Advisers are better at building structures than at closing them, and clients are better at paying for maintenance than at admitting a structure has stopped working. The result is a category of entity that everyone in the file knows is redundant and nobody proposes to remove, because removing it requires someone to say that the original advice has been overtaken.
This piece is about identifying that entity from the outside, using tests that do not require anyone to concede anything. Each of the signs below is a matter of record rather than of judgement, and each of them can be checked against documents the group already holds.
The question is arithmetic
Start by discarding the framing that makes the decision difficult. The question is not whether the structure was correct when it was built, whether it is legitimate, or whether the jurisdiction has been treated fairly. Those questions produce conversations rather than decisions.
The question is whether the annual cost of holding the entity exceeds the annual benefit it produces, discounted for the probability that the benefit survives the next two years. Both sides of that comparison are calculable, and the calculation usually resolves the matter before the discussion begins.
The cost side is often understated because it is spread across suppliers. Registered agent and registered office fees, director fees where local directors are used, accounting and audit where required, the substance return, the annual government fee, the beneficial ownership filing, the group’s own internal time, and the adviser fee for the annual review that concludes the entity should be kept. The benefit side is often overstated because it is quoted gross, before the charges described below.
Sign one: the entity acquired an activity nobody chose
The most reliable indicator is a document signed for an unrelated reason. Under the substance regimes of the main offshore jurisdictions, an entity within their scope that only holds equity participations and only earns dividends and capital gains sits inside a light regime: the Economic Substance (Companies and Limited Partnerships) Act of the British Virgin Islands gives such a pure equity holding entity a reduced test in section 8(2), and the International Tax Co-operation (Economic Substance) Act (2026 Revision) of the Cayman Islands does the same in section 4(5) for an entity only carrying on that business. An intercompany loan advanced for consideration earns interest, which takes the entity outside that definition, and it can amount to financing and leasing business, or finance and leasing business in the British Virgin Islands wording, which both statutes describe as the business of providing credit facilities for consideration. Holding a trade mark and licensing it is an intellectual property business under both. Either takes the entity out of the reduced test and, where the new activity is a relevant activity, puts the activity it has acquired under the full test for that activity.
The test is mechanical. Read the entity’s agreements and ask which of them generate income of a kind other than dividends and capital gains. If any do, and the income comes from one of the relevant activities the statutes list, the entity is carrying a compliance burden it was never priced for, and the burden is recurring.
The follow-up test is whether anyone noticed. Where a loan has been outstanding for three years and the substance return still describes a pure equity holding entity, the group is not carrying a burden. It is carrying an exposure. In both jurisdictions the authority may determine non-compliance up to six years after the end of the period concerned, under section 10 of the British Virgin Islands Act and section 6 of the Cayman Islands Act, and neither limit applies where the delay is caused by deliberate misrepresentation or negligent or fraudulent action, in the British Virgin Islands wording, or by material misrepresentation, bad faith or fraudulent action, in the Cayman Islands wording.
Sign two: the fixed cost is certain and the benefit is contingent
Compare the two flows honestly and the asymmetry is usually stark.
The costs are annual, invoiced and unavoidable, and they now include penalty exposure, part of which operates on the calendar rather than on the substance. In the Cayman Islands, section 7(8A) of the Act requires the authority to impose, on an entity that must meet the substance test and fails to submit its economic substance report within the time allowed, a penalty of five thousand dollars and a further five hundred dollars for every day the failure continues, penalties the authority cannot impose outside the time limits in section 7(8B). In the British Virgin Islands, section 12(2) of the Act sets the penalty on a first determination of non-compliance at not less than five thousand dollars and not more than twenty thousand dollars, or fifty thousand dollars for a high risk intellectual property entity. Neither charge requires the structure to have been aggressive.
The benefit, by contrast, is generally a deferral or an exemption that depends on facts continuing to hold: a shareholder staying non-resident, a disposal not happening, a treaty remaining in force, a jurisdiction staying off a list. When the benefit is expressed as a probability-weighted number over a realistic horizon, many structures are found to be paying a certain annual cost for a contingent benefit the group does not expect to realize.
Sign three: the jurisdiction moved and the structure did not
Lists change, and they change faster than structures do. Three movements in the past year illustrate the point and each of them is verifiable.
In conclusions published in the Official Journal on 6 March 2026, the Council revised the European list, leaving ten jurisdictions in Annex I and nine in Annex II, with the British Virgin Islands in Annex II. Separately, Commission Delegated Regulation (EU) 2026/83 added the British Virgin Islands to the list of high-risk third countries for anti-money-laundering purposes, in force from 29 January 2026. That is a different list with different consequences: for business relationships and transactions involving a listed country, Article 18a of the anti-money laundering directive requires Member States to make banks and other obliged entities apply enhanced due diligence measures.
The Dutch designation regulation in force from 1 January 2026 lists the British Virgin Islands and the Cayman Islands on its low tax limb, alongside Anguilla, the Bahamas, Bahrain, Bermuda, Guernsey, the Isle of Man, Jersey, Turkmenistan, the Turks and Caicos Islands and Vanuatu, and lists Panama and others on the limb that tracks the European list. That second limb follows the European list in force in the preceding calendar year, which is how article 13ab of the Wet op de vennootschapsbelasting 1969 and article 1.2 of the Wet bronbelasting 2021 define it, and so it still names Fiji, Samoa and Trinidad and Tobago, which appear in Annex I of the conclusions published in the Official Journal in October 2025 but not in the March 2026 text, and does not name Viet Nam, which the March 2026 text added to Annex I together with the Turks and Caicos Islands, already listed on the low tax limb. A structure tested against one instrument and not the other is being tested against the wrong year.
If any entity in the chain sits in a jurisdiction that has moved on any of these lists since the structure was designed, the design assumption has expired. That is not a reason to unwind by itself. It is a reason to re-run the arithmetic with current inputs, which is a task groups defer indefinitely.
Sign four: the home jurisdiction already taxes the income
The strongest single indicator that a structure has stopped working is that the income it holds is already being taxed at the shareholder’s level.
For a Dutch corporate shareholder, the controlled foreign company provision in article 13ab of the Wet op de vennootschapsbelasting 1969 includes in the shareholder’s profit, pro rata to its interest and to the period held, the tainted income a controlled body earns in the year, net of the related costs, to the extent that the balance is positive and has not been distributed by the body before the end of that year. A body is controlled where the taxpayer, alone or together with an affiliated body or individual, holds more than half the nominal paid-up capital, more than half the statutory voting rights, or an entitlement to more than half the profit, and where it is established in a state designated by ministerial regulation that either does not tax companies on profits or taxes them at a rate below nine per cent, measured at 1 October of the preceding calendar year, or appears on the European list in force in the preceding calendar year, unless the body is resident and subject to a profit tax in another state that is not designated. Tainted income covers interest and other income from financial assets, royalties and other income from intangibles, dividends and gains on shares, financial leasing income, income from insurance, banking or other financial activities, and income from invoicing activities that add little or no economic value, consisting of sales or service income earned with goods or services bought from or sold to the taxpayer or an affiliated body or individual.
The provision does not apply where the controlled body carries on a substantive economic activity, and a body is not controlled where its income usually consists mainly of untainted income, or where it is a financial undertaking within the meaning of the anti-tax-avoidance directive whose tainted income usually comes mainly from parties other than the taxpayer and its affiliates. Read the other way, that means a controlled entity holding passive income in a designated jurisdiction with no real activity is the precise case the rule was written for. Where the rule bites, the offshore entity is producing a Dutch tax charge, an offshore compliance cost and no deferral, and a negative balance it generates in a bad year is not attributed but is set against the positive balances of its own tainted income of the six following years, and not below nil.
Sign five: the banking relationship is being managed rather than used
The last indicator is behavioural and it is the one clients recognize fastest.
If someone in the group spends time each year preserving a bank relationship for an entity, rather than using it, the entity is consuming a scarce resource. The European anti-money-laundering framework requires an institution that cannot complete due diligence to refrain from the transaction, terminate the relationship, and consider a report to the financial intelligence unit: today through Article 14(4) of the anti-money laundering directive, as transposed by each Member State, for the customer identification, beneficial ownership and purpose of relationship measures in points (a) to (c) of its Article 13(1), and for banks from 10 July 2027 through Article 21 of Regulation (EU) 2024/1624, which also requires the institution to keep record of the actions taken to apply due diligence, including the decisions taken and their justifications. An account that survives each annual review by a narrow margin is not an asset. It is an unresolved decision that someone else will eventually take.
The related signal is a payment that has to be routed around the structure. Where a group finds itself paying from a different entity because an interest, royalty or dividend payment from the natural Dutch payer to an affiliated entity in a designated jurisdiction would attract the conditional withholding tax, which the Wet bronbelasting 2021 levies, subject to the conditions and exceptions of that Act, at the rate its article 4.1 sets, the highest rate in the table of article 22 of the corporate income tax act, currently 25.8 per cent, the structure has begun to shape commercial behaviour rather than support it.
What unwinding involves, in order
Unwinding is a sequence and the order matters more than the speed.
Establish first what the entity actually owns and what it owes, including intragroup balances that exist only in ledgers. Those balances are the most common obstacle, because writing one off can be a taxable event at both ends and settling one requires cash the group did not plan to move.
Second, deal with the tax consequences of extraction before moving anything. Distribution, liquidation and share transfer produce different results, and the difference is frequently larger than the annual cost that prompted the exercise.
Third, complete the offshore obligations for the final period rather than abandoning them. In the Cayman Islands, for instance, section 7 of the Act requires an annual notification from each entity within its scope and, from an entity that carries on a relevant activity and must meet the substance test, a report no later than twelve months after the end of each financial year, and the final periods are periods like any other. The six-year determination windows described above are counted from the end of each period in both statutes, not from the date the entity ceases to exist.
Fourth, and only then, strike off or liquidate, and keep the records, for at least the period the substance statute sets where it sets one: in the Cayman Islands, section 7(8) of the Act requires an entity that must meet the substance test to retain the related records for six years after the end of each financial year.
When to keep it
The case for keeping an offshore entity has narrowed and it has not disappeared. Three situations survive the arithmetic reliably.
The entity has a real business with people and premises where it is, in which case the substance regime is a description of what it does rather than a burden. The entity holds an asset whose transfer would trigger a charge or a consent that costs more than the entity does, in which case keeping it is deferral and should be recognized as such and reviewed annually against the same test. Or the entity sits in a jurisdiction chosen for a non-tax reason that still holds, typically a regulatory regime, a fund structure or a joint venture partner’s requirement.
Outside those, the useful discipline is to require the entity to justify itself each year in one paragraph, naming the benefit in figures and the person who relies on it. Entities that cannot produce that paragraph are being kept because nobody has proposed removing them, and the difference between that and a reason is the whole subject of this piece.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.