How to Close a Business in China?
Foreign investors may decide to close their business in China for multiple reasons. By law, there are a series of procedures to go through to liquidate and deregister the company. Failing to follow the prescribed procedures will trigger serious consequences for the legal representatives and the company’s future in China. The process for closing a RO is simpler than closing a WFOE.
Foreign investors may decide to close their business in China for multiple reasons, such as inability to compete with domestic rivals, a real or perceived slowdown in specific sectors, shifts in consumer behavior, rising costs of doing business, impact of geopolitical developments like recent trade tensions with the US or black swan events like the coronavirus pandemic, or local regulatory changes, such as new environmental compliances.
A combination of these factors may account for the decline of an enterprise’s financial viability, market presence, and appeal. This may result in terminal financial difficulties, bankruptcy, a reorganization or merger, relocation, or a change in strategy from the overseas parent company. In such situations, closing business operations and leaving the country may be in the best interest of the organization.
To legally close a business in China, the investors need to go through a series of procedures to liquidate and deregister the company, which involves dealing with multiple government agencies, including the respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities.
Despite the onerous process, investors are highly recommended not to just “walk away” without following the prescribed procedures. Simply walk-away results in very serious consequences for the legal representatives and the company’s future in China. This includes attracting civil liability due to credit owed or even criminal culpability, difficulty during immigration, loss of property and assets, or inability to make future investments due to damage to reputation and financial status.
Below we provide a step-by-step guide for closing a business in China.
Close a WFOE in China: Step-by-Step
A WFOE company structure will usually be subject to special attention during its closure procedure, involving more steps and authority involvement than that of its representative office and Chinese company counterparts.
While the deregistration process can vary somewhat depending on the nature of the WFOE (manufacturing, trading, or service WFOE), its associated business scope, the size and health of the company, and the duration of company operations – there are some general steps that each WFOE must follow.
JV closure may follow similar procedure to those for WFOE.
1) Form a liquidation committee and prepare an internal plan
The first step to closing the WFOE is to form a liquidation committee. By law, the liquidation committee should comprise of a legal representative, representative for the company’s creditors, government representative, as well as certified public accountants and lawyers. In practice, however, the liquidation committee generally consists of any three or more people designated by the shareholders.
At the early stages of the liquidation, the committee should formulate and implement an internal liquidation plan, which makes a note of how the termination of employees, liquidation of assets, payment to creditors, and conclusion of lease will be handled.
Throughout the liquidation process, the committee will be responsible for several matters directly concerning the deregistration process, including – notifying the creditors of the business closure, preparing the liquidation report to submit to authorities, as well as more administrative tasks, such as preparing the balance sheet and recording a detailed list of all assets and evaluating properties.
2) Liquidate the assets
At this stage, the liquidation committee should also begin liquidating the company’s assets and allocate the returns from the sale in the following order:
- Liquidation expenses;
- Outstanding employee salary or social security payments;
- Outstanding tax liabilities; and
- Any other outstanding debts owed by the WFOE.
The company should refrain from settling creditors’ claims until the liquidation plan in step one has been made and approved by the board of shareholders. 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.
3) File a record with SAMR
After the liquidation committee is formed, the WFOE must file a record with the SAMR notifying them of their intent to close the WFOE. 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.
4) Newspaper announcement
Once the SAMR record has been filed, an announcement can be submitted in the newspaper to inform creditors of the business closure and to ask them to declare their claim. Although some cities have removed the requirement to submit a newspaper announcement for easy deregistration, proof of this announcement is still required by various authorities throughout the deregistration process, such as by the Ministry of Commerce (MOFCOM), the State Administration for Market Regulation (SAMR), and at the bank.
The announcement must be made in the provincial- or state-level newspaper and include basic details, such as the WFOE’s name, and in some provinces, committee member names. 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.
5) File a record with MOFCOM
A shareholder resolution, which states the shareholder’s intent to close a business, also needs to be submitted to the MOFCOM. Previously, WFOES needed to obtain approval from MOFCOM before closing the entity, but now a simplified record filing system exists.
6) Begin terminating employees
Businesses are advised to begin terminating employees as early as possible as many adjoining issues may arise once this process is initiated. The WFOE should also make an assessment on their employee’s legal contracts to determine if and how much of a termination fee is owed and identify staff that need special treatment during this stage, as is the case for pregnant women, employees with work-related injury, and others. In theory, all employees can be terminated if the company decides to shut down; however, local bureaus may at times impose their own labor restrictions on companies.
Where employees are eligible for workplace injury compensation, the business will be required to wait for all the injury assessments to have been completed by the HR bureau before closing down. This may take a long time because the assessment needs to be completed after the injury has been stabilized in order to exact the compensation amount owed to the employee. The company should also ensure that employees in key positions return property, such as company chops, financial statements, financial books, key passwords, and working computers before they depart.
7) Tax clearance and deregistration
A simplified tax deregistration now exists for eligible taxpayers. However, a general tax deregistration 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 (CIT), individual income tax (IIT), and stamp tax 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 of the company’s intentions and reasons.
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. It is important to note that the business will incur ongoing tax liabilities throughout the business closure process.
8) SAMR deregistration
Once the official tax clearance certificate has been obtained, the SAMR deregistration processes can begin. To do this, the liquidation committee must submit the liquidation report, signed by the committee members, as well as a shareholder’s resolution report, which needs to confirm the following – the amount of money that is left in the company, the completion of tax clearances, the termination of all employees, and that all creditor claims have been settled.
Once this step has been completed and the SAMR deregistration notice has been obtained, the WFOE will be deemed to be legally deregistered and will no longer exist as a legal entity.
9) Deregister with other departments
At the same time, the business must deregister at the following departments (where relevant):
- State Administration of Foreign Exchange (SAFE): This needs to be completed through the bank rather than SAFE. The entity must make an application at the bank in which their RMB basic account was opened.
- Social insurance bureau: The SAMR deregistration notice needs to be brought to the HR bureau for deregistration.
- Customs bureau: An application letter signed by the legal representative and stamped by the company, along with other original certificates needs to be submitted to the customs bureau for deregistration.
- Other licenses: Production licenses, food distribution licenses, and systems, applications and products (SAP) deregistration (for trading companies with their own website), and others need to be deregistered with the relevant authorities.
10) Bank account closure
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 capital and general account will typically be the first accounts to be closed. The remaining balance of the capital account can be transferred directly to the shareholder’s bank account, whereas the remaining balance 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 close as it is the WFOE’s primary account and is most closely monitored by China. Here, there are several options – the balance can be directly transferred to a legal representative, directly transferred to another domestic account, or the cash amount can be withdrawn.
However, these rules may be subject to changes since the new Foreign Investment Law has come into effect. And, individual bank branches may have their own policies.
11) Cancel company chops
Once all the other steps are completed, the company can cancel the company chops with the public security bureau, if needed. This must be the very last process as many of the previous deregistration steps will require the company chops. In practice, the public security bureau may expect the firm to destroy the chops rather than return it to them
The time taken to successfully close a business depends on the enterprise’ preparedness, credit-debt record, level of compliance, and submission of information to various government departments. In the case of a wholly foreign-owned enterprise (WFOE), it typically takes between 12 to 14 months.
Close a RO in China: Step by Step
For a variety of reasons, there may come a time when foreign headquarters need to close their ROs. For example, when a foreign headquarter looks to transform its RO to a WFOE to expand for-profit businesses, it will need to deregister its RO first.
From a legal perspective, China’s regulations stipulate that a foreign enterprise must, within 60 days, apply to the SAMR to deregister the RO when any of the following circumstances occur:
- The RO is required to shut down in accordance with the law;
- The RO no longer engages in business activities upon the expiration of residency;
- The foreign enterprise terminates its RO; or
- The foreign enterprise terminates its business (meaning the parent company is being closed).
The processes of closing an RO and closing a WFOE share similarities, but the former is much simpler, as there are no complex liquidation procedures or large-scale employee terminations.
Closing an RO typically takes six months to one year, or longer if irregularities are found.
1) Employee termination
When preparing the documents for the RO’s deregistration, the foreign enterprise can start dismissing the RO’s employees. An RO typically employs fewer people, making the dismissal process a little easier than for a WFOE.
However, there are a few points that need to be taken care of.
First, an RO’s local employees are dispatched by a labor dispatch agency, such as the Foreign Enterprise Human Resources Service Company (FESCO).
This means that the local employees sign labor contracts with the dispatching company instead of with the RO and the RO does not have any direct employment relationships with its local employees.
As a result, the RO needs to work together with the labor dispatch agency to deal with employee termination process when laying off a local employee.
To be noted, if the RO terminates its local employee illegally, although the local employees may sue the labor dispatch agency rather than the RO, all the costs will still be borne by the RO, because in most cases, the service agreement between the RO and the dispatch agency includes this provision.
As for the RO’s foreign employees, including one chief representative and one to three general representatives of the RO – their dismissal must be handled by the RO’s headquarter.
2) Tax audit
The formal deregistration of an RO starts with the application to the relevant tax bureau for tax clearance and tax deregistration. This step is often considered the longest – around six months – and perhaps the most difficult part of the entire deregistration process, as the tax bureau will ensure that the RO properly and fully paid all the taxes.
As part of the tax deregistration process, the RO must hire a local Chinese certified public accountant (CPA) firm to audit its accounts for the last three years. The latter will then
generate a three-year tax clearance audit report for submission to the tax bureau.
During this phase, it is important to note that the monthly tax filing of the RO shall still be carried as an on-going activity until all tax closures are completed with the tax bureau.
3) Tax deregistration
The RO will then need to submit the three year tax clearance audit report (up to the current month), the tax deregistration application form, the tax registration certificate, vouchers, tax filing records, and other tax-related documents to the tax bureau for review.
If all the taxes are proved cleared, the tax bureau will issue a tax deregistration certificate to the RO. However, if any unpaid taxes or irregularities are found, the tax bureau may conduct tax clearance for outstanding tax issues or possible on-site inspection of the RO.
The RO may then be required to settle the unpaid taxes, submit additional documentation, or pay penalties.
4) Deregistration with SAFE and customs
After the tax deregistration is done, the RO will also need to deregister the foreign exchange certificate with the SAFE and deregister the customs certificate with the customs authority.
Obtaining the deregistration certificates from both the SAFE and the customs authorities is a mandatory step of the RO deregistration process, irrespective of whether the RO has ever obtained a registration certificate from either of these two authorities.
5) Deregistration with SAMR
The next big step is to officially deregister the RO with the local branch of the SAMR with the following documents:
- The deregistration application letter;
- The tax deregistration certificate;
- Proofs issued by the customs authority and SAFE proving that the RO has deregistered the customs and foreign exchange or has never gone through any registration procedures; and
- Other documents as the SAMR prescribed.
After review, the local SAMR will then issue the ‘notice of deregistration’ stating the official registration and termination of the RO. An announcement of the RO’s deregistration will be listed on a media outlet designated by the SAMR. At this point, all the registration certificates will be cancelled, as well as the chief representative’s work certificate.
Further, it is important that the business registration and the office lease of the RO will need to be valid up until the official deregistration notification is issued by the SAMR.
6) Bank account closure
Last, the RO 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.
7) After the deregistration
After the RO has completed the deregistration, it is important that the parent company requests the return of and keep all accounting records and business documents to safeguard the interest of the parent company.
Finally, the company chops must be cancelled – where applicable – although in practice, the public security bureau may expect the firm to destroy the chops rather than return it to them.
Simplified procedures of company deregistration
The SAT has issued the Notice on Further Optimizing the Procedures for Dealing with Enterprise Tax Deregistration
(henceforth Notice) to ease the difficulties of enterprise deregistration. The Notice takes measures to reduce enterprises’ repeated errands and to issue tax clearance certificates on the spot even when some enterprises submit incomplete documents.
In particular, the newly introduced commitment system presumes the integrity of the enterprise, which may be reflected in a positive inspections record, high tax credit ratings, and no tax or fines owed. In such situations, the tax clearance time will be unaffected, and only a commitment is needed from the legal representative deregistering the company to provide all tax-related information within a stipulated time period.
New government reforms will follow three directions.
- First, simplifying the SAMR deregistration. This aims to see improvement in the general deregistration system for enterprises.
- Second, simplifying tax, social security, business, customs, and other deregistration procedures as well as document submission requirements.
- Third, setting up online service platforms for enterprise deregistration and carrying out “one-stop” online services (or “one website”) to facilitate this.
Through the above measures, many expect that the cancellation time of enterprises can be reduced by at least one-third. At the same time, the government will strictly investigate business entities indulging in the evasion of debt. The names and information on enterprises that have lost credibility due to non-compliance or debt evasion will be jointly published by the respective government agencies.