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. Below is a full analysis of which rules determine sufficient presence, what exactly is examined, and what authorities look at first.
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 2025, over 140 jurisdictions committed to implementing 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 FHTP forum at the OECD reviewed over 320 preferential regimes — approximately 40% were abolished.
The standard defines 12 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.
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 proposes two models: Model A (all CFC income is included if the effective rate is below 50% of the parent jurisdiction's rate) and Model B (only passive income diverted from the parent jurisdiction is included). 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.
Unshell (ATAD III): three gateway criteria
The European Commission's 2021 proposal directly targets shell companies. A structure comes under scrutiny if simultaneously: more than 75% of income is passive (dividends, interest, royalties, rent); more than 75% of that income is cross-border; management is outsourced to external contractors.
If all three criteria are met, the company must demonstrate a minimum set: 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.
Fail the test — the jurisdiction refuses to issue a tax residency certificate. Without it, reduced treaty rates cannot be applied, participation in EU directives on dividends and interest is impossible, and effectively all tax advantages are eliminated. As of 2026, the directive has not been formally adopted due to disagreements, but its criteria are already used by tax authorities as guidance.
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.
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. Not a nominal signatory, but a person actually managing operations. 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.
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.
Jurisdiction-by-jurisdiction practice
Presence requirements depend on which country is assessing the structure. Below is an analysis of criteria, tools, and red flags for three tax administrations.
🇷🇺 Russia: CFC, beneficial ownership, de-offshorization
Controlled Foreign Companies (CFC)
Arts. 25.13–25.15 of the Tax Code. Controlling person — resident of a sanctions-sensitive jurisdiction with share exceeding 25% (or exceeding 10% when aggregate resident ownership exceeds 50%). CFC profit is included in the controlling person's tax base if it exceeds RUB 10 million per year. Rate: 13% for individuals (15% above RUB 5 million), 20% for legal entities.
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 participates in automatic exchange (CRS) since 2018 — receiving data on residents' accounts in foreign banks. 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: transfer of income to jurisdiction with suspended treaty (Netherlands, partially Cyprus, Latvia); 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.
🇺🇸 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. All CFC income exceeding 10% of tangible assets (QBAI) is included in the US shareholder's income. Minimum effective rate — 10.5% (13.125% from 2026). 50% deduction from GILTI (IRC 250) and credit for 80% of foreign taxes (IRC 960). In short: if the CFC pays less than 13.125% abroad, the difference is assessed in the US.
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.
Corporate Transparency Act (2021, effective 01.01.2024) requires most US companies (including LLCs) to disclose beneficiaries to FinCEN. Exceptions — public companies, banks, and large operating entities (20+ employees, $5M+ revenue, physical presence). For SPVs in Delaware or Wyoming — mandatory disclosure.
Economic Substance DoctrineCodified in IRC 7701(o) after Coltec Industries v. United States (2006). 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, Diverted Profits Tax, 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 tax benefit (Finance Act 2022).
Diverted Profits Tax (neobank)
Finance Act 2015 (ss.77–116) introduced tax on diverted profits — 25%, 6 points above the standard corporate rate. Two scenarios: (1) artificial structures without substance to divert profit from UK (avoided PE), (2) transactions with affiliates lacking sufficient economic substance. HMRC issues preliminary notice, taxpayer has 30 days to respond.
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
Under pressure from OECD and EU, Jersey, Guernsey, and Isle of Man adopted Economic Substance Requirements in 2019. 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 laws in BVI (2018), Cayman Islands (2018), 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.
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