How to Close a Company in China
How to Close a Company in China in China
Close a Wholly Foreign-Owned Enterprise in China.
A wholly foreign-owned enterprise (WFOE) is a usual financial investment automobile for international capitalists wishing to operate in China’s service, trading, or manufacturing industry. This business framework provides foreigners full ownership and the autonomy to own property, kind legally binding agreements, hire neighborhood personnel, and invoice in RMB.
While the challenges to setting up a WFOE are well-known and discussed, what often comes as a surprise to many investors, is that a WFOE deregistration can be a much more arduous process, typically taking 12 to 14 months to complete, in contrast to three to six months needed for a WFOE setup.
This extended period accounts for the time that the government bureaus require to ensure that all obligations are met before the dissolution of the company, which includes but is not limited to the repayment of debts, payment of employee wages, and clearing outstanding tax liabilities.
A WFOE company structure will usually be subject to special attention during its closure procedure, involving more steps and authority than its representative office and Chinese company counterparts.
How to Close a Company in China in China
Deregister the company in China
- 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. – here, 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.
- A simplified tax deregistration now exists for eligible taxpayers.
- Businesses 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.
- 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.
Closing a company in China
Step-by-step process to close a company in China
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 a legal representative, a representative for the company’s creditors, a government representative, 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 notes how the termination of employees, liquidation of assets, payment to creditors, and conclusion of the 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:.
– 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 cannot 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 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. Some cities have removed the requirement to submit a newspaper announcement for easy deregistration; various authorities still require proof of this announcement throughout the deregistration process, such as by MOFCOM, SAMR, and 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 required before proceeding to the next step. This ensures that creditors have given adequate notice and time 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, must also be submitted to the MOFCOM. Previously, WFOES needed approval from MOFCOM before closing the entity, but now a simplified record-filing system exists.
6) Begin terminating employees.
– Businesses are advised to terminate employees as early as possible as many adjoining issues may arise once this process is initiated. The WFOE should also assess their employee’s legal contracts to determine if and how much of a termination fee is owed and identify staff that needs special treatment during this stage, as is the case for pregnant women, employees with a work-related injury, and others. In theory, all employees can be terminated if the company decides to shut down; however, local bureaus may sometimes impose their labor restrictions on companies.
– here, 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 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. 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, individual income tax, and stamp duty obligations.
-Businesses 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. Sometimes, the tax bureau may visit the office to learn more about the company’s intentions and reasons.
-If the review is successful, the tax clearance certificate will be issued, which means the business will have successfully deregistered from all its tax obligations. However, 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 legally deregistered and 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 apply at the bank where their basic RMB 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, must be submitted to the customs bureau for deregistration.
– Other licenses: Production licenses, food distribution licenses, and products, applications, and systems (SAP) deregistration (for trading companies with their own website), and others must 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 accounts will typically be the first ones to be closed. After that, 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 been enacted. And individual bank branches may have their 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 last process, as many previous deregistration steps will require the company chops.
China Company Deregistration.
Close a Wholly Foreign-Owned Enterprise in China.We strive to act as strategic partners to our clients, know and treat their business as if it was ours and provide innovative, proactive and cost-effective legal solutions. This commitment applies to all our multidisciplinary teams that bring together the firm’s cross practice and industry talents. We commence every matter already well informed of the given industry trends that influence strategy and planning, resulting in comprehensive solutions. To create a true partnership with each client we also provide complimentary services ranging from corporate finance to investment banking advisory, networking events and B2B summits that bring together clients, countries or regions that share common strategic interests.
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