Substance and tax transparency

What substance means

Economic substance is the evidence that a company does, where it is resident, the work its income comes from: decisions taken there by people who are there, with the staff, premises and spending the activity needs. Two kinds of rule test it.

Jurisdictions with little or no corporate tax have substance laws. The British Virgin Islands’ Economic Substance (Companies and Limited Partnerships) Act 2018, in force since 1 January 2019, requires a company that carries on a relevant activity — banking, insurance, fund management, finance and leasing, headquarters, shipping, holding, intellectual property, or distribution and service centre — to show substance in the BVI and to file an annual declaration through its registered agent within six months of its year-end. A company that is tax resident elsewhere can claim so, with evidence. The Marshall Islands require every non-resident entity to file an annual substance report. Seychelles applies a test through its business tax to companies in multinational groups that want their foreign passive income left untaxed: adequate employees and premises, and for any company other than a pure holding company, its core income-generating activities in Seychelles. Panama adds a test from 1 January 2027 for companies in multinational groups that earn foreign passive income; those that fail it pay 15% on that income. The United Arab Emirates went the other way: its Economic Substance Regulations do not apply to financial years ending after 31 December 2022, and substance there is now tested through corporate tax.

Where there is no substance law — Cyprus, Malta and Liechtenstein among them — substance is still tested: by the rules on tax residence, by treaty partners and banks, and by anti-abuse rules. Cyprus’s decrees of March 2026 test an associated company in an EU-listed or low-tax jurisdiction that receives a payment from Cyprus against criteria such as an independent director, local decision-makers, premises and staff, board meetings and operating costs; failing two or more brings the payment into withholding tax. The EU’s proposed “Unshell” directive, which would have set a common test, was abandoned in June 2025.

Holding, financing, IP and shipping companies

Holding. A company that only holds shares meets the lightest test. In the BVI it reports each year whether its holding is active or passive: a passive holder gives its tax number, its gross income and confirmation that it meets its company-law obligations, and an active one also reports its employees and premises. Panama’s rule asks a pure holding company for one paid, Panama-resident director or officer with suitable experience, and documented premises. In Cyprus the substance of a holding company is its board — decisions taken in Cyprus by directors who are there.

Financing. Lending to group companies is a relevant activity, finance and leasing, under the BVI Act. In Cyprus a group financing company is taxed at 15% on its margin, and its loans carry arm’s-length terms supported by transfer-pricing documentation. Interest is passive income for Panama’s test.

Intellectual property. IP is a relevant activity in the BVI. Cyprus’s IP box follows the OECD nexus approach: 80% of the qualifying profit from patents and copyrighted software is exempt — about 3% effective at the 15% rate — and marketing intangibles do not qualify. The relief follows the company’s own development activity.

Shipping. Shipping is a relevant activity in the BVI. Cyprus offers tonnage tax, currently until 31 December 2029. A Liberian company is not resident in Liberia merely because it owns a Liberian-flag ship; Marshall Islands companies and foreign maritime entities file the annual substance report; and Panama’s 2027 rule excludes companies that commercially operate Panamanian-registered ships.

Exchange of information: CRS and FATCA

The Common Reporting Standard is the OECD’s standard for the automatic exchange of financial account information. Banks and other financial institutions report accounts held by residents of other countries to their own tax authority, which passes the reports each year to the countries concerned. The British Virgin Islands have exchanged since 2017, and Panama, the Marshall Islands and St Kitts and Nevis since 2018 at the latest; Liberia has committed to its first exchanges by 2028; the United States has not adopted the standard.

The 2023 update, sometimes called CRS 2.0, was agreed by the OECD together with the crypto-asset framework and published in June 2023. It brings specified electronic-money products and central bank digital currencies into scope. It applies in the EU from 1 January 2026 through DAC8, and in the BVI from the same date, with 2026 data reported to the International Tax Authority by May 2027. For a structure, the visible result is the self-certification of tax residence that banks ask of each company and trust in it before opening an account.

FATCA is the United States’ own regime: foreign banks report the accounts of US persons to the IRS. Cyprus, Malta, Panama and St Kitts and Nevis have Model 1 intergovernmental agreements in force; in the BVI, under a Model 1B agreement, institutions report to the International Tax Authority. Switzerland still works under a Model 2 agreement; the Model 1 agreement it signed in June 2024 is not expected to take effect before 2028. The Marshall Islands and Liberia have no agreement in the US Treasury’s table.

Crypto-assets: DAC8 and CARF

DAC8, Council Directive (EU) 2023/2226, applies from 1 January 2026. Crypto-asset service providers report on their users, resident and non-resident, and the first exchanges, for 2026, take place by 30 September 2027. DAC8 also covers non-custodial dividend income and certain advance cross-border rulings, and carries the CRS update into EU law. Outside the EU the same reporting follows the OECD’s Crypto-Asset Reporting Framework (CARF): the BVI’s legislation takes effect for 2027, with first exchanges in 2028, and Switzerland applies it from 1 January 2027 at the earliest.

Reportable arrangements: DAC6

Under DAC6, Council Directive (EU) 2018/822, intermediaries — or in some cases the taxpayer — report a cross-border arrangement that bears one of the directive’s hallmarks within 30 days, counted from the day after it is made available or ready for implementation, or from the first step taken to implement it. The hallmarks fall into five categories, A to E. Cyprus applies DAC6 from 30 March 2021, back to arrangements from 25 June 2018. A Commission proposal of 24 June 2026 would recast the rules — among other things removing the category A hallmarks and extending the deadline to 90 days — but tax directives need unanimity in the Council, and it is not law.

Controlled foreign company rules

Controlled foreign company (CFC) rules let a country tax a resident owner on profits kept in a foreign company it controls, where those profits are lightly taxed. Cyprus applies CFC rules under the EU Anti-Tax Avoidance Directive, alongside its interest-limitation, general anti-abuse, exit-tax and anti-hybrid rules. For a company that pays no tax where it is registered, it is in practice the owner’s country of residence and the place where the company is effectively managed that decide where its profits are taxed, through CFC and management-and-control rules.

Pillar Two

Pillar Two is the global minimum tax of 15%. In the EU it is Council Directive (EU) 2022/2523, which applies to fiscal years starting from January 2024 for multinational and large domestic groups with consolidated revenue of EUR 750 million a year or more. That threshold is why it rarely touches a family structure: a family holding company, its subsidiaries and its portfolio are outside it unless the group reaches that size. Several jurisdictions in this knowledge base have added a domestic minimum top-up tax for groups in scope, Cyprus, Liechtenstein, the UAE and the Bahamas among them. For a family company the rate that matters is the ordinary rate where it is resident — in Cyprus, 15% since 2026.

The EU list of non-cooperative jurisdictions

The Council last revised the list on 9 October 2026. Annex I, the jurisdictions the EU treats as non-cooperative, now has eight: American Samoa, Anguilla, Guam, Palau, the Russian Federation, the Turks and Caicos Islands, the US Virgin Islands and Vanuatu. Panama and Viet Nam moved from Annex I to Annex II, and nothing was added. Annex II is not a blacklist: it names cooperative jurisdictions whose commitments are still open — the British Virgin Islands, Brunei Darussalam, Eswatini, Greenland, Jordan, Montenegro, Morocco, Panama, Türkiye and Viet Nam. Belize left Annex II. The next revision is expected in February 2027.

The list matters because member states attach consequences to Annex I. Cyprus withholds tax on dividends, interest and royalties paid to associated companies in Annex I jurisdictions, and from 2026 no longer exempts the profits of a permanent establishment there. Malta refuses its participation exemption for holdings in Annex I entities that cannot show sufficient substance. The tax list is separate from the EU’s list of high-risk third countries for money laundering, which the BVI joined in January 2026 and the UAE left in 2025: that list governs enhanced due diligence by banks and other obliged entities, not tax.