THE DOCTRINE OF PIERCING OF CORPORATE VEIL

Abstract

Piercing the corporate veil (PCV) is a fundamental exception to limited liability in 
corporate law, ensuring that companies and associations remain separate legal entities—thereby 
protecting shareholders from personal liability—unless the corporate form is abused for illegal 
purposes such as fraud, tax evasion, or other misconduct that harms creditors or the state. This 
paper critically examines the legal framework for PCV in Croatia, focusing on its dual 
regulation in both general company law (via the Companies Act) and specialized tax law 
(through the General Tax Act). It explores how abuse of limited liability triggers personal 
liability for controlling individuals and the conditions under which the veil may be pierced, as 
evidenced by Croatian case law, which requires concrete proof of misconduct rather than mere 
non-performance. A comparative analysis reveals significant differences among jurisdictions. 
For instance, while the German system employs “Durchgriffshaftung” to impose direct personal 
liability in cases of asset commingling or undercapitalization, Croatian law maintains a stricter 
separation between corporate and personal assets. Similarly, in the tax context, the Croatian 
General Tax Act introduces a mechanism for tax guarantees that holds certain company insiders 
liable for tax debts when abuse is evident, thereby facilitating faster tax collection. However, 
this approach risks overextending liability to passive members and generating legal uncertainty. 
The paper employs a multifaceted methodological framework—including legal doctrinal 
analysis, comparative and case law analysis, empirical research, sociological inquiry, and 
normative critique—to identify key deficiencies in the current system. Findings indicate that 
the normative vagueness in the Companies Act and inconsistent judicial interpretations hinder 
effective creditor protection, while recent amendments to the General Tax Act may have 
broadened liability in a manner that conflicts with principles of legal certainty and 
proportionality. Based on these insights, the paper proposes targeted legal reforms. First, the 
Companies Act should be amended to incorporate explicit, objective criteria for piercing the 
corporate veil, such as clear definitions of intentional fraud, gross negligence, and asset 
stripping. Second, the General Tax Act should be revised to ensure that tax guarantor liability 
is imposed solely on those actively involved in tax evasion—preferably focusing on company 
managers—thus better balancing efficient tax collection with the protection of innocent 
investors. Finally, enhanced institutional coordination and procedural safeguards, including 
specialized judicial panels and mandatory judicial review of tax-guarantor decisions, are 
recommended to ensure a consistent and fair application of the doctrine. Ultimately, this 
research underscores the need for a balanced approach that preserves the economic benefits of 
limited liability while preventing its abuse. Reforms that clarify statutory language and 
strengthen enforcement mechanisms will not only improve creditor protection and tax 
discipline in Croatia but also align domestic practice with international standards and 
fundamental rights principles.