Is China Creating A New Business Order? Rationalizing China’s Extraterritorial Attempt to Expand the Veil-Piercing Doctrine

Shen, Wei, Watters, Casey | January 1, 2015

Countries are increasingly using tax policy as an instrument to navi-gate through the recent global financial difficulties, and China is no exception. In an effort to avoid the loss of tax revenue resulting from the utilization of for-eign holding companies, the Chinese tax authority issued Circular 698 granting itself the authority to tax transactions between foreign entities taking place out-side of China if the transactions effectively transfer interest in a domestic enter-prise. The phrase “denying the existence of an offshore holding company which is used for tax planning purposes” in Circular 698 appears to share similarities with the veil-piercing doctrine, a long established doctrine of corporate law ex-isting independent of tax regulations, which disregards the separate legal per-sonality of a company. This article addresses the legitimacy and policy objec-tives behind Circular 698 and its implementation, and the article compares the Chinese policy to the application of a similar policy in India. The article then examines how the expansive and extraterritorial veil-piercing scenario created by Circular 698 compares with traditional veil-piercing justifications and the three veil-piercing scenarios listed in China’s Company Law. The article inter-prets Circular 698 in a global context, which underscores the legitimacy of Cir-cular 698 and suggests how foreign experiences can improve the enforcement mechanism for Circular 698. By drawing a global picture this article also en-hances the proposition that there is a need to have a uniform approach to deal-ing with the loopholes that Circular 698 tries to fill at the global level.