Since the mid-2010s, tax authorities have seriously targeted companies that exist only on paper. The target: structures registered in convenient jurisdictions but conducting no real activity there, merely channeling money through.
OECD and the BEPS action plan
The BEPS (Base Erosion and Profit Shifting) action plan was endorsed by the G20 in 2015 and includes 15 actions. Three directly concern SPVs and shell companies. By January 2026, 148 jurisdictions had joined the Inclusive Framework and committed to implementing the minimum standards.
Action 5: substantial activity
Jurisdictions with zero or nominal tax must require registered companies to conduct real economic activity proportionate to income. The OECD runs those reviews through the Forum on Harmful Tax Practices, which reports 332 regimes assessed, with over 40% of them abolished or in the process of being abolished (OECD Secretary-General Tax Report to the G20, October 2025).
The standard defines the categories of mobile activity: headquarters, distribution, service centers, financing, leasing, fund management, banking, insurance, shipping, holding, IP. Each category requires qualified employees and expenses commensurate with income. For IP regimes, the "nexus approach" applies: relief is proportionate to the share of R&D expenses incurred in the jurisdiction itself.
Action 6: principal purpose test
Principal Purpose Test (PPT) is a minimum standard for all tax treaties. If one of the principal purposes of a transaction or structure is to obtain treaty benefits, and this contradicts the treaty's objectives, the benefit is denied. PPT is included in the Multilateral Convention (MLI), signed by more than 100 jurisdictions. The US uses an alternative mechanism — Limitation on Benefits (LOB): objective criteria (public status, active business, connection with residents) instead of subjective assessment of purpose.
Action 13: country-by-country reporting
Groups with revenue exceeding €750 million must file Country-by-Country Reports: for each jurisdiction, revenue, profit before tax, tax paid, capital, employees, and assets are disclosed. For SPVs without people and assets but with substantial income, such reporting creates an obvious imbalance — and attracts the attention of tax authorities in all group jurisdictions.
The three actions work together: Action 5 sets the presence standard, Action 6 allows denial of benefits absent business purpose, Action 13 ensures transparency. An SPV failing all these filters faces risk simultaneously in all group jurisdictions.
European Union: ATAD, Unshell, DAC6
ATAD I: five measures
Directive 2016/1164 (ATAD I) contains five mandatory measures. Interest deduction limitation — net interest expenses are deductible up to 30% of EBITDA (safe harbor €3 million). Exit taxation — unrealized gains are taxed when assets are transferred to another jurisdiction. General Anti-Abuse Rule (GAAR) — tax authorities may disregard "non-genuine arrangements" whose principal purpose is a tax advantage.
CFC rules — income of a low-tax subsidiary is included in the parent's base. ATAD offers two options: Option A attributes the listed categories of passive income unless the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises; Option B attributes only income from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. Hybrid mismatch rules — situations where differences in classification between jurisdictions lead to double deduction or deduction without inclusion are corrected.
ATAD II: third countries
Directive 2017/952 extends hybrid rules to situations involving countries outside the EU and introduces rules on "reverse hybrids" — structures transparent in one jurisdiction and opaque in another. For SPVs outside the EU but under EU control, the hybrid nature of the structure no longer provides tax advantage.
The Code of Conduct Group: substance laws in the offshore centres
The greatest adverse impact on the classic offshore model came from the Council's Code of Conduct Group (Business Taxation). Under its pressure, and in implementation of BEPS Action 5, seven territories — the BVI, the Cayman Islands, Bermuda, the Bahamas, Jersey, Guernsey and the Isle of Man — passed economic substance laws in 2018–2019 and brought them into force simultaneously on 1 January 2019. A company carrying on a “relevant activity” (holding, financing, leasing, insurance, fund management, IP, distribution, headquarters, shipping) must demonstrate core income-generating activities in the jurisdiction: premises, qualified staff, local expenditure and key decisions taken on the ground. An empty shell with a nominee director fails the test and draws information exchange with the beneficial owner's residence country plus penalties. Substance turned from an abstract requirement into annual reporting with concrete metrics.
Administration of that reporting is tightening. An industry advisory of the Cayman Islands Department for International Tax Cooperation dated 17 June 2026 states that from reporting year ESN 2025 the department will no longer send responsible persons courtesy email reminders ahead of the economic substance filing deadline: reminders remain only as a banner on the portal, and responsibility for meeting the deadlines rests entirely with the entity. The reasoning is put plainly — the Act has been in force since 1 January 2019 and the deadlines and requirements are taken to be familiar by now. Meeting the filing calendar now depends on the entity's own compliance process.
Unshell (ATAD III): announced withdrawal of the proposal and its gateway criteria
The European Commission tabled the Unshell proposal on 22 December 2021 to target shell companies, but member states never agreed a single EU substance regime. On 20 June 2025 ECOFIN confirmed that analysis of the proposal would not continue — the Council found that Unshell's indicators overlapped the DAC6 hallmarks — and the Commission put the withdrawal into its work programme for 2026 (COM(2025) 870 final of 21 October 2025, Annex IV "Withdrawals", number 4, with an intention to withdraw within six months). The proposal has not become a separate EU shell-company directive; part of its logic is expected to migrate into the planned DAC6 reform. The official procedure file records “Awaiting final decision”; the work programme alone is not evidence of a completed formal withdrawal. (OEIL).
That reform stopped being "planned" on 24 June 2026, when the Commission adopted the proposal for a recast of the Directive on Administrative Cooperation — COM(2026) 308 final. On the DAC6 side it deletes the generic category A hallmarks in full, ties hallmark C1 to the work of the Council's Code of Conduct Group instead of the OECD list, and leaves hallmark D2 in place — an opaque chain of ownership through persons and arrangements that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises. The text of the hallmark stays as it is; what changes is who fills it with content: Article 52 of the proposal requires the Council, acting on a Commission proposal, to adopt within five years of the directive's entry into force an implementing act setting the criteria for points (a) and (b) of that hallmark. The explanatory memorandum puts it directly — "the substance critera in Hallmark D2 should be further developed in a Council implementing act" — and recital 105 explains why the power goes to the Council rather than the Commission: the criteria bear on Member States' executive and enforcement powers and on their tax bases. The Unshell gateway criteria are not copied across — what is created is the power to write the criteria afresh.
The proposal provides for two stages. The annex carrying hallmark D2 sits in the first: transposition by [31 December 2027], application from [1 January 2028]. Article 52 sits in the second: [31 December 2029] and [1 January 2030]. The dates appear in the proposal in square brackets, meaning they are not agreed, and the proposal itself is tabled under Article 115 of the Treaty on the Functioning of the European Union and requires unanimity in the Council. No obligation follows from it today, and the substance criteria will not acquire normative content before the early 2030s. Both proposals in the package are covered in the EU tax omnibus and the DAC recast; what the evidence consists of and how it is read is in the economic presence file.
What survives is the gateway test itself, still a workable frame for assessing substance. It caught a structure where, simultaneously: more than 75% of income is passive (dividends, interest, royalties, rent); the assets or the income have a cross-border character; and administration and decision-making over the key functions are outsourced to external contractors.
The minimum set the proposal would have required still works as a benchmark: own premises (not shared with a hundred others), a bank account in the jurisdiction, at least one director who is a tax resident, actually makes decisions, and does not sit on ten unrelated companies.
The consequences debated in the draft — refusal of a tax residency certificate, information exchange, denial of benefits under EU directives and treaties — never entered EU law. The outcome arrives anyway: without a residency certificate reduced treaty rates cannot be applied, and the same facts are tested through GAAR, beneficial ownership, CFC and treaty anti-abuse rules.
DAC6: mandatory disclosure
Directive DAC6 (2018/822) requires intermediaries — lawyers, tax advisors, banks — to disclose to tax authorities cross-border arrangements with certain hallmarks. For SPVs, relevant are: hallmark B (acquisition of loss-making company for tax attributes), hallmark C (circular flows of funds, payments to zero-tax jurisdiction, payments to recipient from EU blacklist), hallmark D (transfer pricing), hallmark E (opaque ownership structures). Information is automatically shared among tax authorities of all EU countries.
ATAD allows denial of benefits, DAC6 ensures automatic disclosure of arrangements, and the unadopted Unshell proposal supplies a usable checklist of minimum presence indicators. What matters is whether the company can explain where its people, decisions, risk, assets and commercial purpose sit. (OEIL).
What happens instead of a directive
There is no directive, and the scrutiny is measured. An internal survey by KPMG's EU Tax Centre, run in August 2025 among firms in its network, found that 57% of the jurisdictions covered report increased attention from tax authorities to substance and beneficial ownership; a further group of around 10% had not yet seen it but expected it to come. The source is a survey of advisers measuring perceived practice, not assessment statistics from tax administrations.
The value of such a reading is in the list of factors the respondents observe being assessed: the management of the company, that is whether the key decision-making powers are exercised in the jurisdiction of registration; where the accounting is kept; the cost and expense structure, that is whether spend is proportionate to the scale of operations; headcount; and owned premises and equipment. None of the five was invented by the administrations: each is already written into hallmark D2, into the offshore substance laws, or into the place-of-effective-management test in tax treaties. What is missing is a threshold value for each of those criteria — which is why a dispute turns on the file rather than on formal compliance with a checklist.
What constitutes real presence
Despite differences in wording, the essence is the same: the company must demonstrate that key decisions generating income are made in the jurisdiction of incorporation by people with appropriate qualifications.
Directors. At least one tax resident of the SPV's jurisdiction, actually managing operations. A nominal signatory does not meet the requirement. The board of directors meets locally, with agenda, minutes, and proof of physical presence — at least quarterly.
Employees. Qualified people or dedicated contractors performing Core Income Generating Activities (CIGA). For a holding SPV — investment decisions, portfolio management. For a finance company — risk assessment, financing terms, credit portfolio.
Office. Physical premises — not a virtual address or a registered agent's room shared by a hundred companies. Bank account in the jurisdiction with real transactions. Operating expenses commensurate with scale: rent, salaries, lawyers, accounting, insurance.
The date on which the structure is assessed
The assessment is tied neither to the moment the structure was set up nor to the moment of payment. In C-228/24 (Nordcurrent group, 3 April 2025) the CJEU held that the circumstances of creation cannot be ignored, yet the tax authority may not confine itself to them, nor rely solely on the state of affairs at the payment date: an arrangement initially put into place for valid commercial reasons reflecting economic reality has to be regarded as not genuine from the point at which it was maintained despite a change in circumstances.
The anti-abuse rule itself is not confined to conduit arrangements — a subsidiary carrying on functions of its own falls within the test too. The second condition runs the other way: a non-genuine classification alone is not enough for a refusal, a separate finding is required that the principal purpose was to obtain a tax advantage contrary to the object of the Directive.
Hence the requirement of regularity: a substance file assembled once at inception protects less than a dated annual review with a decision of the governing body, which shows the structure was monitored and brought into line.
The Opinion of Advocate General Kokott of 21 May 2026 in C-203/25 redistributes the weight of individual markers. Mirroring of amounts and close temporal proximity between receipt and redistribution of dividends are, on their own, neither a sufficient nor a necessary condition for finding a non-genuine arrangement; such facts survive as an indicator, but decisive weight they do not carry. Relief may be refused even where the beneficial owner is confirmed and carries on real activity, if the dividend travels onward through an artificial arrangement and there is a direct link between the abusive part of it and the benefit under EU law. This is an Advocate General's Opinion, the Court is not bound by it and has not yet ruled.
Red flags
Board meetings held outside the jurisdiction of incorporation — especially when decisions are actually made in the parent company's country. Nominee directors or those sitting on dozens of unrelated companies. No own employees, everything outsourced without a dedicated team. Virtual office or agent's address.
Circular money flows: received from parent and moved onward in the same amount without economic transformation. Income disproportionate to presence — millions in income with tens of thousands in expenses. The only justification for the structure's existence is tax, giving grounds for GAAR. Meeting minutes signed retroactively or containing template text without specifics.
Ten tests, one question
Substance is assessed under ten different instruments, each with its own trigger, its own standard of proof and its own consequences of non-compliance. A structure almost never faces only one of them: the same file answers the offshore filing, the treaty claim and the CFC exemption at once.
| Test and who applies it | Legal basis | What brings it into play | What has to be shown | Cost of failing |
|---|---|---|---|---|
| Offshore economic substance filing — the local registry or tax department | The 2018–2019 substance statutes of the BVI, Cayman, Bermuda, the Bahamas, Jersey, Guernsey and the Isle of Man, under BEPS Action 5 | Carrying on a listed relevant activity in the territory | CIGA in the territory, direction and management there, adequate people, premises and expenditure | Escalating penalties, exchange of information with the parent and beneficial-owner jurisdictions, ultimately strike-off |
| General anti-abuse rule — an EU member state's tax authority | ATAD Article 6 | An arrangement whose main purpose is a tax advantage and which is not genuine | Valid commercial reasons reflecting economic reality | The arrangement is disregarded and the advantage withdrawn |
| CFC attribution — the parent's residence state | ATAD Articles 7–8 and national implementations, Option A or Option B | Control over a low-taxed subsidiary with passive income | Under Option A, substantive economic activity supported by staff, equipment, assets and premises; under Option B, that the arrangement is genuine | The subsidiary's income is taxed in the parent's hands |
| Treaty anti-abuse — the source state | The principal purpose test of the MLI; the US alternative is a limitation-on-benefits article | A claim to a reduced treaty rate | That obtaining the benefit was not one of the principal purposes, or that objective LOB criteria are met | The reduced rate is refused and the domestic rate applies |
| Beneficial ownership — the paying state | The EU directives as read by the CJEU, from the Danish cases to Nordcurrent C-228/24 | Dividends, interest or royalties passing onward through the recipient | That the recipient decides on the use of the income, bears the risk and is not a conduit — and that the arrangement stayed genuine as circumstances changed | Exemption or relief at source is refused |
| Arrangement reporting — intermediaries, to every EU tax authority | Hallmark D2 of DAC6, retained in the recast proposal COM(2026) 308 final, with its criteria left to a Council implementing act | An opaque ownership chain through persons that carry on no substantive economic activity | Nothing is proved at this stage — the arrangement is disclosed and read later | Disclosure to all member states, and the file becomes the starting point of any later audit |
| Economic substance doctrine — the IRS | IRC §7701(o), for transactions entered into after 30 March 2010 | A transaction whose tax result is disproportionate to its economics | A meaningful change in economic position and a substantial non-tax business purpose | 20% of the underpayment, or 40% where the transaction was not disclosed on the return |
| GAAR and unassessed transfer-pricing profits — HMRC | Finance Act 2013 Part 5; TIOPA 2010 ss. 217A–217C for periods beginning on or after 1 January 2026 | Abusive arrangements; arrangements lacking sufficient economic substance; artificial avoidance of a UK permanent establishment | A reasonable course of action and real functions behind the profit | 60% of the counteracted advantage under GAAR; corporation tax plus six percentage points under the UTPP charge |
| Substance as the price of an exemption — Hong Kong and Singapore | The Hong Kong foreign-source income exemption regime from 1 January 2023, extended to disposal gains from 1 January 2024; section 10L of the Singapore Income Tax Act 1947 from 1 January 2024 | Receiving specified foreign income, or selling a foreign asset at a gain | The economic substance requirement of the regime, with a nexus test for IP income | The income or the gain simply becomes taxable — there is no penalty layer |
| Corporate tax conditions — the UAE Federal Tax Authority | The Corporate Tax Law, after the economic substance regulations ceased to apply for financial years beginning on or after 1 January 2023 | A free-zone entity claiming qualifying income, or a foreign entity said to be managed from the UAE | Adequate substance in the free zone; where residence is claimed, that management and control are exercised there | Loss of the 0% free-zone rate, or an unexpected UAE residence and the filing that comes with it |
Comparison of these instruments yields three points. The first is that the standard of proof barely moves: every instrument requires people who decide, premises that exist, spend proportionate to income and a commercial reason that is not the tax. Only the vocabulary changes — "core income-generating activities" offshore, "substantive economic activity" in ATAD, "substantial business purpose" in the American doctrine, "sufficient economic substance" in the British charge.
The second is that the consequences differ entirely, which determines where compliance efforts are directed. An offshore filing failure produces a penalty and eventually strike-off, and the exposure is administrative. A beneficial-ownership or PPT failure produces withholding tax at the domestic rate on a payment that has already been made, often with interest. A Hong Kong or Singapore failure produces plain tax with no penalty layer. The American and British rules add a punitive element — 40% where a transaction went undisclosed, 60% of the advantage under GAAR. The same missing office therefore costs a four-figure penalty under one instrument and a quarter of the dividend under another.
The third is timing. The offshore statutes test a financial year. ATAD and the CJEU test the moment the arrangement was maintained despite a change in circumstances — a point Nordcurrent makes explicit and which turns a one-off inception file into an annual review. Section 10L tests a disposal that may be years away and looks back across the holding period. A file assembled for the annual offshore declaration will not, by itself, answer a question asked about a sale in the fifth year, and that is the gap most structures discover late. What the file has to contain, line by line, is set out in the economic presence file.
Jurisdiction-by-jurisdiction practice
Presence requirements depend on which country is assessing the structure.
🇷🇺 Russia: CFC, beneficial ownership, de-offshorization
Controlled Foreign Companies (CFC)
Arts. 25.13–25.15 of the Tax Code. Controlling person — a Russian tax resident holding more than 25% (or more than 10% where aggregate Russian-resident ownership exceeds 50%). CFC profit is included in the controlling person's tax base if it exceeds RUB 10 million per year. Rate: the progressive personal income tax scale of 13–22% for individuals (from 2025); for legal entities, the headline profits tax rate, raised from 20% to 25% with effect from 1 January 2025.
Exemptions: CFC profit is not taxed if the company is resident in a country with an effective tax treaty (not from the Federal Tax Service list), the effective rate is not less than 75% of the weighted average Russian rate, or the CFC is an active holding company with passive income share below 20%.
Beneficial ownership
Art. 312 of the Tax Code requires proof that the foreign recipient of Russian-source income is the actual beneficiary, not a transit entity. The Federal Tax Service examines: whether the company makes independent decisions on income disposal, bears entrepreneurial risk, has staff and assets. Supreme Court practice (Severstal case 2017, Krasnobrodsky case 2018) established: formal residency without real activity does not confer treaty rate entitlement.
Thin capitalization
Art. 269 of the Tax Code limits interest deduction on controlled debt. If debt to a foreign related party exceeds equity by more than 3 times (for banks — 12.5), excess interest is recharacterized as dividends and subject to withholding at 15% (or treaty rate). Also applies to back-to-back financing.
De-offshorization and automatic exchange
Russia is formally built into the international framework of automatic exchange, but since 2022 the practical exchange with particular jurisdictions has been limited or politically unstable. That does not make a foreign structure invisible: banks, CRS/FATCA profiles, CFC filings, currency control, payments and counterparty documents still leave a trail for a tax audit. Since 2015, there is an obligation to notify the Federal Tax Service of participation in foreign entities (share exceeding 10%) and of CFCs. Penalty for non-filing — RUB 500,000 per company. For non-payment of CFC profit tax — 20% of the amount, minimum RUB 100,000.
Capital amnesty was conducted in four stages (2015–2023): CFCs, foreign accounts, and assets could be declared with exemption from liability. As of 2026, no new stages have been announced.
Federal Tax Service red flags
The Federal Tax Service in SPV audits examines: payments to jurisdictions with suspended or amended treaties; absence of real activity, office, and people at recipient; overlap of foreign company directors with Russian side beneficiaries; transit nature of flows (receipt and immediate onward movement to third jurisdiction); nominee shareholders without economic rationale.
Since 2023, Russia has unilaterally suspended tax treaties with 38 states. Dividends, interest, and royalties to these countries are taxed at domestic rates (15–20%) without reduced rates.
🇺🇸 United States: Subpart F, GILTI, PFIC, economic substance doctrine
Subpart F and GILTI
Subpart F (IRC 951–964) has been in effect since 1962: certain categories of passive income of a CFC (controlled foreign corporation) are included in the US shareholder's base in the year earned — regardless of whether distributed. Subpart F income: dividends, interest, royalties, rent, insurance income from related persons, sales between related parties.
GILTI (IRC 951A) was introduced by the Tax Cuts and Jobs Act 2017 and brings part of a CFC's income into the US shareholder's base. The 2025–2026 US tax changes reworked the §250 deduction, the foreign tax credit haircut and the tangible-asset return, so the deduction and the effective rate have to be modelled for the specific year and shareholder type rather than taken from the old shorthand formula. For a structure with US owners this is a separate calculation with US tax counsel.
PFIC (Passive Foreign Investment Company)
IRC 1291–1298. A foreign company is a PFIC if 75%+ of gross income is passive or 50%+ of assets generate passive income. For a US investor, this means punitive taxation: on sale of the interest, profit is allocated across years of ownership and taxed at the maximum rate for each year plus interest. Exit options — QEF (qualified electing fund) election or mark-to-market, allowing annual payment.
FATCA and Corporate Transparency Act
FATCA (2010) requires foreign financial institutions to report to the IRS on US taxpayer accounts. Penalty for non-compliance — 30% withholding on all US-source payments. For SPVs with US beneficiaries — full transparency: the bank identifies ultimate beneficiaries and transmits data to the IRS.
The Corporate Transparency Act changed in 2025: FinCEN issued an interim final rule under which companies formed in the United States, and U.S. persons, are exempt from BOI reporting, while the obligation remains for foreign companies registered to do business in the United States. The previous blanket advice to file a BOI report can therefore no longer be used without first checking the company's status and the rule currently in force.
Economic Substance Doctrine
The doctrine is codified in IRC 7701(o), added by section 1409 of the Health Care and Education Reconciliation Act of 2010 and applying to transactions entered into after 30 March 2010. A transaction lacks substance if: (1) it does not meaningfully change the taxpayer's economic position (aside from taxes), and (2) there is no substantial business purpose other than tax. Penalty — 20% of underpayment (40% without disclosure on return).
Check-the-box (Treasury Reg. 301.7701-3) allows choosing the tax classification of a foreign company for US purposes: corporation or transparent structure (disregarded entity / partnership). The choice determines whether Subpart F/GILTI applies. An error can result in double taxation.
IRS red flags
The IRS in audits focuses on: absence of business purpose other than tax; circular transactions among related parties; treaty shopping through conduit companies; FATCA and CTA violations; transfer pricing outside arm's length (IRC 482); structures removing profit from GILTI.
🇬🇧 United Kingdom: GAAR, UTPP and substance laws
General Anti-Abuse Rule (GAAR)
Finance Act 2013 (Part 5, ss.206–215) introduced a general anti-avoidance rule. GAAR applies to arrangements HMRC considers abusive: no reasonable economic purpose other than tax advantage, and it contradicts the legislation's purpose. Decision is made by an independent Advisory Panel. Penalty — 60% of the value of the counteracted advantage, introduced by Finance Act 2016, s. 158, which inserted s. 212A into FA 2013.
UTPP, which has replaced the Diverted Profits Tax
DPT under Finance Act 2015 applied to accounting periods beginning before 1 January 2026. For periods beginning on or after that date it has been replaced by Unassessed Transfer Pricing Profits (UTPP) inside Corporation Tax (TIOPA 2010, ss. 217A–217C). UTPP covers the same two scenarios — arrangements lacking sufficient economic substance and artificial avoidance of a UK permanent establishment — and is charged at the underlying corporation tax rate plus 6 percentage points, which will usually but not always be 31%. HMRC opens with a preliminary notice and decides whether to assess after written representations.
Register of Overseas Entities and PSC Register
Economic Crime (Transparency and Enforcement) Act 2022 established the Register of Overseas Entities at Companies House. Any foreign legal entity with UK real estate must register and disclose beneficiaries. Data updated annually. Breach — criminal offense (up to 5 years) and prohibition on dealing with real estate.
PSC Register (Companies Act 2006, Part 21A) requires all UK companies to maintain a register of persons with significant control: ownership exceeding 25% of shares/votes, right to appoint directors, other significant influence. All public via Companies House. For UK SPVs, anonymous ownership is excluded.
Substance laws of Crown Dependencies
Jersey, Guernsey and the Isle of Man adopted economic substance requirements for defined categories of activity. Companies in certain activities (banking, insurance, fund management, leasing, HQ, shipping, distribution, IP, holding) must demonstrate: management and control in the territory (meetings with quorum of local directors); qualified employees; adequate expenses; physical office.
Similar rules apply in the BVI, the Cayman Islands and Bermuda. Non-compliance — fines, information exchange with parent jurisdiction tax authorities, and compulsory liquidation (striking off).
HMRC red flags
HMRC examines: jurisdictions without UK treaty or with limited information exchange; disproportionality of profit relative to real functions and risks of foreign structure; UK-resident directors actually managing foreign company (risk of UK tax residency under central management and control test); artificial fragmentation of activity to avoid PE; hybrid instruments for double deduction or deduction/non-inclusion. The separate management-location test and evidence of decision-making are explained in corporate tax residence.
Q/A
What economic substance does a family office need in its jurisdiction?
Real decision-making locally: at least two qualified investment professionals physically working in the jurisdiction, board and investment committees meeting there with minutes, a physical office, and operating expenditure proportionate to AUM — regimes like SG 13O/13U and HK FIHV codify exactly this. A letterbox family office loses both its incentive and its banking file.
What substance is needed for each part of a cross-border structure to survive a tax audit?
For each part of the structure: holding — local board decisions and financing oversight; operating — staff, contracts and premises where revenue is booked; IP — R&D functions meeting the nexus approach; family office — investment professionals and local spend.
Hong Kong vs Singapore substance requirements — where is real presence cheaper to maintain?
Both require local directors, decisions and spend; the cost differs — Singapore's maintenance typically runs higher than Hong Kong's for a small operating company (current figures should be verified for the scope in question).