How to Maintain Substance in Offshore Jurisdictions

The era of letterbox companies is over. Regulators and banks now expect offshore entities to have real operations—people, premises, decision-making, and day-to-day activity where the company says it lives. That’s what “substance” means in practice. If you run a group with entities in places like the BVI, Cayman, Bermuda, Jersey, Guernsey, Isle of Man, UAE, or Mauritius, you can absolutely maintain compliant substance without blowing up your cost base. But it takes planning, documentation, and honest alignment between what the entity earns and what it actually does.

What “Substance” Actually Means

Economic substance rules grew out of the OECD’s Base Erosion and Profit Shifting (BEPS) project, particularly Action 5, which targeted preferential regimes that attracted profits without real activity. Between 2018 and 2020, more than 40 low- or no-tax jurisdictions introduced their own economic substance regimes (ESR) to stay off EU/OECD blacklists. The gist is consistent, even if details vary by country.

When regulators talk about substance, they’re looking for five things:

People: employees or directors with the right skills actually doing the work locally.

Premises: suitable physical office space or dedicated facilities in the jurisdiction.

Process and decision-making: board meetings, approvals, and key management decisions made locally by people who understand the business.

Expenditure: an appropriate level of local spend relative to the activities and revenue.

Documentation: an audit trail proving all of the above, not just a service contract or a P.O. box address.

You’ll also see a recurring concept: core income-generating activities (CIGA). CIGAs are the essential tasks that produce the income of the entity. For a fund manager, that’s portfolio selection and risk management. For a finance company, it’s negotiating loan terms and managing risk. For a holding company, it’s more limited—mainly holding shares and receiving dividends—but even then you need basic governance and oversight.

Know the Rules in Your Jurisdiction

Each jurisdiction publishes its own law and guidance. You don’t need to memorize every clause, but you must internalize the themes and differences.

British Virgin Islands (BVI): The Economic Substance (Companies and Limited Partnerships) Act applies to “relevant activities” (holding, finance and leasing, fund management, headquarters, distribution and service center, shipping, insurance, IP). Pure equity holding entities have lighter requirements—maintain records and adequate premises/people for that activity. Reporting is via the BOSS system. Penalties for non-compliance typically start around USD 20,000 for a first failure (more for high-risk IP) and can escalate to USD 200,000+, plus potential strike-off for repeated failure.

Cayman Islands: Similar ESR framework under the International Tax Co-operation Act. Compliance requires being “directed and managed in the Islands,” adequate expenditure, premises, and CIGAs performed in Cayman. Annual notifications and returns go through the Department for International Tax Cooperation (DITC) portal. Penalties commonly range from USD 12,000–$100,000 depending on severity and recurrence, with possible escalation.

Bermuda: Economic Substance Act and Regulations set robust standards. Bermuda expects genuine local presence for regulated activities (insurance, fund management) and meaningful oversight for others. First-year penalties can reach USD 250,000, doubling for repeat failures.

Jersey, Guernsey, Isle of Man (Channel Islands): Very mature regimes with clear guidance and a strong “mind and management” expectation. Returns are filed through the tax authorities, and there’s active supervision. These jurisdictions are used for funds, trust companies, and real-economy holding structures.

UAE: ESR rules (Cabinet Resolutions 31/2019 and 57/2020, with guidance) apply broadly and interact with the UAE corporate tax regime. Free zones have their own administration, but ESR applies across the board. Penalties start around AED 50,000 for failure and can reach AED 400,000 with administrative sanctions.

Mauritius: The Global Business (GBL) regime requires two resident directors, local company secretary, a principal bank account in Mauritius, local records, and CIGAs performed in Mauritius for qualifying income or partial exemptions. Substance expectations increase if claiming an 80% exemption on certain income. Regulators look closely at staff and expenditure proportionality.

Other jurisdictions (Bahamas, Barbados, Anguilla, etc.) have parallel rules. Don’t rely on hearsay—obtain the current guidance and filing deadlines. In my experience, most non-compliance issues stem from ignoring a small, jurisdiction-specific wrinkle, like outsourcing rules or a missed notification.

Identify Your Relevant Activities

Substance hinges on what your entity actually does. Map your activities to the definitions used by your jurisdiction. Common categories:

Holding company (pure equity): owns shares and receives dividends or capital gains. Minimal CIGA, but you still need proper governance, record-keeping, and an “adequate” local footprint.

Headquarter business: coordinating group operations, providing senior management, controlling and managing budgets of group subsidiaries.

Distribution and service center: purchasing, storing, shipping goods; or providing services to group affiliates.

Finance and leasing: lending, leasing, managing credit and pricing, treasury.

Fund management: discretionary investment management decisions, risk management, client relations.

Insurance: underwriting, claims management, actuarial and risk.

Shipping: crew management, operations, maintenance and repairs, logistics.

Intellectual property (IP): ownership and exploitation of patents, trademarks, software. High-risk IP has tougher standards—if the entity earns IP income and isn’t doing real development, enhancement, maintenance, protection, and exploitation (DEMPE) locally, it will likely fail ESR.

Record exactly which CIGAs apply to each entity and who performs them—employee names, job descriptions, and location. This is the anchor for everything that follows.

Decide Your Substance Model

There’s no one-size-fits-all model. You’ll typically choose one of three paths:

1) Light-touch compliance for passive holding

Suits a BVI or Cayman pure equity holding company.

Use a local corporate service provider (CSP) for registered office and basic administration.

Appoint at least one local director who actually understands your portfolio and participates in board meetings.

Maintain books and records locally; ensure board decisions on dividends, acquisitions, and disposals occur locally.

Adequate premises could be your CSP’s office with a dedicated space, plus clear access to company records.

2) Operational hub

Useful for distribution, services, or headquarters functions, including UAE or Mauritius setups supporting a regional business.

Lease an office and hire a small team (GM or finance lead, ops/admin, support roles).

Move intercompany contracts so the entity invoices and gets paid for the services it actually performs.

Implement a transfer pricing policy (for example, cost-plus 5–10% for routine services; higher margins need justification).

Directors live or spend substantial time in the jurisdiction; key contracts signed locally after substantive review.

3) Regulated or specialist operations

Funds, insurance, and finance companies often sit in Jersey, Guernsey, Bermuda, or Cayman and rely on licensed administrators and managers.

Outsourcing is common but must be controlled locally with senior decision-making onshore.

Ensure board oversight is real: investment committee minutes, risk frameworks, and documented challenge to proposals.

Whichever model you choose, resist the temptation to centralize all brains somewhere else while leaving a shell offshore. Regulators and banks can smell that disconnect a mile away.

Step-by-Step Implementation Plan

Here’s the plan my clients have used successfully, with course corrections where needed.

1) Run a substance diagnostic

Compile a one-page profile for each entity: activities, revenue sources, CIGAs, staff counts, outsourcing, premises, board composition, and actual location of decision-makers.

Flag gaps: no local decision-making, zero staff, mismatched activity and revenue (e.g., earning service fees without local service delivery), or outsourcing to a different jurisdiction.

2) Align the financial period and compliance calendar

Match the financial year-end to your jurisdiction’s ESR filing schedule. Cayman, BVI, and others generally require notifications/returns within 6–12 months of year-end.

Set a governance calendar: board meetings, quarterly management reports, budget approvals, ESR filings, tax filings (where applicable), and audit sign-offs.

3) Put “mind and management” onshore

Appoint at least one local director with domain knowledge. Generic nominee directors who rubber-stamp board packs are a liability.

Hold board meetings with a quorum physically present in the jurisdiction. Build a cadence that fits the business: quarterly for routine operations; monthly during major transactions.

Circulate board packs 3–5 days before the meeting. Directors must be able to show they read, questioned, and shaped decisions.

4) Secure premises and IT

Lease appropriate office space. For a holding company, a dedicated serviced office often suffices. Operational hubs need space proportional to staff and equipment.

Keep records on local servers or accessible locally. If using cloud systems, ensure local access and document data controls.

Create a simple “Premises Register” with the address, lease, photos of signage/workstations, and a floor plan.

5) Build a capable local team

Hire for the functions that constitute your CIGAs: finance managers, portfolio analysts, operations leads, or compliance officers.

Use employment contracts under local law and register for payroll/social contributions where required.

Avoid a team of 100% contractors. A handful of employees signals commitment and control, supported by consultants where needed.

6) Use outsourcing correctly

ESR generally allows outsourcing of some CIGAs to a provider in the same jurisdiction, provided you supervise and retain control.

Sign detailed service agreements: scope, SLAs, reporting, data protection, and right to audit.

Keep oversight minutes and quarterly service review notes to demonstrate control.

7) Move the economic flows

Update intercompany agreements so the offshore entity is the contracting party for the services or financing it actually performs.

Set pricing aligned with transfer pricing norms: cost-plus for routine services; interest rates that reflect risk and function for finance entities.

Invoice from the offshore entity, receive payment to its local bank account, and record revenue and expenses in local books.

8) Document transfer pricing and risk

Draft a basic master file/local file (even if not mandated) outlining your functions, assets, risks, and pricing policy.

If your offshore entity claims higher margins, evidence why: unique intangibles (not owned elsewhere), significant management functions, or specialized risk-taking.

9) Build the audit trail

Keep detailed minutes, including discussion points, alternative options considered, and reasons for decisions.

Maintain logs of director attendance, agreements signed locally, and travel records for visiting executives.

Save copies of significant emails that show local analysis and decision-making, not just approvals.

10) File on time and adapt

Use the official portals (DITC in Cayman, BOSS in BVI, etc.) and meet deadlines. Late filings get noticed.

If your activities change (e.g., a holding company starts lending), re-run the diagnostic and adjust staffing and premises accordingly.

Practical Benchmarks and Costs

Substance doesn’t have to mean “expensive,” but there are real costs. Rough benchmarks from recent projects:

Local director fees: USD 5,000–25,000 per year for experienced industry directors; more for regulated entities or heavier time commitments.

Serviced office: USD 500–1,500/month in BVI; USD 1,000–3,000 in Cayman; higher for premium locations. UAE varies widely—from USD 5,000/year for flexi-desks to USD 20,000+/year for Grade A space.

Staff salaries (very approximate, vary by role and jurisdiction):

Administrator/office manager: USD 35,000–60,000

Accountant/financial controller: USD 60,000–120,000

Compliance officer/MLRO: USD 80,000–160,000

Investment/fund professional: USD 100,000–250,000+

Ongoing CSP/administrator fees: USD 5,000–30,000 depending on complexity and regulated status.

A pure holding entity may be compliant with a local director, CSP support, and a modest office budget under USD 20,000–50,000/year. An operational hub typically starts around USD 200,000–500,000/year including staff, rent, and services. When you’re earning millions in fees or spreads, that’s a reasonable, defensible level of spend.

Documentation That Actually Stands Up

When I’ve seen regulators ask questions, these pieces of evidence made the difference:

Board packs that include financials, risk reports, and memos from local staff, not just summaries from another country.

Minutes that show challenge and debate, not a one-line “approved.”

Local employment contracts, job descriptions tied to CIGAs, and timesheets or work logs for key staff.

A vendor oversight folder: service agreements, quarterly service reviews, KPI dashboards, and remediation notes.

Physical presence proof: lease, photos, security logs, device inventories.

Banking evidence: local bank statements, major vendor payments, payroll records.

It’s not about volume; it’s about credibility. Ten pages of sharp, business-specific minutes beat 50 pages of boilerplate.

Common Mistakes That Trigger Problems

I’ve lost count of how many times I’ve seen these issues derail ESR compliance:

Rubber-stamping. Directors who never say no and meetings that last five minutes. Regulators aren’t fooled.

Outsourcing CIGAs to a different jurisdiction. If your Cayman company’s core work is performed in London, you’ll likely fail ESR.

Calling contractors “employees.” You can use contractors, but a zero-employee footprint is an easy audit target unless the business model truly justifies it.

Ignoring pure equity holding rules. Some teams treat holding companies as if they’re exempt from everything. They aren’t. Minimal substance still means governance and basic local presence.

High-risk IP in low-substance locations. If you moved IP to a no-tax jurisdiction without moving the DEMPE functions, expect a presumption of non-compliance.

Mismatched financial periods. Missing ESR deadlines because year-ends don’t line up with local reporting windows is a totally avoidable mistake.

Copy-paste minutes. Identical minutes across different companies and sectors scream inauthentic.

Overpromising in filings. Don’t say you have six staff and then pay no payroll. Discrepancies get flagged by banks and regulators.

Special Topics and Tricky Areas

Pure equity holding entities

Minimal CIGAs, but keep it tidy: maintain local records, hold periodic board meetings locally, and ensure the company can demonstrate oversight of its investments.

Adequate expenditure doesn’t mean extravagant. Director fees, CSP fees, and registered office costs can suffice if they match the company’s simple profile.

High-risk IP and DEMPE

If your offshore entity earns income from patents, trademarks, or software, you must show development, enhancement, maintenance, protection, and exploitation functions performed locally.

Purely holding IP while R&D, marketing, and brand management sit elsewhere rarely passes ESR tests. Consider locating the IP where the DEMPE teams actually sit, or build a real local IP operation with skilled staff and budget.

Funds and asset management

For Cayman/Jersey/Guernsey funds, investment management often sits with a regulated manager, and the fund board provides oversight.

Substance is demonstrated via investment committee processes, risk reports, valuation oversight, and periodic portfolio reviews. Boards should challenge managers, not just defer.

Side letters, conflicts, and valuation policies should be reviewed and approved locally.

Shipping

Shipping operations have clear CIGAs: crew management, logistics, chartering, technical management.

Outsourcing to a local ship manager can work if the company retains strategic decisions (routes, charters, major capex) and documents oversight.

Distributed teams and remote work

Pandemic-era travel exceptions have mostly expired. Virtual-only governance without local presence is risky.

Hybrid models are workable: key executives travel for quarterly meetings; local directors and staff handle day-to-day. Keep travel logs and evidence of in-jurisdiction meetings.

Pillar Two perspective

The OECD’s Pillar Two global minimum tax applies to groups with consolidated revenue above EUR 750 million. Smaller groups aren’t directly impacted, but the same narrative applies: align profits with substance.

Even for large groups, ESR still matters alongside minimum tax, especially in determining where functions and profits belong.

VAT, customs, and local taxes

The UAE and Mauritius have VAT regimes that interact with substance. If you operate a distribution or service center, check VAT registration thresholds, place-of-supply rules, and invoicing requirements.

Customs or free zone rules may dictate inventory handling and documentation.

Case Studies from the Field

A SaaS group and the IP trap

A tech client moved software IP to a Cayman entity to benefit from a zero-tax rate, but all developers and product managers were in Berlin and Toronto. The Cayman company had no staff, just a registered office. That structure was high-risk.

What worked: we re-scoped Cayman’s role to group treasury and commercial contracting for certain markets. IP ownership and DEMPE stayed with an EU entity where dev and product lived. Cayman provided regional go-to-market support and intercompany services, with a small local team (commercial lead, contracts manager, finance). Transfer pricing moved from royalty-heavy to service-fee based. ESR compliance became straightforward and credible.

A family office in Jersey

A family office used a Jersey company as a holding vehicle for private investments across real estate and PE funds. Initially, the board met in London and “ratified” decisions in Jersey—thin substance.

What worked: appoint two Jersey-based directors with transaction experience, move quarterly investment committee meetings to Jersey, and hire a local analyst to prepare investment memos and monitor assets. Minutes started reflecting actual debate on deals and valuations. Costs rose by around GBP 120,000/year, but bank comfort improved and ESR risk dropped dramatically.

A BVI holding company done right

A BVI pure holding company with stakes in operating subsidiaries wanted to remain lean. We kept things simple: a BVI-resident director, a serviced office with dedicated space at the CSP, local custody of statutory records, and two in-person board meetings per year for dividend approvals and material transactions. ESR filings reflected “pure equity holding” with adequate premises and expenditure. The company passed an inquiry with minimal follow-up.

A UAE distribution hub

A manufacturing group shifted Middle East distribution to a UAE free zone entity. To build substance, they hired a regional GM, two account managers, and a logistics coordinator; leased a small warehouse; and onboarded a local 3PL. Contracts with regional customers moved to the UAE entity, which invoiced and got paid locally. VAT registration, customs processes, and ESR aligned. With cost-plus 8% pricing validated by a benchmarking study, audits were smooth and banks were cooperative.

Compliance Timelines and Filing Tips

Notification vs. return: Many jurisdictions require an initial annual notification (declaring if you’re within scope) and a more detailed return later.

Typical windows: 6–12 months after financial year-end for returns; notifications can be earlier (e.g., Cayman historically required notifications by January for calendar-year entities). Always check current dates.

Financial period choice: Some jurisdictions let you select a financial period; choose one that suits your operational calendar and other filings.

Reporting content: Describe CIGAs, staff counts (with roles), premises, outsourcing arrangements (with provider details), and expenditure levels. Be precise and consistent with your statutory accounts.

Attach supporting documents if the portal allows: org charts, job descriptions, leases. If not, keep them handy in case of a follow-up.

A practical habit: run an internal “substance pack” close to year-end—board minutes, staff list, premises proof, and spend summary—so filing is just a matter of transcribing.

How Regulators Assess and Audit

Most authorities use a risk-based approach. Red flags that often trigger review:

Entities claiming high-margin activities (finance, IP, HQ) with no or minimal local staff.

Inconsistent data: ESR filings list staff, but no payroll is reported; or big revenue with tiny local spend.

Frequent director churn or directors serving on hundreds of boards across sectors they don’t understand.

Cut-and-paste filings across multiple entities in different industries.

If you’re contacted:

Respond promptly with a concise, coherent package. Include a cover memo explaining your business model, CIGAs, and how your people and premises map to them.

Provide calendars, minutes, and evidence of contracts signed locally.

Offer to host a site visit. Transparency builds trust.

Exit, Migrations, and Winding Down

If you can’t or don’t want to build substance in an offshore jurisdiction, plan an orderly transition:

Migrate the company (continuation) to another jurisdiction where your team is based. Many offshore jurisdictions allow redomiciliation.

Move activities and contracts first, then move the entity. Don’t leave a hollow shell claiming revenue it doesn’t earn.

Keep ESR filings up until the migration date. Document the transition—board approvals, notices to counterparties, and final accounts.

For wind-downs:

File final ESR reports if the entity had a relevant activity during the period.

Settle taxes/VAT (if any), close bank accounts, and retain records per statutory retention rules (often 5–7 years).

A Simple, Actionable Checklist

Map activities and CIGAs for each entity.

Choose the right substance model (holding, operational hub, specialist).

Appoint experienced local directors and set a governance calendar.

Lease appropriate premises; maintain a premises register.

Hire staff aligned to CIGAs; avoid 100% contractor models for core functions.

Execute and monitor local outsourcing with detailed SLAs.

Align contracts and cash flows; open and use local bank accounts.

Prepare transfer pricing documentation; match profit to function and risk.

Build an audit trail: board packs, minutes, oversight logs, payroll, and invoices.

File notifications and ESR returns on time; keep evidence consistent with accounts.

Reassess annually and whenever your business model changes.

Personal Lessons After Years of Doing This

A few patterns have repeated across industries and jurisdictions:

Start small, but be real. A single strong director, a part-time controller, and a modest office can satisfy substance for a simple business far better than a façade of grand titles and zero local activity.

The board is your backbone. Strong chairs and engaged directors protect you when regulators or banks ask tough questions. They also improve the business. I’ve watched sloppy deal approvals transform into disciplined investment processes once boards began meeting properly onshore.

Outsourcing is fine—control isn’t. Keep decision rights local, read the reports, and document oversight. It’s amazing how many failures come down to “we relied entirely on a provider in another country.”

Write for a human, not a checklist. When you draft minutes or filings, tell the story of your business clearly and candidly. A coherent narrative backed by evidence beats jargon every time.

Don’t leave IP in limbo. If your brand or software is the crown jewel, either build a real team where the IP lives or repatriate it to where the team sits. Half-measures get expensive.

Bankers notice everything. Even before regulators do. If your offshore entity never pays a bill locally and all signatures are abroad, expect hard questions or account closures.

Final Thoughts

Substance is not about photos of desks and a receptionist. It’s about aligning your profits with the people and processes that create them, and being able to prove it. The offshore jurisdictions that thrived under the new rules are the ones that embraced real business—high-caliber directors, credible administrators, and practical frameworks that let companies operate efficiently.

If you approach substance as a box-ticking exercise, you’ll spend money and still feel exposed. If you treat it as an opportunity to professionalize governance and put the right work in the right place, compliance becomes a byproduct of good operations. That’s the sweet spot—credible, cost-effective, and sustainable.