Passive vs active directors in blockchain projects: governance, substance, and tax reality

Even as startups, blockchain projects are global in reach. Entities, teams, investors and customers may be split across multiple jurisdictions, a fact that brings with it a host of regulatory and fiscal considerations. For a busy startup founder, questions of legal structure and tax residence can feel secondary, or even alien, but to ignore them is a mistake.

As soon as a project incorporates, issues tokens, holds IP, or earns revenue, it enters the jurisdictional world of states, tax authorities, and regulators. Blockchain projects need to think about how their ambitions and arrangements will be regarded by government authorities, particularly as they scale.  Often, authorities are assessing behaviors and fact patterns rather than the stated goals and practices of a project. This applies in various areas, such as securities - if a securities regulator thinks your utility token is in fact a security, it will treat it as such irrespective of what you officially claim about it. It also applies in tax. Where tax authorities consider an offshore entity is not, in fact, ‘really’ offshore, they may choose to tax it as an onshore entity - having large implications for the project as a whole.

One of the most underestimated elements of this is the question of who sits on the board, and how they behave.  A structure and set of officers that made sense as a tiny startup may not make sense as you rise in revenue and prominence. For blockchain projects using offshore entities, the distinction between passive directors and active directors can determine whether a structure is robust or fragile, compliant or vulnerable.

1. Why directors matter in Web3 structuring

Directors have various roles. Much of the time, directors are the people actually controlling a company - sorting out its daily operations, setting and executing its strategic vision, either themselves or through the employees of the company. Directors are also a legally required role within a company - most jurisdictions require there to be one or more directors for each corporate entity that gets set up. In some jurisdictions, like the BVI and Malta, these can be non-local directors; others, like Singapore, require locally resident directors. 

In the web3 world, directors are often hired simply to fulfill the local requirement to have a director for the new entity. Actual control of the entity may be exercised elsewhere, either by another director in a separate jurisdiction, or by an informally empowered individual who is making most of the decisions. This kind of director is known as a ‘nominee’ or ‘passive’ director. This works, up to a point, but it is important to consider the potential ramifications. 

For tax authorities, directors are not symbolic. They are a key element in determining legal locus of management and control - the place where strategic authority is supposed to reside. This matters enormously for web3 projects, where teams are globally distributed, decision-making is informal or asynchronous, founders may operate across multiple jurisdictions tokens, IP, and treasuries sit inside legal wrappers

Where directors are based, what authority they exercise, and how independent they are shapes:

• corporate tax residence
• transfer pricing outcomes
• access to treaties
• exposure under CFC rules
• Exposure under related parties rules
• regulatory credibility

Web3 teams therefore need to think carefully about when they want to have active directors vs passive directors, where they want to have them, and what the implications of this choice could be for them and their project. Below, we outline passive vs active directors in more detail.

2. What are passive directors in a blockchain context?

A passive director in a blockchain project is typically a professional appointed to provide administrative continuity and local presence, without directing the protocol’s strategic or economic decisions.

In web3 structures, passive directors are commonly used to:

• Satisfy local corporate requirements
• Support offshore holding or IP entities
• Facilitate banking and exchange relationships
• Manage routine filings and approvals
• Preserve founder privacy

These directors are often supplied by professional service firms and may sit on dozens of boards. Their value lies in process, not vision, and they will typically act on the instructions of a company founder / other director, rather than providing independent oversight. 

In many cases, they are a sensible interim solution—especially when the project is pre-revenue or experimental. For foundations, DAOs-in-waiting, or IP-holding entities, passive directors can provide a stable legal shell while the protocol evolves.

Crucially, passive directors are not inherently “bad” or illegitimate. In early-stage protocols, foundations, or treasury entities, they can be highly effective—provided their role is correctly understood and scoped by founding teams.

3. Active directors: providing management and control

By contrast, active directors are those who actually govern. Broadly speaking, an active director is a person who exercises day‑to‑day managerial authority, signs off on material contracts, and can unilaterally direct the entity’s affairs. These active directors can either be supplied by the project itself, or the project can select active, independent directors to join them and their board in exchange for a fee.

In blockchain projects, active directors may conduct a wide variety of activities:

• Approve token launches and emissions
• Control treasury strategy
• Oversee IP licensing
• Manage commercial partnerships
• Direct regulatory and legal posture
• Decide where value accrues

For tax purposes, these individuals matter far more than formal titles or organisational charts. If active directors are making decisions from London, San Francisco, or Singapore, tax authorities may conclude that management and control sits there - regardless of where the company is incorporated.

In decentralised systems, the irony is sharp: governance may be dispersed on-chain, but legal accountability remains stubbornly centralised.

4. The regulatory and tax risks of passive directors

Problems arise when passive directors are used to simulate substance rather than support it. Tax authorities are sceptical of offshore entities that:

• Have no real decision-makers locally - this indicates real control is elsewhere
• Rely on pre-scripted board minutes - shows the local directors are not fully engaged
• Rubber-stamp founder instructions - again, indicates lack of independence
• Have directors with little commercial understanding - show they cannot exercise oversight
• Provide any other fact pattern that could lead to the view they are really controlled in a jurisdiction other than the one in which they claim to be based. 

In blockchain projects, this risk is amplified by:

• Informal governance practices
• Founder-led decision-making outside boards
• Discord- or Telegram-based strategy discussions
• On-chain actions not mirrored in corporate governance

When passive directors merely execute instructions from founders elsewhere, tax authorities may disregard them entirely and attribute control to the founders’ location. This can collapse the tax rationale of an offshore structure overnight.

5. How tax authorities test control

Where web3 projects - or particular entities within a web3 project - want to be situated in a low tax jurisdiction, they will need to make sure they meet various tax residency criteria if they want it to stand up to external analysis. In the event that the entity is investigated by a tax authority and it does not meet a set of tests, the structure will have some unexpected tax bills.

Tax authorities use a “substance‑over‑form” approach when they look at offshore structures. Instead of simply accepting the paperwork that says a company is incorporated in a low‑tax jurisdiction, they ask who actually directs and manages the business on a day‑to‑day basis, and who may lie behind it

Test 1 - Management and control:  The first test is the “place of effective management” (PEM) or “central management and control” (CM&C) test, which examines where the key strategic decisions are made. If board meetings, executive sign‑offs, or major policy discussions regularly take place in another country - whether in a physical conference room, via video‑calls, or through on‑chain voting that is effectively controlled by a handful of individuals - authorities are likely to treat that jurisdiction as the entity’s true residence, regardless of the nominal offshore registration.

Test 2 - CFC analysis: A second test is the Controlled Foreign Company (CFC) analysis. Many jurisdictions have rules that pull the income of a foreign subsidiary into the parent’s tax base when the parent or its affiliates exercise “substantial influence” over the subsidiary. Factors examined include: (i) the percentage of voting rights held by the parent or related parties; (ii) the presence of related‑party loans, guarantees, or service agreements; (iii) whether the offshore entity’s financial statements are prepared by the parent; and (iv) whether the parent can unilaterally appoint or remove directors. If any of these indicators show that the offshore company is effectively a “branch” of the onshore parent, the CFC rules will apply and the offshore profits will be taxed as if they were earned domestically.

Test 3 - Related parties: Beyond ownership and control, tax administrations ask whether the offshore entity is economically dependent on another party. The related‑party test looks at things like (a) significant shareholdings (usually 25 %‑50 % of voting rights), (b) the ability to appoint a majority of the board, (c) material financing arrangements (e.g., a loan that funds more than half of the subsidiary’s cash needs), and (d) the provision of core services (IP licensing, treasury management, accounting) on an exclusive, non‑arm‑length basis. If any of these relationships demonstrate that the offshore company cannot operate independently of the related party, the tax authority will treat the two as a single economic unit and will disregard the offshore jurisdiction for tax purposes..

Test 4 - substance checklist: Finally, tax administrations scrutinise the operational substance of the offshore entity through a “substance checklist.” They look for tangible evidence of a local presence: a physical office lease, locally‑employed staff, local bank accounts, and regular filing of statutory returns. Even the minutes of board meetings are examined - authorities will check whether the minutes reflect genuine deliberation by locally‑resident directors or merely a rubber‑stamp of instructions sent from abroad. If the offshore company relies on nominee or passive directors, this can impact substance. 

In assessing the true residence of a blockchain related entity - a Panama token issuance vehicle, for instance, or a Cayman foundation - tax authorities will look to things like:

• Who controls the treasury
• Who sets tokenomics
• Who holds meetings, what is discussed in those meetings, and who executes them
• Who owns or licenses IP
• Who can pause, upgrade, or terminate systems
• Who negotiates with other parties on behalf of the entity
• Who hires and fires staff
• …. And various other things besides.

Passive directors cannot be used to set the residence of a project entity if these powers are clearly exercised elsewhere. A passive nominee director who merely rubber‑stamps the founder’s instructions often signals a lack of independence, whereas an active director with genuine decision‑making authority can break the economic‑dependence chain and - along with other factors -  help the offshore entity pass the above tests

6. Hybrid boards for Web3 projects

Many of the most robust blockchain structures increasingly use mixed boards.

A common pattern includes:

• one or two genuinely active local directors
• founder-directors with defined powers
• passive directors handling administration

This allows projects to:

• anchor management and control credibly
• satisfy substance expectations
• retain founder influence
• scale governance over time

In such structures, passive directors add operational value without being asked to carry strategic weight they cannot credibly bear.

9. Passive directors as infrastructure, not camouflage

Used correctly, passive directors are part of a broader governance stack. They provide:

• Speed of formation: for projects simply seeking to get started, they can be useful initial directors
• Fulfillment of local requirements: they ensure that you local director requirements are met
• Filings and updates: they ensure that your local filings are kep up to date
• Signatories: as your local signatories, they can help you rapidly execute documents
• Privacy: the names of passive directors can appear on local registries, thus ensuing the privacy of project UBOs and directors elsewhere

They are very useful for projects seeking to rapidly get off the ground, and projects who use them as a part of a wider hybrid governance model. Where they can fall down is in relation to tax. As they scale, projects seeking to ensure their entity is deemed offshore-resident for tax purposes should consider having more local substance in their chosen jurisdiction. One way to obtain this is by having active and independent directors. 

Blockchain projects that survive regulatory scrutiny are those that treat governance as a system, not a loophole.

10. Conclusion: designing for reality

Web3 projects are building new economic systems, but they operate inside old legal ones.

Passive directors are not a shortcut around that reality. They are a tool - useful, lawful, and often necessary. They are useful for startups, and when integrated into a structure that reflects where power truly lies.

Active directors ground a project in tax reality. Passive directors support it legal and operationally. Together, they can form a governance architecture that scales with the protocol.

In blockchain, as in law, decentralisation is not declared. It is designed - and directors are part of that design.

Are you looking for a director? Feel free to contact us on contact@daospv.com