Dormant company refers to a company that exists in the legal sense, but doesn’t conduct any business activities for an undetermined period.
China first piloted business suspension policies and dormant company status in Shenzhen on March 1, 2021. With the Administrative Regulation of the People’s Republic of China on the Registration of Market Entities (the Regulation) and its rules taking effect on March 1, 2022, China expanded the implementation of the business suspension policy throughout the country.
In the past, companies in China could not go dormant during economic disruptions and had to choose between permanently closing or maintaining operations. There is now a less dramatic alternative to closing a company, but what are the benefits and drawbacks of the dormant company status? How do you apply for dormant company status?
In this publication, we introduce China’s business suspension policy, talk about its pros and cons and break down how to apply for dormant company status.
According to the Regulation, companies in China can independently decide to close down for a certain period of time due to natural disasters, accidents, public health events, social security incidents and other events that disrupt business operations.
Applicable market entities:
The Regulation applies to all types of legal entities engaged in profit-making activities in China, including:
- Companies, including WFOEs, non-company enterprise legal persons and their branches;
- Sole proprietorship enterprises, partnership enterprises and their branches;
- Farmer specialized cooperatives (associations) and their branches;
- Individual industrial and commercial households;
- Branches of foreign companies;
- Other market entities as prescribed by laws and administrative regulations.
Pros and Cons:
Simply put, dormant company status is a good option for struggling companies unwilling to close their business to survive and take a break.
In the dormant status, a company can reserve its legal standing and special license/s and or pre-approvals (hard to apply for again in certain industries), legally suspend its business and protect its assets including intangible assets such as the company’s name, branding and fame as well as physical assets, such as property.
Apart from the above-mentioned benefits, the companies’ administrative costs can be reduced. Companies can stop renting their original business premises used for the registered address as long as they can provide an address for the service of legal documents which can be different from the registered address to receive legal documents and notifications. In Shanghai, an email address can be provided to receive legal documents and notifications. Dormant companies do not run the risk of being blacklisted or labeled as entities with “abnormal operation” because they can’t be contacted through their registered address.
Dormant companies cannot be used to apply for or extend foreigner work permits and work visas. Additionally, dormant companies cannot hire or maintain staff on payroll.
The dormant status does not change the companies’ claim to creditor’s rights and performance of debts, administrative penalties, administrative review decisions, judgments, arbitration instruments and other statutory or agreed obligations. The debts owed by the enterprise to external parties must still be repaid to creditors in accordance with the law. The litigation and arbitration involved in the enterprise is not affected, nor is the enforcement of the relevant award. Once the company meets the requirements for dissolution or bankruptcy as stipulated in the Company Law, it may still be filed for bankruptcy and be subject to a court action for dissolution by the shareholders.
Tax obligations of dormant companies are not clearly specified in the Regulation and its Implementing Rules. We have no idea whether companies still should file month, quarter and annual taxes or not. The competent tax authority should clarify the corresponding tax responsibilities during the suspension period.
Steps to apply for dormant company status:
Before applying for business suspension:
(1) Companies should go to the registration authority for the record. For example in Shanghai, you can go to Shanghai Market Supervisory Authority (Shanghai SMS) in Xuhui district. The registration authority will publicize the period of suspension, the address for service of legal documents and other information to the society through the National Enterprise Credit Information Publicity System.
A. Application for the suspension of market entities putting on record
B. Commitment Letter of business suspension putting on record
(2) Companies should deal with labor relations and other related matters with employees in accordance with the Law of the People’s Republic of China on Employment Contracts. Though in dormant status, companies still have labor relations with employees. Therefore, they should contribute to the housing provident fund for employees as specified in the Housing Provident Fund Management Regulations. If having difficulty in paying the housing fund, companies can apply for a reduction in the proportion of contributions or deferral of the housing provident fund. It is not allowed for a company to unilaterally terminate an employment contract just because the company is applying for business suspension. Terminating staff should follow normal termination procedures.
During the dormant status:
(1) Companies still need to publish their annual reports on time from January 1 to June 30 each year. The reporting information includes: business scope, registered address, main accounting information, social insurance information, etc. They can submit the report online through the National Enterprise Credit Information Publicity System. Companies not publicizing or filing annual reports will be listed as entities with “abnormal operation” and be imposed a fine of up to 10,000 yuan.
The accumulation of suspension period shall not exceed 3 years. Companies can also apply for 3 years of suspension one time.
After the suspension period:
(1) Companies will automatically resume operation once the date you apply for or 3 years are due. If companies want to extend the suspension period, they should apply within 30 days before the expiry of the period. If companies decide to close down their business, they should promptly apply for deregistration.
(2) Once companies independently decide to or have actually carried out business activities, they are considered to resume business. What they need to do is to publicize their termination of business through the National Enterprise Credit Information Publicity System within 30 days. If not, they will be required by the registration authority to correct. If not corrected, they will have a fine of 30,000 yuan.
(3) When resuming business, companies should promptly apply for registering their messages, if their registration and filing matters are put on record change and they use the address for the service of legal documents instead of residence (their main business premises).
The dormant company status policy in China is still in a testing phase. Relevant policies and regulations are not yet mature and require the cooperation of the government agencies such as the tax bureau, the labor bureau, and the social insurance bureau to promote the policy. However, China’s initiative to implement the suspension policy reflects its support of the development of enterprises and stimulation of its market. With the policy, companies have the right to apply for dormant company status on their own. Looking ahead, the suspension policy will become more and more perfect with the joint efforts of many parties. Let’s wait and see.