Editor's Note: On June 18, 2026, a local tax authority served a Notice of Tax Matters by public announcement, determining that the employee stock ownership platform of Ancar Inspection (a listed company) had fraudulently changed its business scope from equity investment to consulting services and had unlawfully applied for the assessed collection method for enterprise income tax (EIT), resulting in approximately RMB 248 million in underpaid EIT. The authority required 47 individual shareholders to bear the additional tax payable and late payment surcharges in proportion to their respective capital contributions. This article uses this case as a starting point to trace the tax planning pathway employed around the lifting of the lock-up on restricted shares held by the employee stock ownership platform. It analyzes the statute of limitations for tax recovery and the strategic risks of raising a limitations defense, the scope for arguments against imposing late payment surcharges, the disputed legal pathways by which tax authorities may pierce the corporate veil and pursue shareholder liability after company deregistration, and the typical tax risk exposures revealed by this case—with the aim of providing reference and cautionary guidance for relevant market participants.

 

01  The Full Story: Share Lock-Up Expiry, Cash-Out, and Non-Compliant Tax Planning by the ESOP Platform

 

Ancar Inspection was listed on the ChiNext Board of the Shenzhen Stock Exchange on December 6, 2016. Company A (located in City S) was established in June 2010 as an employee stock ownership platform holding shares in Ancar Inspection, at an IPO issue price of RMB 13.79 per share. Over many years of continuous holding, Company A accumulated approximately 26.99 million shares in Ancar Inspection through initial acquisition, dividend distributions, and other means. As an employee stock ownership platform that invested prior to the IPO, Company A's shareholding consisted of restricted IPO shares subject to a 36-month lock-up period before they could be traded on the market. On December 3, 2019, Ancar Inspection issued an Announcement on the Lifting of Lock-Up on Pre-IPO Shares, explicitly stating that the approximately 26.99 million restricted shares would be unlocked on December 6, 2019 and become freely tradable shares thereafter.

 

However, several months before the lock-up expiry date, Company A had already quietly begun preparatory actions. In October 2019, Company A (located in City S) relocated its registered address to an industrial park in a county within City Y, simultaneously changing its name to Company B (located in City Y), and changing its registered business scope from "equity investment and investment consulting" to "enterprise management consulting, cultural and creative planning consulting services." This series of actions—changing the address, name, and business scope—bore the hallmarks of advance tax planning maneuvers. Following the change in business scope, Company B promptly applied to the competent tax authority at its new location—citing inadequate accounting records and the inability to properly account for costs and expenses—and was approved to use the assessed collection method for EIT at a deemed taxable income rate of 10%. Under this deemed income rate, the comprehensive EIT burden was only approximately 2.5%, a stark contrast to the 25% EIT rate applicable under the actual accounting method where all disposal proceeds would be included in taxable income.

 

Once this arrangement was in place, the share disposal began. On one hand, from January to March 2020, Company B sold approximately 5.8 million Ancar Inspection shares through block trades and centralized bidding. On the other hand, Company B simultaneously initiated dissolution and liquidation proceedings. In February 2020, Company B was approved for dissolution by unanimous shareholder vote, and a liquidation committee was established to commence liquidation of the company's assets. In April 2020, upon completion of liquidation, Company B transferred the remaining approximately 21.19 million Ancar Inspection shares to the 47 individual shareholders through a non-trading transfer. A non-trading transfer is a method of changing securities ownership that is distinct from exchange-based trading; it occurs by operation of law in circumstances such as legal person dissolution and liquidation, inheritance, or divorce, and is effected through direct changes to securities accounts without the transferee paying any cash consideration.

 

With respect to the above share disposals and non-trading transfer, the tax authority determined that Company B had underpaid EIT of approximately RMB 248 million during the period from January to April 2020. When Company B was deregistered, the shareholders' resolution signed by the 47 shareholders stated that "debts and liabilities arising after deregistration shall be borne by all shareholders in proportion to their respective capital contributions." The liquidation report also contained complete records of each shareholder's contribution ratio: the largest shareholder held 40%, the second-largest approximately 32%, and the remaining 45 shareholders ranged from 6.4% down to less than 0.05%. Approximately six years later, on June 18, 2026, the tax authority served notices by public announcement listing Company B and all 47 individual shareholders as recipients, informing each shareholder to bear the additional tax payable and corresponding late payment surcharges in proportion to their respective capital contribution ratios.

 

Looking at the case as a whole, this is a classic example of tax planning carried out ahead of the lifting of an IPO lock-up. The ESOP platform completed its relocation, name change, and business scope modification on the eve of the lock-up expiry, applied for and obtained the assessed collection method on the grounds of inadequate accounting records, and then executed a combination of concentrated share disposals and dissolution-cum-liquidation distribution to complete the cash-out—with each step interlocking with the next, and evident marks of tax planning throughout. From a motivational standpoint, this type of arrangement most likely originated from tax planning "black intermediaries" aggressively selling the low-rate assessed collection scheme to ESOP platforms in connection with IPO lock-up expiries, drawing the platforms and their individual shareholders into this ostensibly compliant but actually non-compliant pathway. Whether the parties involved have any defense, and whether deregistration can cut off tax liability, will be analyzed further below.

 

02  The Statute of Limitations for Tax Recovery, and Whether Late Payment Surcharges Should Apply

 

The tax authority determined that Company B underpaid approximately RMB 248 million in EIT, covering two components. The first component relates to the equity transfer gains from selling approximately 5.8 million shares through block trades and centralized bidding from January to March 2020, calculated by applying the 25% EIT rate to the total disposal proceeds less the cost basis computed at the IPO issue price of RMB 13.79 per share. The second component relates to the distribution of the remaining approximately 21.19 million shares to the 47 individual shareholders through a non-trading transfer in April 2020, which is treated as a deemed sale during the liquidation period under applicable law, with transfer proceeds recognized at the closing price of approximately RMB 41 per share on April 8, 2020 (the date Company B's tax registration was cancelled), less the corresponding tax cost basis, and likewise subject to the 25% EIT rate. Against this backdrop, the tax authority's service of notice by public announcement in June 2026 came more than six years after Company B's deregistration in April 2020, making the question of whether the statute of limitations for tax recovery has expired a threshold issue worthy of attention.

 

Under Article 52 of the Law on the Administration of Tax Collection (Tax Collection Administration Law), its implementing regulations, and Guoshuihan [2009] No. 326, the statute of limitations for tax recovery is divided into three tiers: (1) Where the shortfall was caused by the tax authority's error—i.e., the tax authority misapplied tax laws or administrative regulations, or its enforcement actions were unlawful—the recovery period is three years; (2) Where the shortfall was caused by the taxpayer's calculation errors or other inadvertent mistakes—i.e., non-intentional errors in formula application and obvious clerical errors—or where the shortfall resulted from the taxpayer's failure to file a tax return, the recovery period is five years if the cumulative amount of underpaid tax reaches RMB 100,000 or more; (3) Where the shortfall was caused by the taxpayer's intentional conduct—such as tax evasion or fraudulent tax refunds—there is no limitation period for recovery. As for the commencement of the limitation period, Article 83 of the Implementing Regulations of the Tax Collection Administration Law provides that it runs from the date on which the tax was not paid or was underpaid.

 

In this case, it is first necessary to identify the timing of Company B's tax obligations with respect to the two categories of income. Under Article 53 and Article 55 of the Enterprise Income Tax Law and Guoshuihan [2009] No. 684, where an enterprise ceases operations during the course of a tax year, the date on which liquidation commences serves as the dividing line between two independent tax periods: the "operational period" and the "liquidation period." Company B established its liquidation committee pursuant to a shareholders' resolution in February 2020; the period prior to that date constitutes the operational period, and the period from that date through the completion of deregistration in April 2020 constitutes the liquidation period. The filing deadline for EIT on income earned during the operational period is sixty days from the date of cessation of operations, falling approximately in late April 2020. EIT on income earned during the liquidation period must be filed before the completion of the deregistration procedure, also falling in April 2020. Accordingly, both tax obligations commenced in April 2020, and a five-year recovery period would have expired in April 2025.

 

On its face, the tax authority's service of notice by public announcement in June 2026 would appear to fall outside the five-year limitation period. However, the question of whether the limitation period has expired turns on when the tax authority "discovered" the non-compliance. If the tax authority initiated an investigation prior to April 2025, the limitations defense would be difficult to sustain. More importantly, even where there is a procedural defense argument on the merits, affirmatively invoking the expiry of the limitation period as grounds for exemption from back payment is strategically highly risky. If the taxpayer raises such an argument, the tax authority is very likely to treat it as evidence that Company B acted with subjective intent to evade taxes; and once tax evasion is established, the third paragraph of Article 52 of the Tax Collection Administration Law removes the limitation period entirely—with the result that there is no time bar on tax recovery, and the taxpayer faces administrative fines of 0.5 to 5 times the underpaid tax, as well as criminal prosecution risk. The scope for arguing that the back-payment obligation on the principal tax amount has been extinguished by expiry of the limitation period is therefore quite limited.

 

By contrast, there is considerably more room to argue against the imposition of late payment surcharges. Article 52, paragraph 1 of the Tax Collection Administration Law provides that where the taxpayer's failure to pay or underpayment of tax was caused by the tax authority's error, the tax authority may require the taxpayer to pay the back taxes within three years, but may not impose late payment surcharges. The underlying rationale is the administrative law principle of legitimate expectation (reliance protection): a taxpayer who filed in good-faith reliance on an administrative approval should not be required to bear all adverse consequences alone.

 

In this case, when Company B relocated to City Y and applied for assessed collection on the grounds of inadequate accounting records, the competent tax authority at the new location was not unaware of basic facts such as Company B's registered business scope (which had previously been "equity investment") and its holding of approximately 26.99 million restricted shares in Ancar Inspection, yet nonetheless approved the EIT assessed collection method at a deemed taxable income rate of 10%. The taxpayer formed a legitimate expectation based on this approval and completed its subsequent filings accordingly. The negligence of the competent tax authority at the approval stage—and quite possibly a locally permissive enforcement stance—is directly causally linked to Company B's underpayment. In these circumstances, shifting the entire burden of the underpayment's consequences—in particular, the extremely large late payment surcharges accruing at 0.05% per day over more than six years—entirely onto the taxpayer would be difficult to justify and is inconsistent with the fundamental legal principle of proportionality between penalty and offense. Accordingly, there is substantial room to argue for exemption from or reduction of the late payment surcharges, and this should be the primary focus of the taxpayer's communications with the tax authority and its statement of representation and defense.

 

03  Whether the Tax Authority Can Pierce the Corporate Veil to Pursue Shareholder Liability After Deregistration

 

In this case, Company B completed its commercial deregistration in April 2020, and its status as a legal person was extinguished as a matter of law. Six years later, the tax authority named all 47 individual shareholders as recovery targets, requiring each shareholder to bear additional tax payable and late payment surcharges in proportion to their respective contribution ratios. Whether the tax authority may pursue shareholders directly after deregistration, and through which legal pathways it should do so, is another central dispute in this case—and directly affects the personal interests of the individual shareholders behind the many already-deregistered ESOP platforms.

 

In the Notice of Tax Matters, the tax authority cited Article 19 and Article 20(2) of Judicial Interpretation II of the Company Law as the basis for recovery. Article 19 provides: "Where shareholders of a limited liability company, directors and controlling shareholders of a joint stock limited company, or the actual controller of a company, after the company's dissolution, maliciously dispose of company property causing losses to creditors, or obtain deregistration from the company registry by submitting false liquidation reports without having undergone lawful liquidation, creditors may claim that such persons bear corresponding liability for the company's debts, and the people's courts shall uphold such claims in accordance with law." Article 20(2) provides: "Where a company is deregistered without having undergone lawful liquidation, and shareholders or third parties have undertaken to bear the company's debts at the time of deregistration, creditors who claim that such persons bear corresponding civil liability for the company's debts shall be upheld by the people's courts in accordance with law." The tax authority also noted that the shareholders' resolution at the time of Company B's dissolution contained a commitment clause stating that "debts and liabilities arising after deregistration shall be borne by all shareholders in proportion to their respective capital contributions," and on that basis determined that all shareholders should bear the additional tax payable and late payment surcharges in proportion to their contribution ratios.

 

However, a close reading of the above provisions reveals that both Article 19 and Article 20(2) use the formulation: "creditors who claim … the people's courts shall uphold such claims in accordance with law." The institutional pathway established by the judicial interpretation is for creditors to bring civil litigation before the people's courts, with judicial bodies making substantive review of the relevant facts and evidence before determining shareholder liability by judicial ruling. In other words, the dispute resolution mechanism presupposed by this pathway is a judicial process, not an administrative process. Whether shareholders should bear liability for the debts of a deregistered company is fundamentally a matter of civil law under company law, and should be subject to the final determination of a judicial body. If the tax authority substitutes its administrative enforcement decisions for judicial rulings, there is a risk that this constitutes an administrative body usurping the function of the judicial branch.

 

In addition to pursuing shareholders directly, another pathway available to tax authorities in practice is to request the market supervision authority to first revoke the company's deregistration, thereby restoring its legal person status, and then to proceed with recovery against the company as the taxpayer. Article 20 of the Implementation Measures for Company Registration (effective February 2025) expressly provides: "Where there is evidence proving that the applicant has manifestly abused the independence of the company's legal personality and shareholders' limited liability, transferring property maliciously, evading debts, or circumventing administrative penalties by changing the legal representative, shareholders, registered capital, or deregistering the company, in ways that may endanger public interests, the company registration authority shall refuse to process the relevant registration or filing, and shall revoke any registration or filing already completed." The Guidelines for Enterprise Deregistration (2025 Revision) further provide that "where a business entity obtains deregistration by submitting false materials or by other fraudulent means that conceal important facts, the registration authority may impose penalties such as confiscation of illegal gains or fines in accordance with law, and may revoke the deregistration in accordance with law." It should be noted that revoking a deregistration is contingent on the existence of such illegal circumstances; if the deregistered enterprise does not exhibit the relevant misconduct, the market supervision authority cannot revoke the deregistration merely on the basis of a letter from the tax authority.

 

It is noteworthy that Article 56 of the Draft Amendments to the Tax Collection Administration Law (Consultation Draft, 2025 Revision) introduces the principle of denial of legal personality (piercing the corporate veil) from Article 23 of the Company Law into the field of tax administration, expressly providing that where investors abuse the independence of the legal person and the limited liability of investors—by withdrawing capital or carrying out malicious deregistration to evade tax—the tax authority may pierce the principle of limited liability and directly recover tax and late payment surcharges from the investors. While this provision fills the institutional gap in the mechanism for piercing the corporate veil to recover tax debts and clarifies the applicable pathway for denial of legal personality in the tax context, the author is of the view that 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.

 

Although the above procedural pathway disputes objectively exist, it is not uncommon in practice for tax authorities to directly pursue tax recovery against shareholders of deregistered enterprises. For relevant market participants, company deregistration does not mean that legal risk falls to zero; it does not sever historical tax risk. Every transaction during the company's existence, every tax filing, and every liquidation document may become a clue or basis for subsequent look-through scrutiny, and relevant market participants need to be vigilant.

 

04  Typical Tax Risk Points Revealed by This Case for ESOP Platforms

 

This case highlights several categories of risk that deserve particular attention for both existing and already-deregistered ESOP platforms.

 

First, the risk of applying formal changes in business scope to qualify for assessed collection. Article 1 of the Announcement on Relevant Issues Concerning Assessed Collection of Enterprise Income Tax (State Tax Administration Announcement [2012] No. 27) expressly provides that enterprises engaged exclusively in equity (stock) investment business may not use the assessed collection method for EIT. The 2021 Announcement jointly issued by the Ministry of Finance and the State Taxation Administration (No. 41) further clarified that individual proprietorships and partnerships holding equity investments, stock investments, partnership interests, and other equity-type investments must uniformly adopt the audit-based collection method, definitively closing the policy window for such arrangements. When conducting a look-through review, the tax authority does not stop at the formal statements in commercial registrations, but is capable of making comprehensive judgments based on the enterprise's historical shareholding, securities account trading records, fund flows, and tax filing data.

 

Second, the collateral risk of misclassifying VAT items. Under Caishui [2016] No. 36 and State Tax Administration Announcement [2016] No. 53, when a company transfers restricted shares in a listed company after the lock-up period expires, it should declare VAT under the "transfer of financial instruments" category, using the IPO issue price as the cost basis. It cannot reclassify the transaction as "consulting services" simply because its registered business scope has been changed to "consulting services." The true risk of misclassifying VAT items does not lie in the overstatement or understatement of VAT per se, but rather in the fact that the misclassification, combined with the change in business scope and the assessed collection of EIT, creates a coordinated appearance that corroborates the tax authority's finding that the substance of the business differs from the contents of the filing. Moreover, when an enterprise is engaging in large volumes of stock transactions but declaring VAT under a non-financial instrument category, this in itself is an anomalous signal that is easily captured by tax big data risk screening systems, which in turn increases the probability of attracting the attention of the tax inspection authorities.

 

Third, the liquidation tax risk of treating non-trading transfers as deemed sales. Corporate ESOP platforms face a two-tier tax burden during dissolution and liquidation. At the corporate level, the enterprise must pay EIT at 25% on liquidation income. At the shareholder level, under Article 5 of Caishui [2009] No. 60, the residual assets distributed to shareholders must be recognized at their realizable value or actual transaction price as the tax cost basis; the portion attributable to the company's accumulated undistributed profits and surplus reserve allocated to shareholders according to their shareholding ratios is treated as dividend income and taxed at 20%; any excess or shortfall in residual assets relative to the shareholder's investment cost is recognized as gain or loss on investment transfer, also taxed at 20%. A non-trading transfer does not involve cash consideration, but under tax law it must be treated as a deemed sale. If the enterprise completes its formal exit merely through commercial deregistration and securities custodian transfer without recognizing liquidation income at fair value and filing tax returns accordingly, the discrepancy between the data held by the securities registration and settlement institutions and the tax filings will likewise serve as an entry point for the tax authority's risk screening.

 

Fourth, the risk of concentrated clean-up of historical regional tax planning arrangements. In the early period, certain localities attracted ESOP platforms holding restricted shares in listed companies through assessed collection policies and fiscal rebates, creating an operational path for completing share disposals by exploiting regional tax differentials. Following the issuance of Announcement No. 41 in 2021 and the continued improvement of the tax big data platform, the policy space on which such arrangements relied has ceased to exist, and strengthened cross-regional audit coordination has substantially increased the traceability of historical transaction data. In this case, the tax inspection bureau directly obtained securities fund account statements from securities firms to verify each trade on an item-by-item basis, and disposal activities that took place years ago remain susceptible to re-examination.

 

Conclusion: In order to deeply align the interests of key employees with those of the company, many A-share listed companies established equity incentive plans at the IPO stage through employee stock ownership platforms, holding shares in the form of limited liability companies or limited partnerships. After listing, how ESOP platforms can carry out orderly share disposals upon the expiry of the lock-up period and properly handle tax matters is a practical issue of common concern to all parties. Against the backdrop of continuously intensifying tax administration and rapidly improving tax big data risk control capabilities, the Chinese government is also advancing targeted rectification campaigns against non-compliant fiscal and tax incentives, rebates, and barriers to fair competition. The scale and likelihood of exposure of historical tax risks of this nature are continuously expanding. For ESOP platforms that are still in existence, or that have already been deregistered but have similar historical operational traces in prior years, it is advisable to conduct a systematic self-review against this case as soon as possible, assess the historical tax compliance status, fully prepare statements of representation and defense materials in the event of an audit, and seek the support of professional tax lawyers when necessary, in order to strive to resolve the risks within a more favorable time window.