Is China creating a new business order? Rationalizing china’s extraterritorial attempt to expand the veil-piercing doctrine

Countries are increasingly using tax policy as an instrument to navigate 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 foreign holding companies, the Chinese tax authority issued Circular 698 granting itself the authority to tax transactions between foreign entities taking place outside of China if the transactions effectively transfer interest in a domestic enterprise. 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 existing independent of tax regulations, which disregards the separate legal personality of a company. This article addresses the legitimacy and policy objectives 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 interprets Circular 698 in a global context, which underscores the legitimacy of Circular 698 and suggests how foreign experiences can improve the enforcement mechanism for Circular 698. By drawing a global picture this article also enhances the proposition that there is a need to have a uniform approach to dealing with the loopholes that Circular 698 tries to fill at the global level.