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Companies in China may want to liquidate their business for various reasons such as changes in their business scope, failure to adapt in the market, relocation of the company, local regulatory changes, such as new environmental compliances, or due to an industry crisis that might be caused by geopolitical tensions or by the recent evolution of the coronavirus pandemic.
Nonetheless, China continues to be an attractive and reliable destination for investments. Already in 2020, just at the beginning of the pandemic, China has surpassed the United States becoming the largest recipient of foreign direct investments in the world and the country expects an increase of 10.8 % on an annual basis.
Therefore, there is a clear indication that international trade is reaching record highs in the country and that foreign companies still have huge development opportunities in China.
This is due also to internal policies that give particular importance to stability and economic recovery, with the adoption of fiscal and monetary policies to stimulate growth in the sectors of the economy defined as strategic such as internal consumption and foreign investments.
Regardless of what factors might trigger the decision to shut down the business, investors cannot simply abandon the company and walk away without following a proper closure procedure. If such, this behavior could result in very serious legal liabilities for the Legal Representative and compromise any other future project or business that the company intends to carry on in China.
PRC law requires a formal liquidation procedure that has to be followed by any foreign entity, which involves various government bodies and documents preparation.
Liquidation is certainly one of the most complex corporate operations and that it takes longer to finalize, as it is subjected to stringent scrutiny by the Chinese tax authorities, that will carefully check the correct historic accounting management and administration of the company, possibly going to recalculate the taxes due for the previous years.
The full liquidation process can easily take up to 1 year or more. Below you can find the step-by-step guide for the de-registration of a company in China.
WFOE De-registration process:
Simple cancellation & Normal cancellation
The simple company cancellation was introduced by the Chinese State Administration for Industry and Commerce in 2017 to further promote enterprise cancellation facilitation and optimize the business environment. It mainly applies for companies without complicated scopes or structures.
Since then, there are two approaches to cancel a company: a simple cancellation or normal cancellation.
Voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholder(s). Such a decision will happen once a company’s leadership decides that the company has no reason to continue operating. This type of liquidation requires a liquidation committee to be formed and start the process within 15 days.
Appoint the liquidation committee
The first step is to appoint a liquidation committee within 15 days of the announcement of the company liquidation.
This newly established body will have the responsibility to carry on the liquidation process in accordance with the provisions of the law and the Articles of Association.
After an analysis of the financial situation, the committee will have to draft a liquidation plan and a report for approval, which will clarify how the termination of employees, liquidation of assets, payment to creditors, and conclusion of lease will be managed.
The committee will be responsible for several matters such as notifying the creditors of the business closure, as well as more administrative tasks, such as drafting the balance sheet and recording a detailed list of all assets and evaluating properties.
Audit of the company
The Pre-Liquidation Audit Report is to ensure the tax authorities that the business dealings and company accounts were valid and in proper order prior to the liquidation decision.
In addition, Having a clear idea of the company’s financial situation will surely facilitate the already complex tasks that the committee will need to face.
Outsourcing this task to a professional provider is also recommended as a detailed investigation carried out by an external entity will indeed provide a more accurate and truthful overview. Company accountants, financial officers and balance sheets will be under rigorous inspection, and eventual discrepancies or mismanagement can be spotted and fixed timely.
Liquidate the company assets
At this stage, the liquidation committee should also begin liquidating the company’s assets.
All the fully owned assets by the company are valued and sold to pay off the liquidation expenses, outstanding debts, fees and taxes.
After the debts have been discharged, the liquidation committee can distribute the remaining returns among the shareholders. If the company’s assets are unable to settle the debts, it will file a bankruptcy declaration with the court.
Notify the SAMR (state administration of market regulation)
After the liquidation committee is appointed, the company must file a record with the SAMR notifying them of their intent to close the company. This can be completed by submitting a shareholder resolution, which reflects the shareholder(s)’ decision to close the business and announces the names of the members that have been appointed to form the liquidation committee.
Announcement on the local newspaper
Within 60 days after the establishment of the Liquidation Committee and after the notification to the SAMR, the company must submit a public announcement of the liquidation in the provincial- or state-level newspaper including basic details such as the company name.
The main purpose of the announcement is to inform creditors about the company liquidation and give them time to declare their claims to the Liquidation Committee.
Following the announcement, a minimum of 45 days is then required before proceeding to the next step. This is to ensure adequate notice and time has been given to creditors to handle unresolved obligations and unpaid accounts.
Notify the Ministry of Finance and Commerce (MOFCOM)
The company also needs to submit the shareholder resolution (stating the intent to liquidate the company) to the MOFCOM in their record filing system.
Terminate the employees
Starting the liquidation process creates a legal base in which the company can lawfully lay off employees. Foreign invested enterprises should also make an employment settlement report, including details regarding termination, transfer, notice and severance pay, and identify staff that need special treatment during this stage (i.e. pregnant women, work-related injured employees).
The company should also ensure that key employees return property, such as company chops, financial books, passwords, and company computers before they leave.
Businesses are advised to begin terminating employees as early as possible as many adjoining issues may arise once this process is initiated.
However, just because liquidation is underway, this doesn’t suggest that all employee contracts should be terminated immediately. In fact, it is often the case and preferential that some employees are kept to help and support the liquidation process.
In many cases, if the company still intends to maintain some sort of operations in China after the liquidation, key employees can still be hired under an EOR service provider.
Tax account deregistration
This step is probably one of the most difficult and time-consuming procedures in the process.
A general tax de-registration process will usually take around four to eight months and it will be required to submit necessary documents such as the signed board resolution, evidence of lease termination, and tax filing records for the previous three years, directly to the local tax bureau that will check whether the company has paid the tax based on submitted financial statements and tax returns
During this step, all tax liabilities need to be identified and settled before deregistering the business from its tax obligations.
Moreover, the tax bureau might request a liquidation report, which is not too different from an audit report, covering all of the years under review for closure clearance. This audit needs to be carried on and drafted by a local
certified public accountant (CPA) firm and then brought to the tax bureau for review.
Once the tax office approves the liquidation, a tax clearance certificate will be issued. stating that the company has successfully deregistered from all its tax obligations.
However, it is important to point out that during this process the business will incur ongoing tax liabilities.
Deregister the company with the SAMR
Once the deregistration with the tax office is completed and the tax clearance certificate has been obtained, the company can initiate the formal liquidation application with the SAMR.
The liquidation committee must submit the relevant documents (such as the liquidation report and the shareholder’s resolution report) to confirm the completion of tax clearances, the termination of all employees, and creditor claims settlement.
Once this step is completed and the SAMR release the deregistration notice, the company will be legally deregistered thus will no longer exist as a legal entity.
Deregister the company with other relevant departments
As explained before, after the deregistration with the SAMR, the company no longer officially exists. After that, companies have to deregister at the Social Security Bureau, State Administration of Foreign Exchange (SAFE), Customs Bureau and other relevant departments that handle the company licenses (i.e. food license, production license, etc.).
Cancel the social insurance and housing fund
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:
- The client needs to prepare the documents, then handle the social security and housing fund account cancellation on site.
For Social Security cancellation, the following documents are required:
- Social security registration certificate (if you have);
- Certificate of cancellation of business license;
- 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:
- Cancellation application form;
- Certificate of cancellation of business license.
If all the necessary documents are complete and available, the cancellation can be done on the spot.
The acceptance time of the organization is from 5th to 26th of each month (except statutory holidays).
The account can only be cancelled 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 cancelled after the business license gets cancelled.
Close the bank account
Usually, a company has two to three bank accounts; the RMB basic account, the capital account and possibly the general account..
The RMB basic account must always be the final account to be closed as it is the company primary account.
Since it is not possible to close a bank account when there are still funds in it, the remaining funds on the account must be spent, withdrawn or transferred to the legal representative or another domestic account.
Cancel the company chops
After all the procedures are completed, the company chops can be disposed with the Public Security Bureau that may expect the company to directly destroy the chops rather then return them.
Continued usage of the company chops after the company has been formally liquidated is punishable by law. Therefore, the company should ensure a proper disposal.
China’s corporate laws do not officially permit the existence of dormant companies, but it is possible to discharge most of a company’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 company’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 company has, will need to either be terminated or let expire, whichever is more cost-effective.
The company 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 company 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 company 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 company’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 Required to Close a company in China
To start the company de-registration in China, you will need to prepare the following documents:
- Originals of Certificate of approval, Letter of approval, Business License
- Taxation registration certificate (2 originals)
- Enterprise Code certification (2 originals)
- Statistics registration certificates
- Foreign exchange accounts permit
- Written board resolution of Cancellation
- Copy of Legal Representative’s passport (first page, signature page, and most recent immigration records’ page)
- Bank Account Certificates
- All chops (Company chop, finance, Legal representative)
- All accounting related documents: bank statements, invoices of compmany 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.
How long does it take 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 company 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 company 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 company 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 company 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 company 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 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 help 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 cancelled but still want to retain your current employees.
- 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
- 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
- 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
- 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
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.