Editor's Note: On 1 July 2024, the new Company Law of the People's Republic of China (the "New Company Law") came into force, clarifying the simplified cancellation system and adding a mandatory cancellation system on top of the original ordinary cancellation system for companies, providing convenience for the exit of market entities. Enterprises with ordinary cancellation should pay tax in a timely manner and register for tax cancellation; enterprises with simplified cancellation should make a written commitment that they have settled the tax payable, and those with untrue commitments will be held jointly and severally liable. In practice, if the tax authorities find that the cancelled enterprise owes tax or evades tax, they may recover the tax from the enterprise by resuming the tax registration or business registration, or they may recover the tax from the shareholders by filing a civil lawsuit or taking an administrative action, and the responsibilities and risks faced by the enterprise and shareholders are different in different cases, which will be briefly analysed in this article.

I. After the cancellation of an enterprise, the tax authorities recover taxes from the enterprise and shareholders in different ways

According to the Guidelines on Enterprise Cancellation revised by the General Administration of Market Supervision, the State Administration of Taxation and five other departments, the termination of an enterprise's business activities and its withdrawal from the market usually involves three main processes, namely, resolution of dissolution, liquidation and distribution, and cancellation and registration. In the case of ordinary write-off system, the taxpayer shall submit relevant supporting documents and information to the tax authorities, pay the tax, cancel the invoices and registration documents, and apply for tax write-off registration after approval by the tax authorities. In the case of simple cancellation system, all the investors of the enterprise shall undertake in writing that the main body of the business has not incurred debts or debts have been settled, so that they can be exempted from the tax clearance certificate, and go directly to the market supervision and management department for the cancellation of the registration. In practice, if the tax authorities find that the cancelled enterprise owes tax or evades tax during its existence, they may recover the tax from the cancelled enterprise, and may also recover the tax from its shareholders or investors by: (i) issuing a notice of tax matters to require the enterprise to pay back the tax; (ii) reinstating the industrial and commercial registration or tax registration of the cancelled enterprise, and then requesting the enterprise to pay back the tax; (iii) issuing a notice of tax matters directly to the shareholders to recover the tax; (iv) issuing a notice of tax matters directly to the shareholders to recover the tax; and (v) issuing a notice of tax matters directly to the shareholders to recover the tax. (iv) filing civil lawsuits to assert claims against shareholders or investors; and (v) transferring to the judicial authorities if the enterprise is found to have committed the offences of false invoicing or tax evasion.

II. Tax authorities should follow the principle of administration in accordance with the law in recovering taxes from cancelled enterprises

(i) Cancelled enterprises cannot become eligible administrative counterparts

According to the relevant provisions of the Civil Code, the Company Law and the Regulations on the Administration of Registration of Market Entities, the cancellation of a company means the elimination of the legal personality of the legal person, and its legal status as the subject of liability has ceased to exist, so that the acts of the tax authorities in requesting it to make tax re-payment or in imposing administrative penalties are invalid, and this is the viewpoint of most of the court judgements in practice. In particular, if an enterprise is cancelled for the reason of separation, according to Article 48 of the Tax Administration Law, if the taxpayer has not paid the tax at the time of separation, the taxpayer after separation shall bear joint and several liability for the unfulfilled tax obligation.

(ii) Restoration of the business registration or tax registration of cancelled enterprises should be legal and compliant

In that case, can the restoration of an enterprise's industrial and commercial registration or tax registration make the enterprise an appropriate administrative counterparty? At present, enterprise cancellation adopts a dual registration system of tax cancellation and business cancellation, and restoration of tax registration alone cannot produce the effect of restoring the qualification of a legal person, so the tax authorities will request the restoration of an enterprise's registration as a market entity by sending a letter to the market registration authority, and then request the enterprise to pay back taxes or make a decision on penalties. However, according to the Regulations on Administration of Market Entity Registration and Guidelines on Enterprise Cancellation (2023), if an enterprise submits false materials or adopts other fraudulent means to conceal important facts in the cancellation registration to obtain the cancellation registration, the registration authority may revoke its cancellation registration and reinstate the enterprise subject qualification in accordance with the law. If the cancelled enterprise does not exist in the above circumstances, the municipal supervisory department may not be able to revoke the cancellation registration of the enterprise solely on the basis of a letter from the tax authority.

III. After the cancellation of the enterprise, can the tax authorities recover the tax directly from the shareholders?

(i) The joint and several liability of shareholders for tax arrears of a cancelled enterprise shall be subject to the statutory circumstances

In the case of a limited company, according to the Company Law, it shall bear limited liability for its debts with all its assets. If there is (a) abuse of the independent status of the company and the limited liability of the shareholders to the detriment of the company, its shareholders and creditors; (b) failure to make capital contribution, failure to fully fulfil the obligation to make capital contribution or absconding from the capital contribution; (c) failure to carry out the liquidation procedures upon dissolution of the company or failure to carry out the liquidation procedures in accordance with the law; and (d) in the case of a one-person limited liability company If the shareholders cannot prove that the company's property is independent of their own property, the creditors will be able to claim that the shareholders are jointly and severally liable for the debts of the enterprise during its existence. Disregarding the issue of statute of limitations, if the unpaid tax during the existence of the enterprise is regarded as a kind of claim, the liability of the shareholders will be different under different circumstances. In the case of ordinary cancellation, if the above four circumstances exist, the shareholders will face the risk of being jointly and severally liable for the unpaid taxes during the company's existence. However, if the company has been legally dissolved, announced and cancelled, and there are no other three types of actions that are detrimental to the interests of the creditors, the tax authority adopts the form of "piercing the corporate veil" to directly issue a notice of tax matters to the shareholders to require them to make up for the tax and late payment, which is lacking in sufficient legal basis, and there are also disputes in the judicial practice. In the case of simple cancellation, according to Article 240 of the Company Law, one of the prerequisites for simple cancellation is that all the shareholders of the company in the period of existence of the company has not generated debts or has been paid all the debts to make a commitment to the shareholders if there is a commitment is not true, then the cancellation of the debt before the registration of joint and several liabilities, i.e., the shareholders should be for the cancellation of the enterprise before the arrears of tax joint and several liabilities. If the shareholders in the process of cancellation of the company does not exist inaccurate commitment, fraudulent cancellation of registration with false liquidation report and other circumstances, the shareholders are required to assume responsibility for the tax arrears in the law is not justified.

For a sole proprietorship or partnership, according to the Partnership Law and the Sole Proprietorship Law, if the assets of the invested entity are insufficient to settle the debts, the general partner of the partnership and the investor of the sole proprietorship shall bear unlimited joint and several liabilities for the debts that are not settled during the period of the invested entity's existence, while the limited partner of the partnership shall bear limited liability limited by the amount of the capital contribution he/she subscribed. The limited partners of a partnership have limited liability up to the amount of their capital contribution. Similarly, if the tax arrears during the existence of a partnership or a sole proprietorship are regarded as a kind of claim, the investor will be exposed to the risk of assuming joint and several liability for the payment of the tax arrears.

(ii) There is no basis in law for the tax authorities to take administrative action to recover tax arrears directly from the shareholders of a cancelled enterprise.

In practice, the basis for the tax authorities to directly issue notices of tax matters to shareholders for the recovery of tax includes the Company Law, the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II), the Law on Individual Sole Proprietorship Enterprises, and the Law on Partnership Enterprises, among others. On the one hand, according to the principle of administration in accordance with the law, the tax authority, as the administrative organ responsible for the collection of taxes, shall be authorised by the Tax Administration Law and relevant laws and regulations. If there is no clear laws and regulations for authorisation, the tax authorities require taxpayers, withholding agents other than the subject of administrative responsibility against the principle of "no authorisation can not be", beyond the boundaries of administrative power. On the other hand, civil and commercial law as a private law should not be applied in the field of tax law, which should be invoked in public law, otherwise it may lead to administrative relative's rights being compromised. Specifically, if the tax authorities invoke civil and commercial law to treat shareholders as administrative counterparts in the recovery of tax arrears of a cancelled enterprise, the shareholders can only initiate administrative remedial procedures if they pay the tax, pay late fees or provide tax guarantees, but cannot initiate civil proceedings.

(iii) The tax authorities shall follow the rules of civil litigation in initiating civil proceedings to recover tax arrears from shareholders of cancelled enterprises.

As mentioned above, the legitimacy of the tax authority to invoke the Company Law and its judicial interpretations to make administrative acts is debatable, but the tax authority as a creditor may file a civil lawsuit to claim tax claims on the basis of which the shareholders are required to bear joint and several liability for tax claims during the survival of the enterprise, as in the case of the dispute between the State Administration of Taxation, Lishui Municipal Taxation Bureau, and the shareholders of Hu Moumou, a dispute over liability for harming the interests of the company's creditors [(2019) Zhe 1126 Civil Court No. 237]. However, the civil litigation rules of the statute of limitations and tax law recovery period is in conflict, the civil law of the statute of limitations for three years, while the tax law of the recovery period of three years or five years, and for the existence of tax evasion can be indefinite recovery. The issue of how to calculate the statute of limitations when the tax authorities apply civil law procedures to recover taxes is also a problem that needs to be solved.

(iv) Where a cancelled enterprise is suspected of committing a crime prior to cancellation, shareholders may face the risk of criminal liability

According to Article 215 of the Interpretation of the Criminal Procedure Law of the Supreme People's Court and the Reply of the Supreme People's Procuratorate to the Approval of the Supreme People's Procuratorate on the Issue of How to Prosecute Suspected Criminal Units that have Been Revoked, Cancelled, Suspended or Declared Insolvent, when a people's court hears a case of a unit crime, and the defendant unit has been cancelled or declared insane, there shall be no further recourse to prosecute the unit; however, those persons directly responsible for the crime of the unit, the persons in charge of the unit, and other persons directly However, if the persons in charge and other persons directly responsible for the unit offence should be held criminally liable, the trial shall continue. If the tax violations occurring before the cancellation of the enterprise constitute a crime, then the tax authorities may transfer the case directly to the public security authorities to file a case, and if the public security authorities find that the case indeed constitutes a crime after investigation, the relevant responsible persons will face the risk of assuming criminal liability.

IV. Conclusion

In practice, it has been controversial as to whether the tax arrears of a cancelled enterprise should be recovered from the enterprise or the shareholders. In recent years, tax bureaus and municipal supervisory bureaus in many places have signed a cooperation mechanism to strengthen the verification of tax payment before the cancellation of enterprises and to increase the supervision of tax arrears of cancelled enterprises. For cancelled enterprises with tax arrears and other problems, the tax authorities will send a letter to the Municipal Supervisory Bureau to restore their subject status, and then take administrative actions to recover taxes or make a decision on penalties. Enterprises that fail to pay taxes, late fees and penalties in a timely manner may face the risk of criminal liability. For the shareholders of cancelled enterprises, they still face the risk of being required by the tax authorities to take administrative actions or file civil lawsuits to pay back taxes and late fees, and they should also take active measures to safeguard their legitimate rights and interests by adopting administrative tax remedies when necessary.