shareholders, and, in certain cases, to the regulator. In regulated industries, their responsibilities may additionally include ensuring compliance with licensing conditions, corporate procedures, and applicable compliance standards.

Breach of fiduciary duties may result in civil liability, disqualification, or administrative sanctions. Reliance on “group instructions” does not exempt a director from liability where such instructions contravene the law or cause harm to the company.

Distinction between group interests and subsidiary interests

The interests of the group and those of a particular subsidiary do not always align. For example, profit redistribution, transfer pricing arrangements, or the assumption of intra-group obligations may benefit the holding structure while exposing the local legal entity to financial or regulatory risks.

In such circumstances, the director is required to assess the consequences for the specific company and make decisions based on its legal and financial position. Failure to recognise this distinction may lead a regulator or court to conclude that the director has breached their duties.

Accordingly, a local director within an international group remains an independent subject of responsibility rather than a mere technical executor of the parent company’s instructions. This necessitates the development of a governance model that preserves strategic unity within the group while safeguarding the legal autonomy of its subsidiaries.

Conflict of interest between the group's strategy and the local director's responsibilities

In international corporate groups, strategic decisions are typically made at the level of the parent entity. However, the legal responsibility of a local director remains tied to the specific subsidiary they serve. It is at this point that a potential conflict arises: the group’s corporate strategy may not align with the interests of the individual company in which the director performs their duties.

Particularly sensitive are situations involving intra-group financing, asset redistribution, transfer pricing arrangements, or the assumption of obligations for the benefit of the holding structure. Even where such decisions are economically justified from a group perspective, the director is required to assess their impact on the financial stability and legal position of the subsidiary.

A director is not entitled to automatically follow instructions from the parent company where they:

Contravene local law;
Create a risk of breaching licensing requirements;
Cause harm to the company or its creditors;
May be qualified as an abuse of powers.

Compliance with group directives does not relieve a director of personal liability. In a number of jurisdictions, courts and regulators expressly emphasise that a director must act independently and within the scope of their fiduciary duties, even where their appointment was initiated by the parent company.

Risk of “shadow director” and excessive control by the parent company

In international groups, the parent company inevitably seeks to maintain strategic control over its subsidiaries. However, excessive involvement in day-to-day management may result in the actual exercise of control being characterised as the status of a “shadow director”. In a number of jurisdictions, such qualification carries significant legal and regulatory consequences.

The concept of a “shadow director” applies where a person is not formally appointed as a director of the company but, in practice, issues directions in accordance with which the appointed directors act. If local directors operate solely on the basis of instructions from the parent company without conducting independent assessment and decision-making, a regulator or court may conclude that hidden control is being exercised.

Particular scrutiny arises in regulated sectors and in tax practice. Excessive control by the parent company may lead to:

The risk of recharacterisation of the place of effective management (POEM);
Doubts as to the existence of genuine substance in the subsidiary’s jurisdiction;
Increased supervisory attention from the licensing authority;
Tax claims and a reassessment of corporate residence.

Regulators assess not only formal documentation but also the factual conduct of the parties: where key decisions are made, who initiates strategic actions, where management documentation is prepared and signed, and who ultimately exercises control over financial flows.

Substance and place of good governance: tax and regulatory implications

In recent years, regulators and tax authorities have paid increased attention to the actual place where managerial decisions are taken within international groups. The formal presence of a director in a particular jurisdiction no longer guarantees that the company will be recognised as tax resident in that country. Greater emphasis is now placed on the analysis of substance and the place of effective management (POEM).

Place of effective management and the risk of recharacterisation of tax residence

In a number of jurisdictions, corporate tax residence is determined not only by the place of incorporation but also by the place of effective management. If strategic decisions are made by the parent company in another country, there is a risk that such country may be regarded as the place of effective management.

Tax authorities may consider the following factors:

Where board meetings are held;
Where key managerial decisions are actually made;
Who initiates and approves strategic actions;
Where management documentation is prepared, signed, and stored;
Where the individuals exercising real control are located.

If local directors formally approve decisions that are effectively dictated by the parent company, this may serve as grounds for revisiting the company’s tax residence.

Substance as an element of regulatory sustainability

In regulated sectors, the issue of substance extends beyond tax considerations. Licensing authorities expect that a subsidiary maintains a genuine management presence in its jurisdiction, including autonomous directors and an effective decision-making framework.

The absence of genuine substance may lead to:

Increased supervisory scrutiny;
Requirements to restructure governance arrangements;
Suspension or revocation of licences;
Refusal of banking services.

This issue is particularly sensitive for fintech companies, investment structures, and other licensed entities.

Balancing group control and local autonomy

While the parent company is entitled to define the group’s overall strategy, it is essential to distinguish between strategic planning and operational management. Local directors must have the ability to:

Discuss and assess decisions in light of local legal requirements;
Record their independent position in board minutes;
Initiate additional reviews or seek external advice where necessary.

Documented independence of local management becomes a key element of defence in both tax and regulatory disputes.

Accordingly, governance in an international group directly affects not only corporate risk exposure but also tax residence, licensing stability, and banking compliance. Proper structuring of managerial processes enables the preservation of strategic unity within the group without undermining the legal autonomy of its subsidiaries.

Tools for aligning governance without compromising independence

An effective cross-border governance model requires a careful balance between strategic control exercised by the parent company and the legal autonomy of its subsidiaries. The objective is not to weaken group control, but to structure it in a way that preserves the independence of local directors while ensuring compliance with applicable legal requirements.

Group policies and framework instructions

One of the key instruments is the development of unified group policies that define strategic directions, compliance standards, and risk management principles. Such documents establish a common framework for all group entities without replacing or undermining the authority of local directors.

It is important that group-level instructions remain strategic or recommendatory in nature, leaving the subsidiary with the authority to make final decisions in light of local law and its own best interests. This approach reduces the risk of excessive control being characterised as actual management.

Distinction between “reserved matters” and operational management

International holding practice demonstrates that an effective governance tool is the formal definition of a list of strategic matters requiring approval by the parent company. At the same time, day-to-day operational decisions should remain within the competence of local management.

This approach enables the group to retain influence over key strategic developments while confirming the subsidiary’s autonomy in its daily operations. Regulators and tax authorities, when analysing governance structures, pay particular attention to this distinction.

Documentation of management decisions

Proper documentation of board meetings and other managerial decisions is of particular importance. Minutes should reflect genuine discussion, the independent position of local directors, and a reasoned assessment of risks, rather than the formal approval of pre-determined decisions.

The recording of independent analysis and reasoning becomes an important element of evidence demonstrating management autonomy in the event of a tax audit or regulatory dispute.

Practical solutions for a sustainable cross-border governance model

Building an effective governance model within an international group requires a systematic approach. The objective is not merely the formal allocation of powers, but the creation of a structure that simultaneously ensures strategic unity at the group level and preserves the legal autonomy of subsidiaries.

Clear distinction between strategic and operational control

The parent company may define the overall strategy, investment priorities, and corporate governance standards. However, operational decisions, contract execution, and the management of day-to-day activities should remain within the responsibility of local management.

Formalising this distinction in corporate documentation helps mitigate the risk of control recharacterisation and allegations of hidden management.

Genuine board meetings

Regular board meetings of the subsidiary should reflect actual discussion of matters, risk assessment, and independent decision-making. Minutes should record the directors’ positions and reasoning, rather than merely the outcome of a vote.

Such practice plays a critical role in tax audits and in the assessment of the place of effective management.

Appointment of independent directors

In certain cases, the appointment of an independent or locally based director with real authority strengthens evidence of management autonomy. This is particularly relevant in licensed and high-risk sectors.

The presence of an independent participant within the governance structure may reduce regulatory exposure and enhance trust from banks and supervisory authorities.

Systematic documentation of interaction with the parent company

It is important to document the format of communication with the parent company, the nature of its recommendations, and the extent of its involvement in decision-making. Clear documentation demonstrates that strategic guidance does not substitute the independent will of local management.

How Structum helps build a sustainable management model for an international group

Building an effective cross-border governance model requires a comprehensive analysis of the corporate structure, tax exposure, and regulatory requirements in each jurisdiction where the group operates. Structum team supports international holding structures at the stages of incorporation, restructuring, and preparation for regulatory or tax reviews, helping to design a governance framework that complies with legal requirements and meets supervisory expectations.

Within this area, we provide the following services:

Analysis of the existing governance structure and identification of excessive control risks;
Assessment of “shadow director” exposure and the risk of recharacterisation of the place of effective management;
Development of corporate policies and governance frameworks for international groups;
Structuring of “reserved matters” and allocation of decision-making powers;
Assistance with the appointment and due diligence of local directors;
Preparation of board minutes and corporate documentation in line with substance requirements;
Advisory services on tax residence and management autonomy;
Support in interactions with regulators and tax authorities.

This comprehensive approach ensures a balance between strategic group control and the legal independence of subsidiaries, minimising corporate, tax, and regulatory risks.

If your international structure requires a reassessment of its governance model or preparation for a regulatory or tax review, the Structum team is ready to conduct a legal assessment and develop a practical solution tailored to the requirements of your jurisdiction.