Three months into the deal, someone finally asked where the IP was held.
Not who owned it. Not what it was worth. Where it sat - which entity, which jurisdiction, under what license. The answer turned out to be a BVI company that hadn’t filed anything since 2019, nominally owned by a Cyprus holding entity whose sole director was a corporate services provider in Limassol who also served as director for 400 other companies.
This wasn’t a scam. This was a Series B company with real revenue, real customers, and a cap table full of sophisticated investors. Nobody had diligenced the offshore structure because everyone assumed someone else already had.
We see this pattern constantly. And it almost never surfaces during financial DD.
Why Financial DD Misses Offshore Structures
Financial due diligence looks at numbers. Revenue recognition, working capital, normalized EBITDA. The team running it is usually a Big Four firm or a mid-market accounting practice. They’re good at what they do. What they don’t do is trace entity chains across jurisdictions and ask whether the structure actually works.
Here’s what “works” means in practice:
Does the entity have substance? Not the legal definition of substance - the real one. Is there a person in that jurisdiction who makes decisions about the entity’s operations? Can you call them? Do they know what the entity does? Or is it a brass plate on a shared office in Nicosia with a corporate secretary who handles the annual filing and nothing else?
Does the transfer pricing hold up? If the operating company in Germany pays a royalty to the IP holding company in Ireland, is that royalty at arm’s length? Has anyone actually done a benchmarking study, or did the company’s tax advisor set a number five years ago and nobody revisited it? We’ve seen transfer pricing documentation that was copy-pasted from a template with the previous client’s name still in the footer. That’s not an edge case. That’s Tuesday.
Is the beneficial ownership chain clean? Post-CRS, post-DAC6, post-Pandora Papers - can you trace every entity in the chain to a real person with a real tax residence? Are there nominee structures that made sense in 2012 but are now a liability? Are there bearer shares that were supposed to be immobilized but never were?
Most acquirers and investors skip these questions entirely. They look at the org chart, see “Cyprus HoldCo” and “Ireland OpCo,” nod because that sounds like a normal structure, and move on. The problem is that a normal-looking structure and a compliant structure are very different things.
The Three Offshore DD Failures We See Most
1. The Inherited Structure Nobody Understands
A founder sets up a company. Gets advice from a friend’s accountant. Incorporates a BVI entity because “that’s what you do.” Four years and two funding rounds later, nobody in the company can explain why the BVI entity exists, what it holds, or what obligations it has.
We worked with a company that had a Maltese entity in their chain. When we asked the CFO about it, he said it was “for EU market access.” Malta was in the EU, sure. But the entity had never traded, never employed anyone, and never filed a tax return. It existed because the original advisor thought it might be useful someday. Four years of non-compliance later, the cost to unwind it was six figures in advisory fees and a voluntary disclosure to the Maltese tax authority.
The acquirer in that deal repriced by EUR 300K. Not because the tax exposure was necessarily that high - because nobody could tell them with certainty that it wasn’t.
2. The Structure That Worked Until It Didn’t
Tax rules change. Substance requirements tighten. What was compliant in 2020 isn’t necessarily compliant in 2026.
The classic example: a Dutch holding company used for its participation exemption. Pre-2024, you could run a fairly lean operation. Post-ATAD implementation and the Dutch government’s own crackdown on letterbox companies, the requirements shifted. We’ve seen holding structures where the Dutch entity had one part-time employee, a serviced office, and board meetings held by phone from London. That was marginal five years ago. Today it’s a substance failure waiting to be challenged.
The problem with DD is that it tends to evaluate structures as they exist today, not as they’ll be evaluated tomorrow. If you’re acquiring a company with a Dutch holding entity, you need to know: does this structure survive a tax audit in 2027? Not just in 2026. Because if the structure gets challenged post-acquisition, that’s your problem now.
We had a client who acquired a SaaS company with a Singapore IP holding entity. The structure was originally set up to benefit from Singapore’s IP development incentive. Reasonable enough. But the actual development was done by contractors in Eastern Europe, the company had no Singapore-based technical staff, and the “development activities” attributed to Singapore were basically project management emails sent by the founder during layovers at Changi Airport. The tax authority didn’t find that compelling.
3. The Structure That’s Actually a Liability
Some offshore structures don’t just fail to provide benefits - they actively create risk.
CFC rules are the obvious one. If you’re a UK parent company with a subsidiary in a low-tax jurisdiction, and that subsidiary’s profits are primarily passive income or income from arrangements with connected parties, those profits can be attributed back to the UK parent. We’ve seen companies that set up UAE entities “for tax efficiency” without understanding that the UK’s CFC rules would attribute the income straight back. The entity cost money to maintain, created compliance obligations in two jurisdictions, and provided zero tax benefit. Net negative.
Then there’s the reputational angle. Post-Panama Papers, post-Paradise Papers, post-Pandora Papers, having a BVI or Cayman entity in your chain is a headline risk. It might be entirely legitimate. But if a journalist runs your company name through the ICIJ database and finds a connection, you’ll spend more time explaining it than you saved in tax.
For PE firms doing mid-market deals, this matters. Your LPs care about ESG. They care about governance. A structure that looks aggressive - even if it’s technically compliant - creates a conversation you’d rather not have during fundraising.
What Proper Offshore Structure DD Actually Looks Like
Forget the org chart review. That’s where everyone starts and where most people stop. Here’s what a real review covers:
Entity-by-entity substance audit. For every entity in the chain, document: number of employees, physical office (owned or leased, not serviced), bank accounts, board composition, where board meetings happen, evidence of local decision-making. If any entity scores zero on all of these, flag it.
Transfer pricing documentation review. Not whether documentation exists - whether it’s current, defensible, and consistent with actual intercompany flows. Pull the last three years of intercompany invoices and compare them to the TP study. If the study says 5% royalty and the invoices show 12%, you have a problem.
Regulatory compliance check. Is every entity current on its filings? Annual returns, tax returns, beneficial ownership registers, economic substance declarations. We’ve seen entities that haven’t filed in three years. The directors didn’t know because the corporate secretary stopped sending reminders after the company stopped paying their fees.
CFC and anti-avoidance analysis. Map every entity against the CFC rules of the ultimate parent’s jurisdiction. Identify which entities could be challenged. Quantify the potential tax exposure if the structure is recharacterized. This isn’t hypothetical - HMRC, the IRS, and the BZSt are all running more CFC challenges than they were five years ago.
Unwind cost estimate. If the structure doesn’t survive scrutiny, what does it cost to fix? Migration of entities, strike-offs, voluntary disclosures, restated transfer pricing. Price this before you price the deal, not after.
The Conversation Nobody Wants to Have
Here’s the uncomfortable truth about offshore structure DD: the people who set up the structure are usually still involved in the business. The founder chose this structure. Their advisor recommended it. Telling them it doesn’t work isn’t just a technical finding - it’s personal.
We’ve sat in rooms where the founder’s tax advisor insists the structure is “fully compliant” while the DD team’s tax counsel is flagging three substance failures and a transfer pricing gap. Those meetings aren’t fun. But they’re necessary, because the alternative is pricing the deal wrong and discovering the exposure post-close.
The best acquirers we work with treat offshore structure DD as a standard workstream, not an add-on. It gets its own section in the DD report. It has its own timeline. And the findings go into the price discussion, not into a side letter that everyone forgets about.
If you’re acquiring or investing in a company with cross-border entities, and nobody on your DD team has looked at the actual structure - not the org chart, the actual compliance status of each entity - you’re not doing due diligence. You’re doing due hope.
What This Means for Your Next Deal
Start with three questions before you engage a full workstream:
- How many entities are in the chain, and can the CFO explain why each one exists? If they can’t, that’s your first red flag.
- When was the last time the transfer pricing documentation was updated? If the answer is “when we set it up,” budget for a rewrite.
- Has any entity in the chain been subject to a tax audit or enquiry in the last five years? If yes, get the correspondence. If no, consider whether that’s because the structure is solid or because nobody’s looked yet.
These questions take ten minutes. They’ll tell you whether you need a full offshore structure DD workstream or whether you can rely on the standard financial DD. In our experience, about 60% of the time, you need the full workstream. The other 40%, the structure is simple enough that the standard review catches it.
Don’t be the investor who discovers the BVI entity six months after closing. By then, it’s not a DD finding. It’s your problem.