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Does cascade of ownership indicate ownership?

Person A owns 100% shares of a business entity B. Business entity B owns a business entity C. Business entity C owns a house D.

Two questions please:

  1. Does the person A own house D, in legal terms?

  2. Can the person A live in the house D without a rental contract from the business entity C?

Thank you.

3 Answers 3

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Likely not, unless A finds a jurisdiction with sufficiently lax accounting and taxation standards.

As described in the question, A, B, and C are distinct legal entitites. For each entity, the tax office would want to know what the revenue, expenses, and net income are. By providing a service (use of the house) free of charge between two entites of the shell construct, profits are moved from C to A. This is usually illegal.

The required paperwork might not have to look like a normal rental contract between a tenant and a landlord, since many questions are resolved by the ownership, but it would have to specify payments. The tax office should complain if they differ too much from the going market rate.

Consider that C might be a LLC, and that C might be a civil judgement against C. Someone would look at the assets owned by C, and that includes the house D.

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  • I would understand that the tax purpose would be valid for a person who is not owner of entity B. Then the rent of house D has a monetary value from which tax has to be paid. But in a situation described in the initial post, the person A owns the house D through a cascade of ownerships.. Also, if the person A would directly own the house D, then there is no reason to pay for the rent, because A would be the owner and the renters too..
    – Jankoo
    Feb 8, 2023 at 16:42
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If the business entities are corporations they are entities separate from person A. The management of corporation C may have never heard of A and may have rented to entity XYZ. Person A will need permission from C.

It might be easy to get that permission.

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  • I was thinking about private / public limited company, such a one that all 100% of its shares is owned by a person A.
    – Jankoo
    Feb 8, 2023 at 16:39
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Does the person A own house D, in legal terms?

The legal owner of the house is entity C. But, person A is described for some legal purposes as an "equitable owner" or an "indirect owner" of house D.

For example, in international taxation, indirect ownership can often be considered for purposes of determining if a company is a controlled foreign corporation. Likewise, indirect ownership of entity C is relevant for purposes of federal diversity jurisdiction if entities B and C are LLCs rather than corporations.

Can the person A live in the house D without a rental contract from the business entity C?

Person A does not have a legal right to live in house D without a rental contract or other permission from entity C. But if person A does so anyway, only entity C would have standing to sue person A in most cases for doing so, and person A could exert their indirect control of entity C to cause entity C to decline to bring suit to enforce its rights.

Person A could also use person A's indirect control of the entity C to cause entity C to ratify person A's use of house D after the fact on whatever terms and conditions person A desired (although this might not suffice if done after an alter ego veil piercing claim is asserted to defeat the alter ego claim).

However, if entity C does not enforce its rights and gets nothing in return, it has arguably made a fraudulent transfer of the fair market rental value of house D to person A during the time it was occupied by person A.

In an extreme case, person A's failure to have an agreement or express permission from entity C could even be a ground upon which a creditor could pierce the corporate veil and ignore the existing of the entities B and C argument that person A's disregard for corporate formalities has the effect of making entities B and C the alter egos of person A.

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