Tax shelter, which is also known as tax haven, generally refers to the countries or regions imposing low or even no tax on enterprise property or income. Tax havens are usually characterized by steady politics, convenient transportation, easy commercial environment, complete legal system, as well as strict bank secrecy laws and trade secrets law, etc. Taxpayers might take advantages of these characteristics to evade the taxes. Bahamas, Morocco, Bermuda, Cayman Islands, Panama, Costa Rica, etc, are all recognized as tax havens all over the world. The Organization for Economic Cooperation and Development (OECD) considers that a country with no tax or only symbolic tax on liquidity management activities, as long as it meets one of the following three additional conditions, it shall be regarded as one tax haven: (1) it doesn't exchange tax information efficiently with other countries; (2) it provides tax preference to the taxpayers in non-transparent ways; (3) the nonresidents in tax havens can enjoy preferential tax without substantial business activities.

Multinational taxpayers make use of tax havens to evade taxes, mainly through setting "shell company" in tax havens, collecting the offshore property and income under the account of the shell company in order to evade the taxes in its original country. The so-called shell company refers to the companies which are established in tax havens yet controlled by foreign shareholders actually, and the main economic activities are beyond the tax havens. The specific ways of evading taxes through shell company are introduced as follows:

1.Transfer the business via the shell company to realize the cross-border transfer of the profits. For example, a batch of goods in country A which should be sold to country B, yet sell to the shell company in tax haven with a low price first, and then sell to country B with a much higher price, however, the goods are actually delivered directly form country A to country B. In this way, most of the profits are transferred from country A to the shell company. Therefore, when multinational taxpayers adopt this way, they usually combine the methods of transfer pricing¹ and unreasonable absorption cost².

2.Utilizing shell company as holding company, collect all the affiliated companies' profits in the form of dividends, so as to exempt from or hold over the taxes of the parent company.

3.Utilizing shell company as trust company, transfer the properties beyond the tax haven into the trust property of the shell company fictitiously, so its business income can exempt from or get less taxes.

In addition, multinational taxpayers also utilize the shell company in the form of insurance company, financial company, patent company as well as service company, in order to avoid international taxes.

Due to the great harms of tax havens, governments of all countries and international organizations pay high attention on the tax havens. At the same time when the developed countries attack the tax havens, China's new tax law enacted a series of new regulations against tax havens. Specifically, there are two aspects as follows:

1.The new Enterprise Income Tax Law unified the income taw system from the tax law, tax rates, pre-tax deduction, tax preference and administration of collection, so as to harmonize the income tax treatment to various enterprises, and create a fair tax system for both domestic and foreign-owned enterprises. Formerly, some domestic enterprises set up the registered place in tax havens in order to enjoy the preferential tax policies for foreign enterprises. Since the new tax law came into force, the phenomenon that the domestic and foreign enterprises with different tax benefits have vanished.

2.The new tax law unified the income tax of both domestic and foreign enterprises, and the tax preference is biased to new and innovative enterprises. Especially, the definition of resident enterprise has been clarified and strengthened. The enterprises setting up according to foreign country's law, but have the actual management institution within China's territory shall be treated as resident enterprise, thus effectively plug up the loophole in tax havens. Early in 2009, the State Administration of Taxation has issued Special Tax Adjustment Measures (for trial implementation), under the Chapter 8 formulates a detailed plan to administer the controlled foreign enterprises. In the scheme, the enterprises in line with the standard of controlled foreign enterprise shall provide the investing information in annual enterprise income tax declaration, and distribute income tax in accordance with the dividend distribution.

In conclusion, Chinese law has established the regulatory framework aims to tax havens. Therefore, the foreign investors, who have the intention to invest in China, shall pay attention to the new tax rules containing the tax havens, inquire upon the new changes in legal environment via professional China law firm or business consultant, in order to make an correct and effective investment strategy. 

1. Transfer pricing refers to a common method that the multinational affiliate enterprises evade the taxes through unreasonable transaction price.
2. According to the permanent establishment principle, permanent institution can share the reasonable part of total organization management fees in the accounting profits. The head office and branches of affiliate companies utilize this principle to increase the cost of an organization, through the way of unreasonably apportion, to reduce the profits of this organization, and thus evade the national tax.