Update: unwinding or simplifying a legacy offshore structure

The trigger is rarely a single event. A group that built its offshore holding layer in the BVI or Cayman Islands a decade ago – when substance rules were thin, beneficial ownership registers (public or government-accessible records of ultimate owners) did not exist, and treaty access could be claimed without a local presence – is now operating under a fundamentally different set of rules. The structure on paper may be identical. The legal exposure underneath it is not.

Across the principal offshore holding centres, economic-substance regimes, mandatory beneficial-ownership registers, and tightened treaty shopping (the use of an intermediate entity to access tax treaty benefits it was not designed to give) rules have converged to make legacy structures a source of active risk rather than a neutral shelf. For groups with a Hong Kong operating hub or holding entity, the position requires a structured re-examination now – not at the next filing cycle.

This briefing sets out what changed, who it reaches, and what the immediate action looks like.

What shifted – and when it started to matter

Three developments have moved in parallel.

First, economic-substance requirements in the BVI and the Cayman Islands require holding companies to demonstrate genuine activity in their place of incorporation – or face penalties and disclosure to their home-jurisdiction tax authorities. A dormant BVI company sitting above a Hong Kong operating entity and doing nothing locally fails that test. The substance regimes apply broadly and have been in force for several years; they are now being enforced.

Second, beneficial ownership registers in offshore centres are being opened – to regulators, in some cases to the public – as part of the FATF standard and evolving bilateral transparency commitments. Structures built on nominee arrangements or layered ownership chains face a straightforward question: does the chain reflect the real commercial and ownership position, or does it obscure it? Regulatory scrutiny of the latter position is intensifying.

Third, the OECD's Pillar Two (the global minimum tax framework targeting MNE groups with consolidated revenue at or above EUR 750 million) has brought a new lens to intercompany flows and where profits sit. Hong Kong's own minimum top-up tax and income-inclusion rule are effective for fiscal years beginning on or after 1 January 2025. For in-scope groups, the holding layer is no longer a neutral element in the tax model.

Layered on all of this is the foreign-sourced income exemption (FSIE) regime in Hong Kong, in force from 1 January 2023 as amended, which conditions the exemption of certain offshore income on economic-substance requirements. A holding company routing dividends, interest, or disposal gains through Hong Kong without genuine substance may lose the exemption.

Who this affects across the corridor

The groups most directly exposed are those that established a BVI or Cayman holding entity – often above a Hong Kong company – during the period when substance and transparency requirements were minimal. The profile is consistent: one or two offshore entities, limited local activity, treaty-access claims based on Hong Kong or a third jurisdiction, and a beneficial-ownership chain that has not been updated since the original structuring.

This is not confined to large MNE groups. Family-owned businesses, private equity structures with a Greater China portfolio, and founder-held groups that internationalised through Hong Kong all fit the pattern. The compliance exposure sits at the intersection of the offshore substance regime, Hong Kong's FSIE rules, and the Significant Controllers Register requirements that apply to Hong Kong-incorporated companies under the Companies Ordinance (Cap. 622) – the latter has been in force since 1 March 2018.

For groups with Mainland China assets or counterparties, the holding layer also intersects with beneficial ownership analysis under Mainland tax rules and the terms of applicable tax arrangements. A structure that once delivered treaty access on paper may no longer do so on substance.

In our cross-border tax and holding-structures practice, we regularly see groups that have not revisited the logic of their offshore layer since it was put in place. The legal environment has moved significantly. The structure has not.

The immediate action

The starting point is a substance-and-ownership audit of the existing structure – not a new chart, but an honest assessment of what each entity actually does, where it does it, who controls it, and whether the beneficial-ownership position is accurately recorded and defensible.

For groups that identify a gap, the options run from in-place remediation (adding genuine substance, correcting ownership records, updating the SCR) through to consolidation or unwinding of the offshore layer. In some cases, Hong Kong's inward company re-domiciliation regime – which commenced in 2025 and allows an eligible non-Hong Kong company to re-domicile to Hong Kong while preserving its legal identity – offers a route to simplification without a full reconstruction. Verify the current commencement date and eligibility criteria before relying on this route.

The sequence matters. A poorly ordered unwind can crystallise the tax exposure the structure was originally designed to manage. Coordination between Hong Kong tax counsel, the offshore jurisdiction's advisers, and – where Mainland assets are involved – PRC tax analysis is not optional; it is the core of the exercise.

For a preliminary read on your structure and the simplification options across the relevant jurisdictions, write to us at info@lockhartyip.com.

Further analysis of the legal and tax considerations in unwinding offshore holding structures is set out in our detailed analysis piece. Our related matter note on a Hong Kong holding company with Cyprus investments illustrates how the cross-border sequencing works in practice. For the full scope of our holding-structures work, see the Holding Structures practice page.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.