Substantive Operation Compliance

A Hainan entity holding a preferential position is expected to genuinely operate in Hainan. That expectation is assessed across several dimensions at once — where the entity is actually managed and its decisions actually taken, whether it has people here proportionate to what it claims to do, whether its accounting is genuinely maintained here, and whether it holds assets consistent with its stated activity. An entity strong on one dimension and hollow on the others is the profile these rules exist to catch.

The distinction that matters in practice is between not having substance and not evidencing it. Plenty of entities genuinely operate here and would still struggle at assessment, because the decisions were taken in conversation, the board records were signed in another jurisdiction, or the local accounting exists but is reconstructed quarterly from a head-office system. The remedy for the second problem is different from, and much cheaper than, the remedy for the first.

Reconstruction is also the weakest possible position. A file assembled after the question is asked has to explain both the substance and why it was assembled late, and the second explanation tends to attract more attention than the first. Records made contemporaneously carry weight that the same records made retrospectively do not.

We assess the entity against each dimension, separate the genuine gaps from the evidencing gaps, and sequence remediation against what an assessment looks at first. Then we keep the evidencing current on the same compliance calendar as the entity's other obligations, so substance is a maintained position rather than a periodic scramble. The applicable standards are set by the authorities and are revised from time to time; we work from the current published version and, where a position is finely balanced, say so rather than presenting it as settled.