Recently, the State Taxation Administration disclosed a case involving an individual proprietorship that engaged in "escape-style" cancellation. The actual controller of this individual proprietorship concealed operating income of RMB 207 million from the entity's business activities and subsequently evaded tax obligations by completing deregistration. The tax authority characterized such conduct as tax evasion and issued a decision to recover the tax underpaid, impose late payment surcharges and impose penalties against the actual controller. In practice, there are also numerous instances where legal persons (e.g., limited liability companies) and unincorporated organizations (e.g., partnerships) evade tax obligations through means such as submitting false materials for deregistration, and tax authorities pursue tax recovery from individual shareholders of dissolved companies or partners of dissolved partnerships. Under such circumstances, can tax authorities directly pierce through the business entity and pursue tax liabilities against natural persons? This article intends to analyze different types of business entities for readers' reference.

I. Can Tax Authorities Directly Pursue Tax Liabilities Against the Actual Controller of a Cancelled Individual Proprietorship?

(I) Practical Case: Pursuing Tax Liabilities Against the Actual Controller of a Cancelled Individual Proprietorship

On February 15, 2023, Liaocheng Economic and Technological Development Zone (ETDZ) Naipao Trading Business Unit completed its market entity registration as an individual proprietorship. During the period from 2023 to 2024, this individual proprietorship sold goods on online platforms and concealed operating income of RMB 207 million by collecting payments through private bank accounts. On July 11, 2024, it completed the deregistration of its market entity. In July 2025, the tax authority issued a decision to recover taxes, impose late payment surcharges and impose penalties against the actual controller of this individual proprietorship.

(II) Legal Analysis of Tax Authorities Pursuing Tax Liabilities Against the actual controller of a Cancelled Individual Proprietorship

Pursuant to Article 41 of the Measures for the Computation of Individual Income Tax on Individual Proprietorships (Order of the State Administration of Taxation No. 35), "Where an individual proprietorship terminates its production and business operations, it shall settle all tax-related matters with the competent tax authority prior to the deregistration of its registration or prior to its application for cancellation with relevant government departments." Article 16 of the Implementing Rules of the Law on the Administration of Tax Collection provides that "Before completing deregistration of tax registration, a taxpayer shall settle all tax payable, late payment surcharges and penalties with the tax authority." Accordingly, fulfilling tax payment obligations in accordance with the law is a prerequisite for the cancellation of an individual proprietorship. Pursuant to Article 6(13) of the Guidelines for Enterprise Deregistration, "Where a market entity obtains deregistration by submitting false materials or employing other fraudulent means to conceal material facts during deregistration, the registration authority may ... revoke the deregistration in accordance with the law." Accordingly, with respect to tax-violating individual proprietorships that have already been cancelled, tax authorities may send a formal letter to the market regulatory authority regarding the relevant investigation findings, and the market regulatory authority will revoke the deregistration of the individual proprietorship in question in accordance with the law, restore its status as a commercial entity, whereupon the tax authority may pursue recovery of unpaid taxes from the individual proprietorship. Can tax authorities directly issue a Tax Administrative Decision or Tax Matter Notice to the actual controller of the individual proprietorship, requiring the actual controller to bear tax liabilities?

Under Article 54 of the Civil Code, "A natural person who engages in industrial or commercial operations and is registered in accordance with the law is an individual proprietorship." Article 56 provides that "For debts of an individual proprietorship, if the business is operated by an individual, the debts shall be borne by the individual's personal property." Accordingly, if an individual proprietorship has engaged in tax evasion or failure to truthfully declare and pay taxes during its operations, even if deregistration has been completed, the actual controller remains liable for the corresponding taxes, and the tax authority is not required to go through the procedure of revoking the deregistration of the individual proprietorship, but may directly pursue tax liabilities against the actual controller of the individual proprietorship.

II. Can Tax Authorities Directly Pursue Tax Liabilities Against Individual Shareholders of a Cancelled Company?

(I) Practical Case: Pursuing Tax Liabilities Against Individual Shareholders of a Cancelled Company

On March 8, 2025, the tax authority initiated a tax audit against a company regarding its acceptance of fraudulently issued invoices. On March 17, 2025, the company completed its deregistration. On June 3, 2025, the tax authority determined that the company had engaged in tax evasion through false declarations and underpayment of taxes by utilizing fraudulently issued special VAT invoices, and directly issued Tax Administrative Decisions against the company's three individual shareholders. The tax authority, relying on the contents of the Undertaking Letter of All Investors signed at the time of the company's deregistration, which stated that "all claims and debts have been settled prior to the application for deregistration" and that "the enterprise has no unpaid taxes payable and the liquidation work has been fully completed," determined that the three individual shareholders had obtained deregistration by submitting false liquidation materials, and required the three individual shareholders to bear the unpaid taxes and late payment surcharges in proportion to their respective capital contributions.

All investors of an enterprise shall make a written undertaking that the market entity has incurred no claims or debts, or that all claims and debts have been fully settled, whereupon they may be exempted from obtaining a tax clearance certificate and may directly complete deregistration with the market regulatory authority. According to the Guidelines for Enterprise Deregistration, after completing liquidation, a company shall apply for deregistration of tax registration, enterprise registration, social insurance registration, and enterprise bank settlement accounts. In practice, company deregistration is divided into ordinary deregistration and simplified deregistration. Under the simplified deregistration procedure, all investors sign a written undertaking and may directly complete deregistration without a tax clearance certificate. In this case, the three individual shareholders adopted the simplified deregistration procedure.

(II) Legal Analysis of Tax Authorities Pursuing Tax Liabilities Against Individual Shareholders of a Cancelled Company

Under Article 240 of the Company Law, "Where a company has incurred no debts during its existence, or has fully settled all debts, it may, upon the undertaking of all shareholders, complete company deregistration through the simplified procedure in accordance with the provisions. ... Where a company completes deregistration through the simplified procedure and the shareholders' undertaking regarding the contents set forth in paragraph 1 of this Article is untrue, the shareholders shall bear joint and several liability for debts incurred prior to deregistration." Accordingly, one of the prerequisites for simplified deregistration is that all shareholders undertake that the company has incurred no debts during its existence or has fully settled all debts. If the shareholders' undertaking is untrue, the shareholders shall bear joint and several liability for unpaid taxes incurred prior to the company's deregistration. Can tax authorities directly issue a Tax Administrative Decision or Tax Matter Notice against the individual shareholders of the company to directly recover taxes and corresponding late payment surcharges?

In the aforesaid case, the tax authority invoked Article 19 of the Provisions of the Supreme People's Court on Certain Issues Concerning the Application of the Company Law of the People's Republic of China (II), which provides that "Where shareholders of a limited liability company ... obtain deregistration from the company registration authority by submitting false liquidation reports without liquidation in accordance with the law, and creditors claim that the shareholders shall bear corresponding compensation liabilities for the company's debts, the people's court shall support such claims in accordance with the law," and Article 20(2) thereof, which provides that "Where a company completes deregistration without liquidation in accordance with the law, and shareholders or third parties undertake to bear liability for the company's debts at the time of deregistration with the company registration authority, and creditors claim that such shareholders or third parties shall bear corresponding civil liabilities for the company's debts, the people's court shall support such claims in accordance with the law," and directly issued decisions to recover taxes and late payment surcharges from the individual shareholders. However, such enforcement approach lacks legality. On the one hand, under the principle of law-based administration, the functions and powers of tax authorities, as administrative organs responsible for tax collection, shall be authorized by the Tax Collection and Administration Law and relevant laws and regulations. In the absence of explicit legal or regulatory authorization, a tax authority's direct demand that a subject other than the taxpayer or withholding agent bear administrative liabilities contravenes the principle of "no authority without legal authorization" and exceeds the boundaries of administrative power. On the other hand, where a tax authority, acting as a tax creditor, seeks recovery from individual shareholders, it should bring a claim for tax claims through civil litigation in accordance with the Company Law Judicial Interpretation (II), requesting the people's court to order the individual shareholders to bear liability for the company's unpaid taxes, with the judicial organ rendering a final adjudication. A tax authority's direct substitution of an administrative decision for judicial adjudication constitutes an improper usurpation of judicial power by administrative power.

In addition, it is noteworthy that Article 56 of the 2025 Tax Collection and Administration Law (Revised Draft for Comments) introduces the corporate veil-piercing rule under Article 23 of the Company Law into the field of tax collection and administration, explicitly providing that with respect to investors who abuse the independent status of a legal person and the limited liability of investors by withdrawing capital or engaging in malicious deregistration to evade taxes, tax authorities may pierce through the principle of limited liability of the company and pursue tax recovery from such investors. Although this provision fills the institutional gap regarding the piercing of tax claims and clarifies the path for applying corporate veil-piercing in the tax field, the tax authority's "piercing of the corporate veil" should still be subject to the judicial review mechanism established under the Company Law as a prerequisite.

III. Can Tax Authorities Directly Pursue Tax Liabilities Against Partners of a Cancelled Partnership?

(I) Practical Case: Pursuing Tax Liabilities Against a Partner of a Cancelled Partnership

A limited partnership, where its actual business operations were limited to equity investment, fraudulently changed its business scope from "equity investment, investment consulting" to "enterprise management consulting, cultural and creative planning consulting services," and simultaneously applied to the tax authority for deemed assessment on the ground that its "books were not sound and costs and expenses could not be properly accounted." The tax authority, based on the partnership's application, assessed individual income tax at a deemed income rate of 13%. On May 12, 2021, the partnership also paid individual income tax under the deemed assessment method during its liquidation and deregistration. On March 13, 2026, the tax authority issued a Tax Administrative Decision against Li, a partner of the partnership, determining that the partnership had improperly applied the deemed assessment method during its liquidation and deregistration, and demanded that Li pay individual income tax of RMB 332 million and corresponding late payment surcharges.

(II) Legal Analysis of Tax Authorities Pursuing Tax Liabilities Against Partners of a Cancelled Partnership

Under Article 3 of the Provisions on Individual Income Tax for Sole Proprietorships and Partnership Enterprises , "A partnership enterprise treats each partner as a taxpayer (hereinafter referred to as investor)." Article 4 provides that "The balance of the total income of a partnership enterprise for each tax year after deducting costs, expenses and losses shall be treated as the production and business income of the investor ... and individual income tax shall be computed and levied thereon." Article 16 provides that "When an enterprise conducts liquidation, the investor shall settle all tax-related matters with the competent tax authority prior to deregistration of registration. The liquidation income of the enterprise shall be deemed as production and business income for the year, and the investor shall pay individual income tax in accordance with the law." Accordingly, a partnership enterprise applies the "taxation first at the partner level, then distribution" rule, whereby the partnership enterprise itself is not the taxpayer for individual income tax purposes; rather, each partner is the statutory taxpayer and is required to declare and pay tax on the business income allocated to them. Therefore, even after the partnership has been cancelled, the partners remain independently liable for their respective individual income tax obligations. In addition, under the Partnership Enterprise Law, with respect to the tax liabilities of a partnership, even after the partnership is cancelled, the original general partners remain jointly and severally liable for the debts incurred during the partnership's existence, while limited partners are liable for supplementary tax obligations to the extent of their subscribed capital contributions.

IV. Conclusion

In recent years, there has been a surge in cases where tax authorities directly pursue tax recovery from natural persons behind cancelled business entities. Individual proprietorships, limited liability companies and partnerships that plan to exit the market and complete deregistration should conduct comprehensive self-examinations to ascertain whether there are any outstanding tax settlement matters, unpaid taxes or other tax-related issues, and shall refrain from engaging in "escape-style" deregistration to circumvent tax payment obligations. For actual operators of individual proprietorships and partners of partnerships, even after the business entity is cancelled, tax authorities may directly pursue tax recovery and tax liabilities against them. For individual shareholders of cancelled companies, they still face the risk of being directly pursued by tax authorities for tax recovery and late payment surcharges. In this regard, individual shareholders should take proactive measures and seek professional support and legal remedies from tax lawyers.