How to Close a Company in China

close company in china

Table of Contents

Companies in China may want to deregister their business for various reasons such as changes in their business scope, failure to adapt in the market, or due to financial crisis. Another important factor that has hit China market recently is the Corona Virus.

China’s 14 trillion economy took its worst hit in the last 50 years with an estimated impact of 6% in the first quarter. Hence, businesses are forced to shut down with less or no profit due to production shortages. Also, due to the shortage of labor and the non-availability of staff, owners are forced to close their businesses/factories.

Irrespective of what factors might trigger this decision to shut down the business, investors cannot simply abandon the company and walk away without following proper closure procedures. PRC law requires a formal de-registration procedure to be followed for closing any foreign entity.

Below you can find the step by step guide for the de-registration of a company in China

Cancel the Bank Account

Most WFOES will have at least three different company bank accounts, each of which must be closed before the account can be properly shut down.

The first accounts to be closed typically will be the capital and general account. The remaining balance of the capital account can be transferred directly to the shareholder’s bank account, whereas that of the general account can be transferred to the RMB basic account or the cash amount can be withdrawn.

The RMB basic account must always be the final account to be closed as it is the WFOE’s primary account and is most closely monitored by China. Here, the several options to be considered are – the balance can be directly transferred to a legal representative, or to another domestic account, or the cash amount can be withdrawn.

The general procedure is described below. However, individual bank branches might have their own policies.

In brief, the company will need to close its bank accounts. Unissued checks and deposit slips should be returned to the bank and money in the account should be transferred out. If the RO intends to transfer the account to the parent company, it will be required to provide reasoning for such actions and seek approval from the bank.

Cancel the Tax Account

Simplified tax de-registration exists for eligible taxpayers who need to shut down their business. However, a general tax de-registration process will usually take around four to eight months. During this process, the tax authority will collect a series of relevant documents including, but not limited to, the signed board resolution, evidence of lease termination, and tax filing records for the previous three years.

At this point, all outstanding tax liabilities will be identified and required to be settled before deregistering the business from its value-added tax (VAT) corporate income tax, individual income tax, and stamp duty obligations.

Businesses that have been operating for more than one year will then be required to complete an audit with a local certified public accountant (CPA) firm to obtain a liquidation report. This liquidation report, along with the unissued invoices, VAT invoices, and equipment, can then be brought to the tax bureau for review. In some instances, the tax bureau may visit the office in person to learn more about the intentions of the company.

If the review is successful, the tax clearance certificate will be issued, in which case the business will have successfully deregistered from all its tax obligations. The important point to note here is that the business will incur ongoing tax liabilities throughout the process of business closure.

Cancel the Import/Export Registration (provided that the company has conducted such registration)

Companies that are registered to customs for import, export and trading business importation or exportation of products must cancel their registration with customs and their respective clearances.

Failure to complete these documents, accordingly, might lead to the delay of the liquidation process. This stage is not applicable to the company if it is in the service industry.

The main documents required for canceling the registering are listed below. However, some additional documents may be required depending on the sector in which the company operates and its geographical location in China.

  1. Application letter for Customs De-registration
  2. Entrustment Letter
  3. Official Reply regarding approval for the commencement of liquidation
  4. Customs Registration Certificate and Customs Declaration Seal

Cancel the Business License

Once the WFOE has obtained tax clearance, it will cancel registrations with all the other government agencies that it registered with while being incorporated. As part of this process, the original registration certificates must be returned and a failure to find or submit any of these documents will further delay the process.

Once this process is completed, any remaining funds can be remitted back to the investors with the final step being the cancellation of the business license.

China’s liquidation process is so time-consuming and expensive. Therefore, the main advantage of closing a WFOE this way is to avoid any unpleasant outcome such as the detention of expatriate personnel and the revocation of their passports.

It also leaves open the possibility of both the investor and any foreign personnel being able to return to China in the future.

Abandoning a WFOE without liquidating it properly will invariably result in the investor being blacklisted and unable to re-establish in China and if the legal representative or other senior executives are expatriates, there is a risk that they will be detained if they return to China.

Cancel the Social Insurance and Housing Fund Account

Social security and housing fund contributions are mandatory for both the employee and the employer. These contributions are made on a monthly basis, but rates differ per city and province.

Some companies going into liquidation face cash flow problems, and therefore, employees’ benefit is the first expense to be neglected. Doing so might lead to paying heavy penalties and that is why it is important for the company to handle this area carefully.

Below are some of the points which a company needs to take care:

  1. Cancelation process
    The client needs to prepare the documents, then handle the social security and housing fund account cancellation on site.
  1. Documents Required
    For Social Security cancellation, the following documents are required:
    1) Social security registration certificate (if you have);
    2) Certificate of cancellation of business license;
    3) Alternative: social security payment card and application form/contact the bank to cancel the payment agreement.
    For Housing Fund cancellation, the following documents are required:
    1) Cancellation application form;
    2) Certificate of cancellation of business license.
  1. Processing time
    If all the necessary documents are complete and available, the cancellation can be done on the spot.
  1. Tips:
  • The acceptance time of the organization is from 5th to 26th of each month (except statutory holidays).
  • The account can only be canceled while there is no personnel in the account and no there stands no unpaid fees.
  • It shall be completed within 30 days after the cancellation of the business license.

*The important point to keep in mind is the company social insurance and housing fund account can only be canceled after the business license gets canceled.

 

Informal Dormancy

China’s corporate laws do not officially permit the existence of dormant companies, but it is possible to discharge most of a WFOE’s liabilities until the business can be restarted or officially closed.

Investors wanting to avoid the formal liquidation process will need to first ensure that all expatriate personnel leave the country and then lay off all of the WFOE’s Chinese employees, paying them agreed severance packages and obtaining signed releases from all of them against any and all claims they might have against the business.

All trade debts will need to be settled and again, releases obtained to minimize the risk of creditors later suing. Inventory and excess equipment will need to be sold and any leases that the WFOE has will need to either be terminated or let expire, whichever is more cost-effective.

The WFOE will need to be relocated to a low-cost address within the same district to cut expenses. This will be easier for non-manufacturing businesses.

The WFOE will then need to choreograph payment of all government taxes while remaining current with them. If the business was engaging in related party transactions and/or transfer pricing practices, it will be useful to engage a CPA firm to assess the amount of underpaid taxes prior to self-disclosure so the investor will be ready to challenge the official tax bill when it is issued.

Once all the above steps have been carried out, the WFOE will still exist, but will essentially be dormant. It will be necessary to continue making NIL tax filings and pay whatever minimal ongoing taxes are levied.

It will also still need to comply with all other government reporting requirements but if all of this is done properly, the cost of compliance, like the cost of the new registered office, will be minimal.

It is important to note that informal dormancy is a temporary solution. Eventually, within 12-20 months – depending on the location – the local government will either start to levy higher taxes or threaten to revoke the business license.

However, for many businesses, this approach defers the expense and inconvenience of liquidating the business and a decision about whether to remain in China or not.

In the meantime, all major debts will already have been cleared off the WFOE’s books so that any subsequent official liquidation will be quicker and easier.

The main advantage of handling the closure this way, apart from keeping the investor’s options open, is that it avoids blacklisting and still affords the investor significant control over the process.

 

Documents Needed to Close a Company in China

To start the company de-registration in China, you will need to prepare the following documents:

  1. Originals of Certificate of approval, Letter of approval, Business License
  2. Taxation registration certificate (2 originals)
  3. Enterprise Code certification (2 originals)
  4. Statistics registration certificates
  5. Foreign exchange accounts permit
  6. Written board resolution of Cancellation of WFOE
  7. Copy of Legal Representative’s passport (first page, signature page, and most recent immigration records’ page)
  8. Bank Account Certificates
  9. All chops of WFOE (Company chop, finance, Legal representative)
  10. All accounting related documents: bank statements, invoices of WFOE expenses

* All the above-mentioned documents are for reference purposes only. Actual documents required might vary for cities, nature of the business, company’s situation and change in policies.

Average Time to Close a Company in China

In China, the procedure for company de-registration is rather complicated, particularly concerning compliance with China Customs and the Tax Authority.

Depending on the facts of the dissolution (i.e. the number of employees at the time of dissolution, location, local labor bureau offices, labor suits, debt and tax issues, etc.), the process can take up to 6 to 12 months.

The most time-consuming step in this regard is Tax De-registration. It is the longest and perhaps the most difficult part of the de-registration process.

Before deregistering with other government authorities, a company will first need to complete tax de-registration with both the state and local tax bureaus where tax authorities will be looking to see that all taxes have been paid correctly and in full.

During this time the WFOE will receive a Notice of Cancellation of Tax Registration from the tax authorities (local and national) and after all the procedures are complete, the company will be sent a notice of the approval of cancellation for the WFOE from the SAIC (State Administration of Industry and Commerce).

This process alone, both at the local and state tax bureau, takes roughly six months for a WFOE to complete. However, the process can take considerably longer if unpaid taxes or other irregularities are found.

 

Difficulties to Close a Company in China

  • Payments related to official accounts need to be nil
    For tax/social insurance/housing fund/import & export account closure, the company needs to make sure that all payments related to these accounts have been settled properly including all penalties and late fees. In Short, these accounts need to be completely clean before closure.
  • Tax filing and business license compliance requirements
    Even after the official deregistration date of the company, a company will still need to continue to file taxes until the official tax deregistration process has been completed with both the local and state tax bureaus.
  • Maintaining the business license and office lease
    Additionally, until the official deregistration certificate has been issued by the AIC, a company will be required to maintain a valid business license and office lease during the deregistration process.
  • To stay in full legal compliance until the entity is closed
    Penalties can be imposed if the company lease or business license expires during WFOE deregistration, so the investors should seek the responsibility for maintaining a valid lease agreement during the de-registration process, a company is advised to plan ahead and weigh the costs of maintaining a lease agreement against potential penalties.
  • Clear all the debts and dues
    If the WFOE owes debts, taxes or salaries when it closes and doesn’t go through the proper liquidation procedure, the legal representative and the directors of the company may be held personally and criminally liable

How Can I Hire/Keep the Employees in China after the Company is Closed?

Closing a business down could be a result of various reasons. No matter whatever is the reason for shutting down the company in china, it still has the option to hire employees and get the work done.

If the company is wishing to hire people in China for completion of certain projects or even as a regular employee for your company, the best option to do is hiring your employees from a China-based staffing agency.

There are agencies based in China that can provide Employment Solutions / PEO (Professional Employment Organization) to foreign companies that require staffing employees for specific types of short and long-term projects and jobs and also helps with signing labor contracts.

In this Service, you can hire employees through a talent dispatch agency like HROne through the PEO/EOR service. While the dispatched employees work for and are supervised by your company, they are in fact employed by the talent dispatch agency. The talent dispatch agency is the legal entity responsible for the administrative management of the employees and handling all the monthly payroll, mandatory benefits for your employees.

These agencies have considerable experience and knowledge of hiring local workers, therefore, it is the only flexible, efficient, and cost-effective avenue to legally recruit local employees after your China legal entity has been canceled but still want to retain your current employees.

 

Tips

  1. If there is any money left in the bank account, we recommend using it up somehow before closure. If the client wishes to collect the money after the closure, the authority will require a liquidation report from the accounting firm. This report will cost extra (15000 RMB+), the detailed quote is provided by the accounting firm based on the asset amount
  2. Instead of requesting the client to provide documents, the closure process requires other authorities to provide several kinds of certificates proving that this company has completed the relevant obligations before closure. It could be difficult to get these documents as different authorities have different requirements
  3. Closing a company in China could also mean that there were some illegal actions involved during the time when the company was operational. Hence, it is important to follow a step-by-step procedure and consult experts for advice
  4. Many times, the company wants to restart its operations in China. Getting a clear legal entity and document procedure could be tiresome. Hence, following the clear guidelines of experts is advisable

 

Conclusion

In the wake of the economic crisis, foreign investors might consider abandoning their manufacturing plants or business. It is therefore important to know about the legal procedure and policies relevant to shutting business in China.

After the company pays up all the salaries and social insurance to its employee, taxes to the authority, debts to other companies or individuals, it can submit dissolution application with the authorities one by one including but not limited to Commerce Bureau, Administration of Industry and Commerce, Statistic Bureau, Finance Bureau, Tax Bureau, State Administration of Foreign Exchange, etc..

The process is very complicated and will take 6 to 12 months, but this is a safe way for shareholders because if they just leave the company alone, there might be a risk that they cannot establish a new business in China again. Companies can still pay taxes every year which will be minimal but this will make sure, if you ever try to revive business in China, there is a company ready.

How can We Help your Business in China?

We are a non-state consulting firm based in Shanghai that helps foreign businesses enter the Chinese market and develop their operations. Our clients are assisted from initial stages with company formation and employment solutions, to further support-requiring stages with our business solutions such as tax & accounting and payroll & tax.

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