The Holy See is a monarchical-sacerdotal state, which is to say that it operates as a monarchy in which the Pope is the "king" (monarchical), with senior members of the church hierarchy, appointed by the Pope, as the governing body (sacerdotal). The Pope himself is elected from candidates worldwide by 120 members of the College of Cardinals and is the chief of state as well as head of the Church. Appointed to office for life (the Polish cardinal, Karol Wojtila, became Pope John Paul II in 1978 and was still on the throne in 2001), the Pope has supreme executive, legislative, and judicial power over both the State of the Vatican City and the universal Roman Catholic Church. Given the wide scope of the Pontiff's authority, an intricate and complex structure of official agencies has been established to administer power within carefully designed categories. This structure is commonly known as the Roman Curia and its members are appointed and granted authority by the Pope.

The Holy See is recognized under international law and enters into certain international agreements, but, strictly speaking, it is not a civil state operating under civil laws, but an absolute monarchy in control of the Roman Catholic Church, ruling according to the Apostolic Constitution of 1967. It is as the Holy See rather than the State of the Vatican that the country sends and receives diplomatic representatives to and from around the world. The head of government, generally a cardinal or archbishop whose appointment and authority is conferred by the Pope, is the secretary of state. He presides over the Pontifical Commission, or cabinet. The legal system governing church matters is founded in canon, or ecclesiastical, law but judicial matters outside the Church are dealt with by the Italian judiciary in Rome.

There are no political parties in the country, but all cardinals under the age of 80 have the vote in electoral issues within the Church. Internally, the Swiss Guard has been responsible for the personal safety of the Pope since 1506, but in reality, its function is ceremonial and policing of the state is left to the Civil Guard. There is no military arm, and Italy takes responsibility for defense.

There are no taxes, no restrictions on the import or export of funds, and no customs or excise duties payable in the Vatican City. Employees of the Vatican pay no income tax and no customs duty on gasoline or goods that they buy in the Vatican. Non-Italians enjoy allowances on their monthly salaries.

The Holy See is a member of numerous international organizations and institutions, such as the International Telecommunications Satellite Organization (Intelsat), the Organization for Security and Co-operation in Europe (OSCE), and the United Nations High Commission for Refugees (UNHCR), although its status is sometimes that of an observer only. The Holy See is especially active within the framework of the United Nations (UN) and has permanent observer status at the UN's New York headquarters and Geneva offices. This also includes specialized UN branches such as the Food and Agriculture Organization in Rome, and the Educational, Scientific, and Cultural Organization in Paris. The Holy See has a member delegate attached to the International Atomic Energy Agency and the UN Industrial Development Organization in Vienna, and engages in diplomatic relations with the European Union (EU) in Brussels.