China implements simplified deregistration process to facilitate market exit

Attracted by the rapid growth of the Chinese economy, many foreign companies have expanded their business operations in China. Though the main goal for any enterprise is to succeed, it is crucial to know the correct steps to close and deregister a business in the country.

Failure to adapt to the local culture, a financial crisis and more recently the COVID-19 pandemic, are some of the reasons that can force a foreign company to decide to abandon the Chinese market.

In the past few years, the Chinese government has simplified the registration and deregistration process to encourage investment, improve its services and facilitate certain types of enterprises to exit the market more quickly.

Compared to business practices in Western countries, the process of shutting down a firm in China is not quite as simple as closing an office, stores or factories.

The Chinese law requires a formal deregistration procedure to close any foreign entity. In 2017, a simplified process was approved, reducing the time and cost of exiting the market.

China’s latest policies on business deregistration (also known as “e-deregistration”), include the simplified State Administration for Market Regulation (SAMR) deregistration procedure and the simplified tax deregistration procedure.

A company can deregister online (called e-deregistration), with no need to visit the local government offices. This process requires fewer documents to be submitted and omits the steps of establishing a liquidation committee or issuing a newspaper announcement, which are needed in the general deregistration procedure.

In August 2021, the circular on Further Improving Simplified Deregistration to Facilitate the Withdrawal of Micro, Small and Medium-Sized Enterprises from the Market established that “market players that have not had any creditor’s rights or debts or have fully settled any creditor’s rights or debts (except for listed companies limited by shares) can apply for simplified SAMR deregistration procedures”.

This means that the application for simplified deregistration is no longer limited to the original four types of companies (limited liability company/LLC, non-corporate legal person, sole proprietorship, and partnership enterprise). In addition, unlisted companies limited by shares can apply for simplified deregistration not only in pilot areas, but also across the country.

A company cannot have creditor’s rights or debts – including outstanding expenses for settlement, employee wages, social insurance premiums, statutory compensation, taxes (late fees or fines) payable, when applying for simplified e-deregistration.

All the investors must issue a written commitment and assume legal liability for the authenticity of the debt status of the firm.

The simplified e-deregistration procedure cannot be requested in certain circumstances, such as when an enterprise has committed a serious violation or had abnormal operations, has frozen or mortgaged assets, is under investigation or has been ordered to terminate the deregistration process.

However, companies can apply for simplified deregistration after the discrepancies have been solved.

These are the steps to apply for a simplified deregistration procedure:

The applicant must first log on to the integrated government service platform, visit the deregistration online service zone, upload the Letter of Commitment of All Investors, and make a public announcement for its intended simplified deregistration application through the National Enterprise Credit Information Publicity System.

 

Once the announcement is posted online, the system will automatically allow for any objections for 20 days (the original period was 45 days).

During the publicity period, the SAMR will pass the related deregistration information to the relevant tax, HR, and social security authorities. For FIEs, the information will also be forwarded to the commerce department for review. These government agencies and other interested parties can raise an objection and state the reasons through the system.

Tax authorities shall not raise any objections, if the taxpayer has never handled tax-related matters; has handled tax-related matters but never received or used invoices (including invoices issued on a commission basis) and has no tax in arrears or other pending matters; and has completed tax clearance formalities.

If there is no objection, within 20 days upon the expiry of the publicity period, the company can request to the local SAMR a simplified deregistration procedure and submit the necessary documents, such as the application letter for deregistration; the commitment letter of all investors; the power of attorney to agent; and the original and duplicate business licenses.

Eligible market players may go through simplified deregistration formalities online throughout the whole process by submitting electronic documents.

The local authority will communicate a decision within three working days and if agreed, the business has been officially written off.

In a similar way, the Chinese State Tax Administration (SAT) introduced the tax clearance certificate exemption service, optimized the on-site tax deregistration service, and simplified document submission requirements and application procedures.

Taxpayers who apply for the simplified SAMR deregistration and have never handled tax-related matters with the tax bureau; or have handled tax-related matters, but have never applied to issue invoices, and have no outstanding tax (including overdue fine) and penalties, are exempted from getting a tax clearance certificate from the tax bureau prior to the deregistration.

Despite the exemption, if these taxpayers need a tax clearance certificate and applied to the tax bureau, they can still immediately obtain one.

Taxpayers can get tax clearance and obtain a tax clearance certificate on site even when there is information missing by ‘making a commitment’ (a commitment of a resubmission within a specified period), if they do not have outstanding tax payments or other penalties; and they have returned the special value-added tax (VAT) invoices and VAT invoices machine to the tax bureau.

If the commitment is not fulfilled in the stipulated time period, the tax authorities will categorize the applicant’s legal representatives and financial managers with a class-D tax credit rating.

The tax bureaus will facilitate the tax deregistration process by simplifying the information required of taxpayers who have conducted real name authentication and are exempted from providing tax registration certificates and personal identification documents.

Other measures for optimizing the process can be applied by the tax authorities. Though these new policies have been implemented in most regions, it is recommended that foreign companies seek professional advice from local experts and authorities to take full advantage of the simplified deregistration procedure.

It is extremely important that a company stays in full legal compliance throughout the entire deregistration process.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
 

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.