In the past, a company in China facing difficulties or other uncertain circumstances had to choose between closing its doors permanently or struggle to continue its operations. Currently, businesses have a better third alternative, which is opting for the dormant company status.
Since March 1st, 2022, the Chinese authorities expanded the implementation of the business suspension policy throughout the country. The company dormant status had been tried first in the Shenzhen region in 2021.
Through a dormant status, a company is permitted to exist in the legal sense, but it is not doing any business activities during a specific period.
A company can independently decide to close down for a certain period of time due to natural disasters, accidents, public health issues, social security incidents and other events that disrupt business operations such as the COVID-19 pandemic. This includes all types of legal entities engaged in profit-making activities in China.
Once the filing process is completed, the company’s status will turn to “business suspension”, which means the company can maintain its existence in a low-cost model within a period of up to three years and return to the market when it is ready.
There are pros and cons to this policy.
For companies which are struggling and need to take a breather, the option of choosing the dormant status is a good one.
In the dormant status, a company can reserve its legal standing and special license/s and or pre-approvals, legally suspend its business and protect its assets including intangible assets such as the company’s name, branding, and fame as well as physical assets, such as property.
Another important benefit is the reduction of costs. Firms can stop renting their original premises used for the registered address as long as they can provide an optional address for the service of legal documents and notifications. In Shanghai, an email address can be provided to receive documents and notifications. Dormant companies do not risk being blacklisted or labeled as entities with “abnormal operation” because they can’t be contacted through their registered address.
On the other hand, dormant companies cannot be used to apply for or extend foreigner work permits and work visas. Additionally, they cannot hire or maintain staff on payroll.
The dormant status does not change the companies’ claim to creditor’s rights and performance of debts, administrative penalties, administrative review decisions, judgments, arbitration instruments and other statutory or agreed obligations.
The debts owed by the enterprise to external parties must still be repaid to creditors in accordance with the law. The litigation and arbitration involved in the enterprise is not affected, nor is the enforcement of the relevant award. Once the company meets the requirements for dissolution or bankruptcy as stipulated in the Company Law, it may still be filed for bankruptcy and be subject to a court action for dissolution by the shareholders.
The government regulation does not clearly specify the tax obligations of dormant companies. The competent tax authority should clarify the corresponding tax responsibilities during the suspension period.
In the past, if an entity stopped its business operation for more than six months, it would be closely supervised, and its business license could be revoked by the registration authority. Now, upon the business suspension filing, the company can stop their operation legally, without revoking their business license.
The company’s legal standing can be reserved during the business suspension period. That is to say, the entity can reserve its existence unless the situation has not improved till the end of the business suspension period. By that time, the company may decide to close its business permanently.
The Regulation and its Implementing Rules do not provide that business suspension can be used as a lawful reason for termination of employees. Rather, it only states that the company’s market entity qualification will be reserved during the dormancy period and the company should handle the labor relationship and other relevant matters in accordance with laws before filing.
In this case, the company can only use the business suspension as a strategic condition in the termination negotiation, rather than as a ground to unilaterally terminate its employees.
There are a few steps that need to be taken to apply for business suspension:
First, companies must go to the registration authority for the record, which will publicize the period of suspension, the address for service of legal documents and other information through the National Enterprise Credit Information Publicity System.
After this step, companies should deal with labor relations and other related matters with employees in accordance with the law. Though in dormant status, companies still have responsibilities with employees and must contribute to the housing provident fund. If a company cannot pay the housing fund, it should apply for a reduction in the proportion of contributions or deferral of the fund. It is not allowed for a company to unilaterally terminate an employment contract just because the company is applying for business suspension.
Once they enter the dormant status, companies need to publish their annual reports on time from January 1 to June 30 each year. The information should include business scope, registered address, main accounting information, and social insurance information, among others.
They can submit the report online through the National Enterprise Credit Information Publicity System. Companies not publicizing or filing annual reports will be listed as entities with “abnormal operation” and be imposed a fine.
The suspension period shall not exceed 3 years. After this period, companies will automatically resume operations. If they want to extend the dormant status period, they should apply within 30 days before the deadline, unless they decide to close their business and promptly apply for deregistration.
When a company decides to carry on with business, they must apply for registering their messages, if their registration and filing matters are put on record change and they use the address for the service of legal documents instead of residence (their main business premises).
In China, the dormant company status policy is still being tested. Not all relevant policies and regulations are clear yet and require the cooperation of the government agencies such as the tax bureau, the labor bureau, and the social insurance bureau to promote the policy.
Many small and medium size companies have been impacted by the COVID-19 pandemic, and have been unable to cover daily operation costs, such as rent and employee salaries. But instead of choosing to close its doors permanently, thanks to this policy companies can put their business on hold until they overcome the difficulties.
China’s initiative to implement the suspension policy reflects its intention to support businesses and stimulate the vitality of the market and consumption potential. 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.