The legal shield protecting shareholders in China is thinner than ever. Under the fully implemented corporate veil-piercing regulations in China in 2026, courts will have new, explicit powers to hold shareholders personally liable for company debts. 

The most significant change is the codification of "Horizontal Piercing", meaning if you own multiple companies and mix their money or operations, a court can order all of them to pay the debts of one. 

For foreign investors and business owners, understanding these expanded triggers, from "commingling of assets" to the "shadow director" trap, is essential to avoid catastrophic personal and cross-entity liability.

What Is Corporate Veil Piercing in China?

"Piercing the corporate veil" is a legal doctrine where a court ignores a company's separate legal personality and holds its shareholders directly responsible for its debts.

The Old Rule vs. The New Rule:

Previously, this was mostly used in extreme cases of fraud. Now, Article 23 of the new Company Law (2024/2026) explicitly broadens the scope. 

It targets any shareholder who "abuses" the company's independent status to evade debts and harm creditors. If you use your company as a personal piggy bank, the law says you must pay its bills.

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The New Veil: Horizontal Piercing

The most aggressive change in 2026 is the formal adoption of Horizontal Veil Piercing.

The Scenario:

Imagine you own two companies: Company A (a risky trading firm) and Company B (a safe asset-holding firm).

In the past, if Company A went bankrupt, Company B's assets were safe.

Now: If courts find that Company A and Company B have "mixed personalities" (e.g., shared staff, mixed bank accounts, same office, same controller), they can order Company B to pay Company A's debts.

Why It Matters:

This destroys the traditional asset protection strategy of separating high-risk operations from valuable assets into different subsidiaries. 

If you run a group of companies, strict separation of books, staff, and contracts is now mandatory to stop "contagion" liability.

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The "One-Person Company" Trap

If you are the sole shareholder of a company (a WFOE or domestic entity), the burden of proof is flipped against you.

Guilty Until Proven Innocent:

In a lawsuit, a multi-shareholder company acts as a shield until the creditor proves abuse. 

But for a One-Person Company, the law presumes commingling. You must prove with audited financial statements that your personal money is separate from the company's. 

If you can't produce clear, independent audits, you are personally liable for 100% of the company's debt.

Retrospective Liability:

Crucially, this liability can follow you even after you sell the company. Courts have held former sole shareholders liable for debts incurred during their ownership if they couldn't prove asset independence for that past period.​

"Commingling": The #1 Liability Trigger

How do courts decide to pierce the veil? The primary test is the Commingling of Assets.​

Common Mistakes that Destroy Protection:

• Financial: Paying company rent from a personal account, or receiving client payments into a personal WeChat wallet.
• Personnel: Staff working for Company A but getting paid by Company B without a clear secondment agreement.
• Business: Two companies signing contracts interchangeably with no clear distinction to the outside world.

Recent judicial trends show that courts are becoming stricter. Evidence of just financial commingling is often enough to pierce the veil now, even if business operations seem separate.​

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Shadow Directors and Controlling Shareholders

The new law also targets those hiding in the shadows.

De Facto Control:

You might not be on the business license, but if you are the "Actual Controller" pulling the strings, you are liable. 

If you instruct directors to take actions that harm the company (like transferring assets cheaply to yourself), you are jointly liable for the losses. This effectively "pierces" the veil of anonymity that many foreign investors use.

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Conclusion

The new corporate veil piercing China rules effectively end the era of "operating loosely" in China. 

The law now significantly favors creditors, assuming that mixed finances constitute fraud. 

For business owners, the message is clear: professionalize your governance. Treat every company as a distinct, sealed compartment. 

If you allow fluids (money, staff, contracts) to leak between them, the courts will tear down the walls entirely, exposing your entire group—and your personal assets—to total liability.

FAQs About Corporate Veil Piercing China

What is "Horizontal Veil Piercing"?

It is a legal rule that allows a court to hold "sister companies" (companies owned by the same shareholder) liable for each other's debts. This happens if the companies are so mixed up in operations and finance that they are effectively one entity.

Are single-shareholder companies riskier in China?

Yes. For a single-shareholder company, the law assumes the shareholder's assets are mixed with the company's. The shareholder bears the burden of proving otherwise. If they cannot provide clear audits, they are personally liable for all company debts.​

Can I be liable for company debts after I sell my shares?

Yes, particularly if you were a sole shareholder. Courts have ruled that if you cannot prove your assets were separate during the time you owned the company, you can still be sued for debts incurred during that period, even after you have exited.​

What is the most common reason courts pierce the veil?

Financial commingling. This includes actions like using personal bank accounts for company business, failing to keep separate accounting books, or freely transferring funds between sister companies without commercial justification.​

How can I prevent veil piercing?

(1) Maintain strict separation of personal and company finances. (2) Ensure sister companies have separate books, staff, and offices (or clear contract agreements for shared resources). (3) Conduct annual independent audits, especially for one-person companies. (4) Document all inter-company loans and transactions formally.

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