China Allows Companies to Apply for Dormant Status

Small-scale enterprises in China have been negatively impacted since the beginning of the COVID-19 pandemic and still are today. Trying to stay afloat by paying employee salaries, office rental costs, and daily operations costs has been a struggle over the past two and a half years. Amazingly, companies have managed to survive through this unprecedented time. Putting their businesses on hold is much more attractive than closing down the entire company.

In a bid to improve the conditions and business environment on a domestic level, Chinese authorities have launched their much-needed “business suspension policy”. The policy allows businesses to suspend their operations or temporarily become dormant to take a break from their financial obligations until the market returns or recovers, or until they become financially stable or viable once again. Stimulating the economy and virility of the market are the main aims of the policy.

What is Dormancy and How and Why Are Companies Choosing to be Dormant?

The concept of a “dormant company policy” that has been implemented across overseas territories such as the UK, Hong Kong, Singapore, and other locations is the cornerstone of the business suspension policy. The definition of a dormant company is a business that refrains from engaging in commercial business activities for a set amount of time.

Any company that applies for dormant status will get benefits like reduced administration requirements, although the rules might be different in each country. However, in China, aside from getting access to business administration relief, enterprises will also receive some of these below benefits via their dormant status:

  • You can reserve your company name.
  • The right to reserve any licenses that were originally pre-approved as the application process can be quite difficult depending on your industry.
  • Protection of your company brand and any intangible assets.
  • You can hold certain physical asset types like property investments.
  • You can save time and the costs it takes to close down a company and set another one up later.

Rules for Dormant Companies in China: Requirements, Application, and Potential Legal Issues

The dormant company status concept in China has also been adopted and has already been in place in a pilot sense since 1 March 2021 and is under the Rules of Shenzhen Special Economic Zone on Commercial Registration.

The Administrative Regulation of the People’s Republic of China in conjunction with the Registration of Market Entities and its Implementing Rules came into place which was then expanded to include the business suspension policy to be implemented on the domestic level.

Companies that have encountered operational issues during the COVID-19 pandemic or flood situations can apply for the business suspension policy in accordance with the new rules. Once the company has filed its application, the enterprise can exist in a low-cost mode for up to three years until the market has returned or adequately recovered.

Understanding Qualified Applicants and Applicable Situations

If your enterprise’s normal operations have been obliterated by COVID or by natural disasters or public health or security incidents, you can apply for the business suspension policy. As a company, you can decide the time period for suspension by your own assessment as long as it’s not more than three years in totality.

There are very few restrictions on application eligibility for a company becoming dormant in China. You should not be on the blacklist for abnormal operations or previously received any suspension fillings due to dishonest or illegal serious acts. If you fulfill these requirements and have never endangered national security or public interests, or the interests of any of your trading counterparts, the application should be a cinch.

Local government and their administrations can implement their own individual policies that are based on their own set of situations. A good example is the Shenzhen government and its stipulations that a company in their jurisdiction needs to be set up for at least one year before the business suspension policy application date.

Legal Ramifications

Exemptions from Retaining Physical Premises and Offices

It’s standard for companies in China to keep and maintain their registered business address and contactable addresses for the duration of their business term. Enterprises can be blacklisted if the authorities want to contact them through the registered address but cannot do so. In this instance, your company can be labeled as operating with “abnormal operations”.

The requirement of being contacted at your registered address is relaxed during the business suspension period. You will still have to provide an address to be able to receive legal documentation, but it’s accepted that the address can be different from your registered business address. The government in Shenzhen and Shanghai will allow companies in their jurisdiction to give an email address to receive the said legal documents and notifications.

That massively helps the enterprise because they do not have to keep the same registered business premises that might be costing them far too much in rental rates. During the business suspension duration, you can use an alternate address to receive legal documentation and that can seriously help struggling enterprises.

Legally Suspending Business

Before this policy was offered, businesses that halted their operations for six months or longer could be supervised closely and even have their business licenses revoked by the local registration authorities. Once you’ve filed your business suspension application, the enterprise can then legally suspend its operations without the fear of losing its licenses.

Reserving Your Legal Standing

Reserving your company’s legal standing for the duration of the business suspension period is a major benefit. You can reserve its existence unless the situation is still the same until the end of the three years is complete. After that time, you might decide to close down permanently if the situation hasn’t gotten any better.

Just to be clear, China’s Regulation and its Implementing Rules do not allow active business transactions during dormancy in Hong Kong and Singapore. And it’s also difficult to be clear whether an exemption also exists or if the dormant company is allowed to pay penalties or any other financial obligations that are required by the court judgments or administrative decisions to be paid or not. Further clarification is needed in these situations from the authorities.

Staff Terminations

Companies cannot use their business suspension status as a lawful excuse to terminate staff as stated by the Regulation and its Implementing Rules. The market entity qualifications of the enterprise are reserved during the dormancy period and this helps them to handle any employment relationships or similar matters in line with the laws that already existed before filing.

This business suspension policy situation can be used as a strategic process for employee termination negotiation, but not as a common ground to terminate its staff unilaterally.

Tax Obligation Requirements

There are no clear and concise rules from the Regulation and its Implementing Rules that detail how a dormant enterprise can marshal its tax obligations. It’s not clear whether or not the company should still complete its tax filing on a monthly, quarterly, or annual basis. Clarification is needed on the corresponding tax responsibilities of the company during the suspension duration.

Conclusion

The implementation of China’s dormant company policy is still in its initial stages based on the listed information above.

There needs to be some supporting regulatory information on how best to promote or implement the new business suspension policy in conjunction with other authoritative bodies like the labor and tax bureaus and the social insurance sectors.

Enterprises in China that are planning to suspend their business operations need to tread with caution and keep an eye on ongoing regulatory updates. Keep in close contact with the correct authorities or seek professional advice on business suspension applications and filings.