The Substance Dossier: What to Keep and How It Reads

Concept

What economic substance is and which regimes impose it is the subject of economic substance. Proof of presence is a separate evidentiary question when a tax authority starts testing it. The distinction has practical consequences. Substance requirements are described in near-identical words across almost every regime — people, premises, spend, decisions taken locally — and a company that has read them usually believes it complies. An adverse outcome follows from deficiencies in the documents: the board met, but the agenda contains no decision; the director is resident, but no document shows him deciding anything; there is spend, but its ratio to turnover reads against the company; the bookkeeping is impeccable and takes place in another country.

That asymmetry will widen over the next few years. The single attempt to convert substance into formal criteria with a closed list of supporting evidence is being taken off the table, and its replacement will not arrive before the early 2030s. In the meantime the question is decided under general anti-abuse rules and administrative practice, where there is no threshold, no safe harbour and no closed list — only the file and how it reads.

Key parameters of the dossier:

The test that is not coming

The Commission tabled the Unshell proposal (ATAD III) on 22 December 2021. The design had two stages: gateway criteria filtered out at-risk undertakings, and those caught had to declare three indicators of minimum substance in their annual tax return — own premises in the Member State, or premises for exclusive use; an own and active bank account in the Union; and one of two further limbs — either a director resident for tax purposes in that Member State, qualified and authorised to take decisions on the activities generating relevant income, who "actively and independently uses that authorisation on a regular basis" and is not a director of non-associated enterprises, or a majority of full-time equivalent employees resident for tax purposes in that Member State and qualified to carry out the income-generating activities.

The most valuable part of the proposal is Article 7(2). It listed the documentary evidence to accompany the declaration: address and type of premises; amount and type of gross revenue; amount and type of business expenses; the type of business activities performed to generate the relevant income; the number of directors with their qualifications, authorisations and tax residence, or the number of full-time equivalent employees with the same particulars; outsourced business activities; and the bank account number, any mandates granted to access the account and to use or issue payment instructions, and evidence of the account's activity. No instrument in force contains such a list. It is the only text in which a legislator set out what a substance file consists of.

Articles 8 and 9 built the presumption machinery on top. An undertaking declaring all indicators and providing satisfactory documentary evidence was presumed to have minimum substance; one failing to declare an indicator or to provide satisfactory evidence was presumed not to. Rebuttal ran through additional evidence: a document allowing the commercial rationale for setting up the undertaking to be ascertained; employee profiles covering level of experience, decision-making power in the organisation, role and position on the organisation chart, type of employment contract, qualifications and duration of employment; and concrete evidence that decision-making on the income-generating activity takes place in the undertaking's Member State. The presumption counted as rebutted where the undertaking proved it had "performed and continuously had control over, and borne the risks of" the relevant business activities. A successful rebuttal carried forward for five further years — but only on condition that the undertaking's factual and legal circumstances remained unchanged.

The text was never agreed. The ECOFIN report of 20 June 2025 recorded that analysis of the proposal in the Council would be discontinued in light of the simplification agenda, and the Commission work programme for 2026 — COM(2025) 870 final, Strasbourg, 21 October 2025 — placed Unshell at number 4 of Annex IV, "Withdrawals", alongside the transfer pricing directive (number 8), DEBRA (number 5) and the financial transaction tax (number 1). The footnote to the annex states the status precisely: these are "pending legislative proposals, which the Commission intends to withdraw within six months".

Where the criteria went

The mechanics of the move are covered in economic substance: the DAC recast (COM(2026) 308 final of 24 June 2026) keeps hallmark D2 in place, and the criteria for its points (a) and (b) are to be set by a Council implementing act within five years of the directive entering into force — no normative content before the early 2030s. What matters for the file is single: the wording of D2(a) — staff, equipment, assets, premises — is the vocabulary of every substance regime verbatim, and those four elements determine the contents of the file.

What administrations actually look at

There is no single enacted EU-wide substance test. For a defensible file, start with the applicable jurisdiction's rules and collect contemporaneous evidence of where decisions are made and records kept, whether expenditure and personnel match the activity, and what premises and equipment are actually used. The jurisdiction-specific statutory tests explain why those records matter; the broader legal framework is analysed in economic substance.

None of the five factors was invented by administrations. Where decisions are taken is "directed and managed" from the offshore substance statutes and "place of effective management" from tax treaties. Where bookkeeping is carried out is an express Cayman rule requiring minutes and appropriate records to be kept in the Islands. Proportionality of spend is "adequate amount of operating expenditure" qualified by "having regard to the level of relevant income". Staff and premises are hallmark D2(a) word for word. The scrutiny runs on a vocabulary that is already written; only the threshold values of those criteria are missing, and it is that gap the file fills.

The date on which the structure is assessed

The Court of Justice judgment in C-228/24 'Nordcurrent group' UAB of 3 April 2025 shifted the evidentiary task further than any of the EU proposals, and the facts read as a catalogue of file defects.

The Lithuanian parent created and distributed electronic games; its United Kingdom subsidiary, established in 2009 and wound up in 2021, acted as intermediary between the group and advertising and game distribution platforms until direct agreements with those platforms could be concluded. Part of the distribution functions passed to the parent in 2017. Following a 2023 inspection the Lithuanian Inspectorate treated the subsidiary as a non-genuine arrangement for 2018 and 2019 and assessed EUR 3 205 211.53 of corporation tax on the dividends received from it.

The grounds are set out in the judgment: the subsidiary's only employee was its director, who at the same time managed seven other companies; it had neither its own place of business nor tangible assets in the United Kingdom; 97 110 undertakings were registered at the same address, provided through a company registration service; and the work of creating and distributing games was in fact carried out by the parent's own employees, who had access to the platforms. The Court did not rule on those facts — the question returns to the national body — but they are what the dispute was made of.

The doctrinal holdings are analysed in economic substance; three of them drive the file. The anti-abuse rule is not confined to conduits — a subsidiary carrying on its own activity falls within scope. The assessment is tied to no single moment: an arrangement created for valid commercial reasons becomes non-genuine from the point at which it is maintained despite changed circumstances (paragraphs 36 and 38). And a non-genuine classification alone is not enough for refusal — a separate finding of a tax advantage defeating the purpose of the Directive is required.

The first two holdings impose a direct requirement on the file, and it cuts against how files are assembled in practice. The set is created when the structure is set up — constitutional documents, lease, director's appointment letter, a note on why the jurisdiction was chosen — and then left untouched for years. On Nordcurrent's logic such a set proves exactly what the tax authority does not dispute: at the date of formation there were reasons. It says nothing about the moment at which the reasons ceased, and that moment is now what is being looked for.

The form that works is a dated annual review: a written assessment of what functions the company performs in the current year, which have changed, whether the commercial rationale survives, and a decision of the governing body on the outcome. A note recording that nothing changed in the reporting year is worth more than no note at all: it is dated, and it shows the structure was being monitored. The inverse case — functions have moved and the company has been kept — requires either a fresh, freestanding rationale or a decision to liquidate or reorganise that fixes the date on which the functions left. The Unshell drafters reached the same conclusion independently: Article 9(4) extended a successful rebuttal for five years only while the undertaking's factual and legal circumstances remained unchanged.

The boundary with corporate residence is worth holding separate. Substance reporting shows where people and costs sit; it does not show where the decision was taken, and in a residence dispute it works as evidence without ever standing in for the substantive defence — that line is drawn in corporate tax residence.

Offshore economic substance regimes

Seven territories enacted economic substance legislation in 2018–2019 under pressure from the Council's Code of Conduct Group and in implementation of BEPS Action 5. The architecture is the same everywhere: a list of relevant activities, core income-generating activities (CIGA) defined for each, and an obligation on an entity carrying on a relevant activity to conduct its CIGA in the jurisdiction, to be "directed and managed" there, and to have adequate staff, expenditure and physical presence measured against the level of relevant income.

The list of relevant activities is near-identical: banking, insurance, fund management, financing and leasing, headquarters, shipping, holding company business, intellectual property, and distribution and service centre business. The differences begin in the detail of the test, and they are evidentiary.

Read across the ten rows and the offshore regimes are one statute written eight times. Every one of the eight territories asks the same three questions — was the activity directed and managed here, were the core income-generating activities carried on here, and were the people, premises and spend adequate to the activity — and the differences are procedural rather than substantive: where the declaration is filed, who files it, how long the authority has to make a determination, and how quickly non-compliance turns into strike-off. A file built to the Cayman template answers the Jersey, Guernsey, Manx, Bermudian and Bahamian questions with almost no adaptation, which is why groups with entities in several of them keep one dossier standard rather than six.

The two rows at the bottom are a different animal and belong in the same table for a practical reason. Hong Kong and Singapore do not ask for a substance declaration at all; they make substance the price of an exemption. Fail the Cayman test and the consequence is a penalty and, eventually, strike-off. Fail the Hong Kong or Singapore test and the consequence is tax — the foreign income or the gain simply becomes taxable. Identify the period under the relevant regime: Hong Kong FSIE refers to the year of accrual; for relevant non-IP gains, section 10L tests substance in the basis period of the sale or disposal. Before a planned Singapore transaction, consider an advance ruling.

The UAE regime illustrates the change in the approach to economic substance. The regulations were not tightened, they were withdrawn — and the substance question moved into the corporate tax regime, where it is now asked about free-zone qualifying income and about the place of effective management. Nothing was relaxed by the repeal: the questions are the same, the consequence is now a tax bill rather than an administrative penalty, and the evidence that answers them is the substance dossier.

The content of CIGA is where the regimes become concrete. For banking it is raising funds, managing credit, currency and interest risk, taking hedging positions, providing loans and credit, managing capital and preparing regulatory reports. For financing and leasing it is negotiating or agreeing funding terms, identifying and acquiring assets to be leased, setting terms and duration, monitoring and revising agreements and managing the associated risks. For fund management it is taking decisions on the holding and selling of investments, calculating risk and reserves, and taking decisions on currency or interest fluctuations and hedging positions. For headquarters business it is taking relevant management decisions, incurring expenditure on behalf of group entities and co-ordinating group activities. For shipping it is managing crew, maintaining ships, overseeing deliveries and organising voyages. The Cayman statute adds a general formula the BVI text does not carry: CIGA are "activities that are of central importance to a relevant entity in terms of generating relevant income", and they must be carried on in the Islands.

Holding companies get a reduced test. Cayman section 4(5): a pure equity holding company satisfies it by confirming compliance with the applicable filing requirements under the Companies Act and adequate human resources and adequate premises in the Islands for holding and managing equity participations. The BVI formulation (section 8(2)) is materially the same. The practical reading is often got wrong: the reduced test removes the CIGA requirement and leaves the people and premises requirements standing, and the word "managing" in it means that a holding company that actively manages its participations must have resources for that management too.

The intellectual property regime stands apart as the one place where the legislator wrote a presumption expressly. BVI section 9: a legal entity is presumed not to conduct CIGA if the activities carried on within the Virgin Islands include none of those listed for IP business, or if the entity is a high risk IP legal entity. The first presumption is rebutted by showing that the strategic decisions and the principal risks relating to the development and subsequent exploitation of the intangible, or to its acquisition from third parties and subsequent exploitation, are taken and borne within the territory, or that the underlying trading activities through which the asset is exploited are carried on there. The second is rebutted by evidence of a high degree of control over the development, exploitation, maintenance, enhancement and protection of the asset exercised by suitably qualified employees of the entity, physically present in the territory and on long-term contracts. Cayman section 4(7) is built the same way and adds a requirement that the employees permanently reside in the Islands.

What the file consists of

The six areas of the file cover everything named in hallmark D2, in Article 7 of Unshell, in the offshore substance statutes and in the factors reported from practice. The areas are interrelated: each area corroborates the one before it, and a file with one area substantiated and the adjacent area unsubstantiated is assessed less favourably than an evenly substantiated file.

Governance

The primary document is the board minute, and the requirements on it are stricter than is generally assumed. The Cayman rule requires the minutes to record the making of strategic decisions of the entity at the meeting; a minute recording the approval of a decision already taken does not, on its face, meet the wording. Board papers — the agenda, documents circulated in advance, calculations, alternatives — prove the decision was prepared; the trace of discussion — directors' questions, amendments, deferred items — proves it was taken. Place and attendance are recorded separately: a quorum of directors must be physically in the jurisdiction, and that is tested against entry dates and travel expenditure.

The second group of evidence comprises governance documents other than minutes. Dividend policy, decision-making rules, delegated authority limits, powers of attorney and their actual use, and the correspondence around the decision. Chronology works as evidence in its own right here: a board resolution dated after the transaction it authorises devalues the whole set.

The third group of evidence is the annual structure review carried by a board decision. It is the only one that answers the Nordcurrent question.

People and functions

Headcount on its own proves nothing; what is proved is the match between functions and income. For each individual the file holds an employment or services contract describing the functions, qualifications and the documents evidencing them, place of tax residence, extent of engagement and — most valuable of all — work product. The list in Article 9(2)(b) of Unshell supplies a ready frame: level of experience, decision-making power in the organisation, role and position on the organisation chart, type of contract, qualifications, duration of employment.

The director without functions is the most common defect. The Unshell indicator framed the requirement through behaviour: the director must "actively and independently use the authorisation on a regular basis" and must not hold directorships in non-associated enterprises. No rule in force carries that text, but this is precisely what gets tested: how many companies the same director serves, whether he signed anything beyond standard corporate documents, whether he leaves any trace in the preparation of decisions.

Outsourced functions are documented separately, because the substance statutes permit outsourcing on conditions. Cayman section 4(4) requires the entity to be able to "monitor and control" the carrying out of CIGA by the other person. The BVI rule (section 8(1)(d)) adds two constraints: no CIGA is carried on outside the territory, and only that part of the other entity's activities solely attributable to this entity counts. Hence the outsourcing file: the contract describing the functions, the provider's reporting, evidence of the entity's control, and a separate record of the provider's hours by client.

Premises and equipment

A lease proves a right of use; it does not prove use. The file closes the gap with utility and communications bills, a floor plan showing workstations, access system data, insurance policies, dated photographs and correspondence arriving at the address. A virtual office fails to prove actual use of premises for a plain reason: it generates none of those documents.

Equipment becomes a subject in its own right where the rule names it. The BVI Act expressly requires that where intellectual property business needs specific equipment, that equipment be located in the territory. The Cayman "plant, property and equipment" formulation frames the point more widely: physical presence means either a place of business or plant, property and equipment, and for companies without an office the second limb has to be evidenced by inventory and title documents.

Finance and spend

Proportionality is the only one of the five factors with no threshold and no formula. The statutes frame it relatively: adequacy is assessed "having regard to the level of relevant income" (Cayman) or "having regard to the nature and scale of the relevant activity" (BVI). The practical consequence is that the absolute figure proves nothing: a hundred thousand dollars of spend against a hundred thousand of turnover is persuasive; against a hundred million it is not.

Into the file go a standalone budget broken down by function, annual financial statements, an audit opinion where one exists, bank statements showing the account is operational, and contracts with local service providers together with the acceptance documents under them. The Unshell requirement on the bank account is more precise than anything since and includes: the account number, any mandates granted to access the account and to use or issue payment instructions, and evidence of the account's activity.

Where the bookkeeping is done is a free-standing assessed fact. The Cayman rule requires the minutes and appropriate records of the entity to be kept in the Islands; the factor reported from practice is worded as "the location where the company's bookkeeping is carried out". A company whose accountant sits in another country and works remotely in a group-wide system loses that factor entirely, and it cannot be reconstructed after the event.

The contractual base

Contracts answer the question the other sections of the file do not resolve: did the company bear risk. The file keeps the contracts and, alongside them, what shows they were individual — negotiation correspondence, drafts, the rationale for terms that depart from the standard form. A template intragroup contract with no trace of negotiation reads as the documentation of a decision taken elsewhere.

Intragroup contracts need further evidence: a description of the service, evidence it was actually rendered, the absence of duplication with the recipient's own functions, and the allocation base with its justification. The substance file relates to transfer pricing, and considering the evidence separately serves no purpose — the tax authority reads both sets at once.

The tax position

The last section of the file answers the question for whose sake presence is tested at all. It holds certificates of tax residence for each year of payment; the computation showing what relief the company claimed and on what basis; a document establishing the commercial rationale for setting the company up — the wording of Article 9(2)(a) of Unshell; and an analysis showing that the structure survives the principal purpose test (GAAR and the principal purpose test) on the allocation of functions recorded in the preceding five sections of the file.

Nordcurrent's third holding makes this section of the file mandatory from the other direction. Classification as non-genuine is not on its own enough to refuse the benefit — a separate finding on a tax advantage defeating the purpose of the directive is required. That gives the company a second line of defence, and it is built on the documents of this section: what advantage was obtained, how it compares with the position without the structure, and whether it is consistent with the purpose of the provision under which it was claimed.

The recurring failures

The five defects below occur more often than all the others combined, and each is created by the company itself — which makes each of them avoidable in advance and unfixable afterwards.

A minute with no substantive agenda. The meeting was held in the jurisdiction, the quorum was met, the minute was signed, and the text records the approval of accounts and the ratification of steps already taken. The Cayman rule requires the making of strategic decisions to be recorded at the meeting; a minute containing no strategic decisions at all shows they were being taken elsewhere.

A resident director with no functions. The director lives in the jurisdiction, was appointed correctly and signs documents — and that is all that is known about him. What gets tested is different: traces of participation in preparing decisions, independence in taking them, and the number of companies served. One resident director across several dozen structures is not in itself a breach, but he contributes nothing to the file.

Spend out of proportion to turnover. The defect appears as the structure grows: the presence budget is fixed at first-year level and never revisited while turnover multiplies. The ratio is tested at each year's reporting date, so the defect accumulates unnoticed and surfaces for several periods at once.

Bookkeeping run from another country. The group keeps the records in a shared system and the local provider only signs off the filings. Formally the filing requirements are met; in substance one of the five assessed factors is missing, and the Cayman rule on keeping appropriate records in the Islands is breached on its face.

A decision taken before the meeting. The most destructive defect, because it is dated. The contract is signed before the minute approving it; the draft resolution arrives from the parent; the correspondence shows the question was settled before the papers went out. The chronology is reconstructed from metadata and bank movements, and no amount of later tidiness repairs it.

Indicators, how they read, and what rebuts them

The indicators provide a working frame for assessment rather than a ready conclusion: each is tested against the facts of the case, the applicable rule and the practice of the particular administration.