There are many reasons why a company in China may decide to close its doors. It is not always easy for foreign investors to compete with domestic rivals, face rising operational costs or the impact of unpredictable circumstances, such as the trade tensions with the United States or the COVID-19 pandemic.
Other reasons may simply be the intention to relocate the company or the difficulty to comply with local regulatory systems.
Whichever the reason, by law, there are a series of steps to go through to liquidate and deregister a company in China. Failing to follow the prescribed procedures will trigger serious consequences for the legal representatives and the company’s future in the country.
A combination of factors could cause a firm’s decision to terminate its operation. In situations such as terminal financial difficulties, bankruptcy, a reorganization or merger, relocation, or a change in strategy from the overseas parent company, 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 involve dealing with multiple government agencies, including respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities.
Investors should not simply “walk away”. Doing so would result in serious consequences for the legal representatives and compromise any other future project or business 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 a bad reputation and financial status.
The process for closing a RO (representative office) is simpler than closing a WFOE (foreign owned enterprise).
Regardless of the factors, any foreign entity should follow a formal liquidation process, which involves various government bodies and documents.
The Chinese tax authorities tend to scrutinize and carefully evaluate the accounting and administration of the company, making the liquidation process one of the most complex and longest to finalize. This can take up to one year or more.
While the deregistration process can vary somewhat depending on the nature of the WFOE (manufacturing, trading, or service), 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 (joint venture) closure may follow similar procedure to those for WFOE.
The following is a list of steps for the deregistration of a company in China.
WFOE deregistration process:
Appoint liquidation committee
Audit of the company
Liquidate the company assets
Notify the SAMR (state administration of market regulation)
Announcement on the local newspaper
Notify the MOFCOM
Terminate employees
Tax account deregistration
Deregister the company with the SAMR
Deregister the company with other relevant departments
Cancel social insurance and housing fund
Close bank accounts
Cancel company chops
In 2017, the Chinese State Administration for Industry and Commerce introduced the simple company cancellation, meant to facilitate the termination of companies without complicated scopes or structures. Since then, there are two approaches to cancel a company: a simple cancellation or normal cancellation.
In a 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 action requires a liquidation committee to be formed and start the process within 15 days.
Liquidation committee
According to the law and Articles of Association, this newly appointed group will be responsible of the liquidation process.
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 administrative duties, such as drafting the balance sheet and recording a detailed list of all assets and properties, as well as other matters like notifying the creditors of the business closure.
Audit of the company
The Pre-Liquidation Audit Report should be done to prove to the tax authorities that the business dealings and company accounts were in proper order prior to the liquidation decision.
The committee will benefit as well from having a good idea of the company’s financial health, before starting its difficult job.
Companies may consider outsourcing this process to a professional provider. A detailed investigation carried out by an external entity will provide a more accurate evaluation. Company accountants, financial officers and balance sheets will be under rigorous inspection, and eventual discrepancies or mismanagement could be identified and fixed timely.
Liquidate company assets
The liquidation committee can start at this point liquidating the company’s assets which have been previously valued. This money will go towards paying fees, taxes, and outstanding debt.
After the debts have been discharged, the 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 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 formation of the committee and after the notification to the SAMR, the company must submit a public announcement of the business termination in the provincial- or state-level newspaper including basic details.
This will inform creditors about the company’s closure and give them time to declare their claims to the liquidation committee.
Following the announcement, a minimum of 45 days is required before proceeding to the next step, to give creditors enough time to handle unresolved obligations and unpaid accounts.
Notify the Ministry of Finance and Commerce (MOFCOM)
Terminate employees
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).
At this point, employees must return company property, such as chops, financial books, passwords, and company computers before they leave.
Though the step of terminating labor contracts should start as early as possible, not all employees should go immediately. Some people should remain to help and support the liquidation phase.
If the company intends to maintain some sort of operation in China after the liquidation, key employees can be hired under an Employer-Of-Record service provider.
Tax account deregistration
This step is probably one of the most difficult and time-consuming procedures, taking between four and eight months.
It requires 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. Authorities will check whether the company has paid taxes based on submitted financial statements and tax returns.
During this process, all tax liabilities need to be identified and settled before deregistering the business. The tax bureau might request a liquidation report, which is not too different from an audit report, covering the years under review for closure clearance. This audit needs to be executed and drafted by a local certified public accountant (CPA) firm and brought to the tax bureau for review.
Once the tax office approves the liquidation, a tax clearance certificate will be issued. However, during this process the business will incur ongoing tax liabilities.
Deregister the company with the SAMR
Once the tax clearance certificate has been issued, 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 is completed and the SAMR releases the deregistration notice, the company will be legally deregistered and will no longer exist as a legal entity.
Deregister the company with other relevant departments
One of the last steps is 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 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.
Close bank accounts
Generally, a company may have two to three bank accounts: the RMB basic account, the capital account and the general account. The RMB basic account must always be the final one to be closed as it is the 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 company chops
After all the procedures are completed, the 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 chops after the company has been formally liquidated is punishable by law.
To start the company deregistration in China, you will need the following documents (documents required may vary depending on cities, nature of the business, company’s situation and change in policies):
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 company expenses
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.