M&A 2026: How investors assess EU holding company substance

          At LigLex, with 15 years of deal experience across Central and Eastern Europe, we are observing a tectonic shift. Ten years ago, Ukrainian businesses incorporated holding companies in Cyprus or the Netherlands primarily for tax optimization, and substance was seen as an annoying cost item—typically a nominal director fee.

          Today the reality is different. In 2025–2026, substance is not a compliance formality; it is a reliability coefficient of the asset that directly affects the valuation multiple in a sale. If your holding is “empty,” an investor will not merely ask for a discount—they may walk away from the deal.

          According to KPMG Ukraine, the volume of M&A deals in Ukraine in 2024 reached $1.1 billion (49 transactions), with foreign investors contributing more than 50% of the aggregate value. At the same time, the median EV/EBITDAmultiple in CEE is 6.7x versus 9.4x in Western Europe—part of this “CEE discount” is driven by structural and tax risks, including weak substance (Forvis Mazars, 2024).

What is holding company substance—and why does it matter in M&A?

Substance is the provable “reality” of management, functions, and the economic role of an entity within a structure—not merely a legal shell.

Investors (and their investment committees) ask one basic question: “If this structure is audited tomorrow by the tax authority, a bank, or a regulator—will it withstand scrutiny based on logic and documentation?” If the answer is “not sure,” the outcome is valuation adjustments and stronger buyer protections in the SPA.

For holding structures, substance typically includes:

• a physical office in the country of incorporation (not a virtual address);
• local directors with genuine decision-making authority;
• employees with relevant qualifications;
• bank accounts in the same jurisdiction;
• documented evidence that strategic decisions are made locally.

“Substance is a key topic when creating investment structures. However, the notion of substance is broad and may include different elements. Tax authorities and regulators may also interpret it differently,” note EY Luxembourg partners Nicolas Gillier and Patricia Goodino Jonas.

EU regulatory pressure has intensified through three mechanisms:

• ATAD I/II (Anti-Tax Avoidance Directive): the General Anti-Abuse Rule (GAAR)—“non-genuine arrangements” without economic rationale can be ignored for tax purposes;
• DAC6: mandatory disclosure of cross-border arrangements meeting certain criteria (hallmarks);
• Pillar Two (15% global minimum tax): effective from 2024 for groups with revenue above €750 million, with the substance carve-out directly linked to payroll and tangible assets.

How does weak substance affect valuation?

Weak substance rarely “kills the deal immediately,” but it systematically reduces price through risk adjustments and buyer protection terms. In practice, this often means a 5–15% loss of Enterprise Value, or an equivalent impact via a combination of price reduction + escrow + special indemnities.

A typical translation of a “compliance risk” into money looks like this:

• lower multiple (risk haircut);
• lower leverage / worse pricing (lenders dislike structural risk);
• more holdbacks/escrow/special indemnities (risk shifted to the seller);
• more pre-closing conditions (CPs) focused on remediation.

The math in practice

If a holding structure enables reduced WHT on dividend distributions (e.g., 5% instead of 15%), that benefit is embedded in the financial model. If substance is weak, an investor will re-run the model at 15% and add penalties and interest.

Example: with EBITDA of €2 million and a 7x multiple, the base valuation is €14 million. A substance risk assessed at €1.5 million NPV (recharacterization + penalties) reduces the price to €12.5 million—-10.7% or -0.75x EBITDA.

Verifiable statistics

From KPMG’s global due diligence survey:

• 55% of material DD findings lead to a deal stopper;
• 38% lead to a purchase price reduction;
• 38% result in additional contractual protections.

In European SPA practice (CMS European M&A Study 2024):

• Tax indemnities appear in 54% of deals—an indicator that tax frequently becomes a dedicated risk allocation topic;
• the seller’s right to participate in tax audits appears in roughly 37% of cases.

According to Bayes Business School, investors spend 30% more time on due diligence in 2024–2025 due to tougher substance requirements.

According to Phoenix Strategy Group, 23% of deals face price renegotiation due to tax risks, with typical adjustments of 15–30% of purchase price. Research by the American Bar Association indicates 38% of failed deals in 2024 were linked to gaps in tax compliance. Moreover, 47% of M&A transactions do not close due to issues identified in due diligence (Ansarada).

Investors typically incorporate tax risk using three mechanisms:

• Debt-like items: tax risks are included as “debt-like” adjustments in the equity bridge, directly reducing price;
• Probability-weighted adjustments: probability × maximum exposure (e.g., 60% × €30 million = €18 million discount);
• Special tax indemnities: for low-probability, high-impact risks.

What substance questions do investors ask in due diligence?

In DD, investors do not test substance as “office + director.” They test the provability of control, functions, and entitlement to outcomes (cash, treaty benefits, IP, financing). Questions typically fall into four streams.

1) Corporate & Governance: “Where are decisions actually made?”

• Where is central management located (board, key decisions, minutes)?
• Is there quorum, competence, and real discussion—not templated minutes?
• Who signs contracts and payments, under which policies?
• Are there authority conflicts between the UBO, local directors, and management?

2) Tax & Treaty: “Is the structure entitled to its tax outcomes?”

• Is there a risk the holding is a conduit/shell (beneficial ownership in doubt)?
• How are dividends/interest/royalties structured: where does WHT arise, is treaty relief available?
• Do functions and risks align with income (especially for financing and IP)?
• Is there exposure under ATAD logic (interest limitation, CFC, hybrid mismatches)?
• Were there DAC6 triggers/reports for cross-border arrangements?

3) Banking & Financing: “Will the structure pass lender and KYC filters?”

• How were bank accounts opened, and who maintains bank relationships?
• Is there evidence of the economic rationale for transactions and flows?
• Is there dependence on a “single person” without control procedures?

4) Operational Reality: “Are there functions, people, processes?”

• Are there staff/contractors with measurable tasks?
• Where is document flow handled (invoices, approvals, policies)?
• Is there an activity trail: contracts, service models, management reporting?

“Businesses should take a critical look at their structures to identify companies that may be regarded as lacking economic presence,” recommend White & Case experts.

Gateway tests: when a structure faces enhanced scrutiny

Three “red gate” criteria:

• more than 75% passive income (dividends, royalties, interest) over the last two years;
• more than 60% cross-border activity (income or assets in other jurisdictions);
• outsourcing administration and decision-making to third parties.

If the company passes all “gates,” it is subject to enhanced review.

What do substance covenants in SPAs look like in 2025–2026?

Substance covenants are contractual commitments to maintain or create a provable management “reality” of the structure through closing and during the post-closing transition.

Warranties (seller statements)

• confirmation that the company is managed from its tax residence jurisdiction;
• beneficial owner status for received income;
• compliance with economic presence requirements;
• compliance with transfer pricing and the arm’s length principle.

Indemnities (compensation obligations)

• general tax liabilities up to closing;
• denial of treaty benefits due to lack of substance;
• WHT reassessment due to structural issues;
• secondary liability after completion.

Conditions Precedent (CPs)

• delivery of an evidence package (minutes, board packs, delegations);
• confirmation of availability of key staff/providers;
• remediation of identified red flags (nominee directors, “empty” service models).

W&I insurance nuance: insurance can help, but “known” substance risks are often excluded or require separate escrow/indemnity. If substance is weak, the insurer typically will not cover that risk—it remains with the seller.

Typical protection mechanism parameters

Substance criteria: minimum vs. recommended

Jurisdiction comparison: Netherlands, Luxembourg, Cyprus

Investors do not view NL/LUX/CY as “brands.” They view them as sets of expected, provable indicators of management and residence.

Netherlands

• at least 50% of directors are NL tax residents;
• decisions must be made in the Netherlands;
• for financing companies: €100,000 annual spend on staff and office (24+ months);
• baseline maintenance: €5,000–15,000/year;
• M&A-ready: €25,000–60,000+/year.

Luxembourg

• majority of directors are LUX residents for financing companies;
• key decisions made in Luxembourg;
• minimum share capital: €12,000 (S.à r.l.) or €30,000 (S.A.);
• baseline SOPARFI maintenance: €15,000–25,000/year;
• M&A-ready: €30,000–60,000+/year.

Cyprus

• “management and control” test: majority of directors are Cyprus residents;
• minimum of 3 board meetings per year in Cyprus;
• physical office (not virtual);
• baseline maintenance: €3,000–6,000/year (lowest-cost option);
• M&A-ready: €15,000–40,000+/year.

Table: Substance criteria — minimum vs. recommended

How to prepare a holding structure for a sale?

Preparation should start 12–18 months in advance—the minimum time to fix structural issues without rushing and without a discount. Substance is not a “document pack”; it is a behavioral and process track record that needs time to mature and leave a provable trail.

Preparation roadmap

Months 0–2: Diagnostics and risk map

• Substance audit of the holding and flows (legal + tax + banking lens)
• Red flag map and prioritization of “what kills price/deal”

Months 2–6: Governance and functional remediation

• Governance rebuild (board cadence, delegations, approval matrix)
• Service model (what the holding does and why it makes sense)

Months 6–10: Evidence base and data room

• “Substance dossier” (see checklist below)
• Investor narrative: economic role, control, compliance

Months 10–18: Vendor DD / Investor Ready

• Pre-check (how a buyer will assess)
• SPA logic and deal-structure options

What can be fixed fast (weeks–months)

• Data room setup
• Compliance documentation
• Voluntary disclosure agreements (VDA) on tax topics
• KPI reporting setup

What cannot be fixed fast (6+ months)

• Creating real substance in a new jurisdiction
• Comprehensive transfer pricing documentation
• Closing multi-year tax compliance gaps
• Multi-jurisdiction restructurings

Self-check: is your holding ready for sale?

Start with: “If I sell tomorrow, can I show within 48 hours who decides what, where, and how in the holding?” If not, you are in the discount zone.

Quick mini-checklist
☐ Regular board meetings with substantive minutes?
☐ Bank signatories and approvals linked to holding jurisdiction?
☐ Contractual logic for intra-group services/financing?
☐ People/roles (in-house or dedicated contractors) with defined tasks?
☐ A consistent documentary trail across key flows?

Substance dossier: what investors expect in the data room

• Org chart + descriptions of holding functions
• Board minutes/resolutions packages + board packs
• Authority matrix; treasury/approval policies
• Bank statements with flow explanations
• Key agreements (service, loan, IP, management)
• Evidence of presence (office/resources/providers) and factual management

FAQ

Q: How much does it cost to build substance in the Netherlands?
A: It depends on functions (simple holding vs treasury/IP) and the “level of provability” required by investors. Baseline maintenance: €5,000–15,000/year. M&A-ready with staff, office, and professional management: €25,000–60,000+/year. For financing companies, minimum staff cost is €100,000/year.

Q: Can substance be fixed in 3 months before closing?
A: Partly—yes (documentation, governance, data room). But a 3-month management track record is limited. Investors will see “window dressing,” which is itself a risk. Result: escrow/covenants and/or price reduction.

Q: Do investors check substance in deals below $5M?
A: Yes, if there is a cross-border structure, dividend/interest repatriation, or bank financing. Deal size matters less than cross-border exposure. Smaller deals may see lighter DD, but baseline questions remain standard.

Q: What is more common: price reduction or stronger SPA terms?
A: Typically the SPA is strengthened first (indemnities, escrow, CPs). If risks are not “controllable,” buyers move to a price haircut or a different deal structure.

Q: Does Pillar Two affect mid-market businesses?
A: Formally, it applies to groups with €750m+ revenue. Indirectly, it affects investor/lender standards and ETR thinking. Pillar Two introduces SBIE—the carve-out depends on payroll (10% in 2024 → 5% by 2033) and tangible assets (8% → 5%).

Q: Can W&I insurance “close” the risk?
A: Partly, but known/structural risks are often excluded or require separate escrow/special indemnities. Addressing root causes is typically superior.

Q: How to prove the holding is not a conduit?
A: Through the chain “functions → decisions → people/processes → documents → money.” Investors do not believe one document; they believe a coherent evidence system.

Q: What about ATAD III (Unshell Directive)?
A: After three years of negotiations, the EU Council officially dropped the directive in June 2025 (ECOFIN Report 9960/25). Instead, DAC6 is expected to be expanded to include hallmarks related to shell entities. Existing ATAD I/II and GAAR rules remain in force.

Conclusion: substance as an investment advantage

Holding company economic presence is no longer a compliance formality—it is a deal-value factor. Under increasing EU regulatory pressure and standardized tax due diligence, substance becomes a competitive advantage in M&A.

The difference between “formal” and “real” substance is the difference between full valuation and a 15% discount; between fast closing and months of escrow negotiations; between a clean exit and multi-year indemnity obligations.

Key takeaway: start preparing the structure 12–18 months before the intended deal. That time is needed to build a track record of local decision-making, create documentation, and eliminate potential red flags.

The LigLex team specializes in structuring holdings for Ukrainian companies preparing for M&A transactions and investment. We begin with a substance audit linked to future DD and SPA expectations—not a “nice folder.” The goal is to remove discount drivers, reduce deal-stopper probability, and design manageable contractual protections for the owner.

If you plan a sale or investment within 12–18 months, a logical first step is a substance diagnostics and an Investor Ready risk map. Let’s discuss.

Author: Sergey Lipatnikov

Sources

1. KPMG Ukraine: M&A Radar 2024 (49 deals; ~$1.1bn)
2. CMS: Emerging Europe M&A Report 2024/2025 (1,281 deals; €25.72bn)
3. Forvis Mazars: CEE M&A Report 2023/2024 (median multiple 6.7x)
4. CMS European M&A Study 2024: tax indemnity (54%), seller participation right (37%)
5. KPMG Global ESG due diligence+ study 2024: impact of material findings
6. EU law (EUR-Lex): ATAD (Directive (EU) 2016/1164)
7. EU law (EUR-Lex): DAC6 (Directive (EU) 2018/822)
8. EU law (EUR-Lex): Pillar Two (Directive (EU) 2022/2523)
9. ECOFIN Report 9960/25: ATAD III withdrawn (June 2025)
10. CMS Expert Guide on substance issues: Netherlands, Luxembourg
11. EY Luxembourg: Substance requirements guidance
12. Reuters, Dec 18, 2025 — global M&A volume, cross-border dynamics, buyouts, banker commentary.
13. Regulation (EU) 2024/1620 (AMLA) and AML Regulation (EU) 2024/1624; EBA ML/TF Risk Factors Guidelines (amending).
14. S&P Global Market Intelligence (Dec 2025) — private capital AUM and dry powder.
15. Reuters, Sep 3, 2025 — shell companies, beneficial ownership, Moody’s assessment, FATF commentary.
16. OECD — BEPS Action 6 (preventing tax treaty abuse), minimum standard / MLI.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice.
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