Closing a Chinese company or a China WFOE company requires an understanding of China’s business laws. There are numerous reasons why foreign companies and entrepreneurs need to close their Chinese companies. It’s often due to the lack of demand for their products or services, or issues regarding adhering to the local markets and their needs. If you currently find yourself in that precarious position, it’s essential that you follow the process and proper procedure of closing your China company.
If you fail to follow the proper procedure to close a Chinese company and liquidate operations, your personal and company’s reputation could be tainted going forward and hider future possible relations when dealing with Chinese companies. You could even suffer fines or penalties from Chinese authorities that could lead to you being blacklisted or even banned from visiting China, or in the worst-case scenario, from leaving.
It takes time and effort to liquidate a Chinese or WFOE company, especially if you are considering a full liquidation, which could take up to a year or longer. Deregistering at the Chinese Tax Bureau can be very time-consuming. The Tax Bureau is famous for its non- cooperation stance as liquidations are not at the top of their priority list. There are numerous things you have to take into account when liquidating a Chinese company, subsidiary or WFOE listed below in a linear manner from conception to completion.
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What Should I Do Before the Liquidation Process?
Following the Chinese company liquidation process is important. It is highly recommended that you get everything prepared and in line and above board before you begin. There are some laws you need to adhere to ensure everything runs smooth and painlessly. You need to properly plan and prepare before you start the liquidation procedures.
It’s important to remember that you could face serious consequences if do perform the de- registration incorrectly or you fail to pay any outstanding taxes. This could even affect major creditors you work with or your employees. These are usually administered in the name of fines or even company penalties that can affect personal liability and even result in you and your legal representation being denied entry into the country.
Ensuring you get the correct approval to deregister the Chinese subsidiary is a great place to start. So here are a few things you need to carefully consider before you start the liquidation process to close your China company.
Labor Contract Termination
Contrary to misguided belief, Chinese laws do a great deal to protect employees so you will need to reach some kind of settlement agreement with each employee on an individual basis. In this respect, terminating employee contracts can take up a massive amount of administration time. But you must have this fixed before you even attempt to start the official liquidation process or before you have dealt with any current tax issues you may have.
Resolve Current Legal Disputes
Before you can liquidate your company in China, you will need to deal with any outstanding legal disputes or cases your company might have. If you are currently amidst a legal dispute, any liquidation procedure will be brought to an abrupt halt. So make sure you fix any outstanding legal cases you currently have before you begin liquidation.
Complete Annual Statutory Requirements
When you are starting the liquidation process, it’s common for Chinese (tax) authorities to audit and inspect your tax status and filings. If your company has a sizeable operating period such as over 5 years or has significant activities ongoing, you might be subjected to audit reports for the past 3 years and a request for info on your additional operation years might also be required.
Have a Valid Registration Address
You need to have a valid registration address during the liquidation process as a landlord might need your company to keep paying rent as you cannot have two companies registered at the same address simultaneously. An alternative option would be to change your registered address before you even start liquidation.
During the Liquidation Process
Now we’ve covered what you need to do before starting the liquidation process, it’s time to get the ball rolling in the right direction. Here is a step-by-step guide to liquidation that you need to follow to close a company in China.
Form a Liquidation Committee
You have a window of 15 days before you decide to liquidate the company to set up a Liquidation Committee. The key responsibilities of the committee are to manage the whole process while giving reports to shareholders on the movements. There must be at least 3 people on the committee and they should be appointed by the company and they should include your legal representatives.
Liquidate Company Assets
Now you have a Liquidation Committee, you can begin the process of liquidating your company’s assets. You will need to calculate your outstanding costs and debts by using your sales receipts. You will need to calculate the following:
a) Any liquidation expenses.
b) Any outstanding salaries to employees, severance payments, and social insurance fees.
c) Any outstanding tax bills or liabilities.
d) Any other outstanding debts you may have.
If you have any funds left after settling those above expenses and paying off debts, the outstanding money will be divided among your current shareholders. However, if your funds are not enough to cover the outstanding debts and liabilities, it’s the job of the Liquidation Committee to go to the people’s court and file for a bankruptcy declaration. The key difference between bankruptcy and liquidation is you will lose control over the company.
Registering your Liquidation with AMR
Filing records with the State Administration of Market Regulation, which was formally called the AIC, should now be performed by your Liquidation Committee. This is essentially your official intent to liquidate your company in China.
Make Announcements in the Newspaper
You have a period of 60 days after the Liquidation Committee has been formed to take out a newspaper listing to announce your liquidation. This is done to give any of your creditors a 45- day notice to declare any debts or issues regarding your company to the Liquidation Committee.
Wait for Creditors to Make their Claims
Your creditors now have a window of 45 days to submit any statements to your Liquidation Committee to make any claims against you. But they will need to provide evidence of those claims or they will be null and void.
Settling Debts with Your Creditors
If debts are logged against your company to the Liquidation Committee from your creditors and proof has been forthwith, you now need to settle those debts.
Registering Your Liquidation with MOFCOM
After you have already registered your liquidation with the AMR, you will also need to officially inform your partners with some kind of shareholder?s resolution that states your intent to liquidate the company. You need to lodge that resolution with the Ministry of Finance and Commerce, which is also known as MOFCOM.
Getting Tax Bureau Liquidation Approval
Obtaining approval for your liquidation process with the Chinese Tax Bureau is often one of the most time-consuming parts of all, so please expect to get delayed at this point.
Deregistering Your Company at Customs
You have to cancel your current Customs License (if you have one) with the Customs Bureau to be officially deregistered. All the original documentation and certificates need to be returned for the de-registration process to be completed.
Canceling All Your Specific Company Licenses
Depending on the industry your company operates within, you might need to cancel some specific licenses. If your company falls under the category of Food & Beverage or even if your company holds an Alcohol license, they need to be officially canceled before you deregister down at the AMR.
Liquidating Your Company at the AMR
After you have successfully deregistered your company at the Tax Bureau and other licenses you may hold, you now need to make a formal liquidation application down at the AMR to make it all official. You will have to return your original and duplicate business license, and once completed, your company will finally be deregistered.
Other Relevant De-registration
Your company now doesn’t exist because you canceled it at the AMR. But now you will need to deregister at the State of Foreign Exchange and the Chinese Social Security Bureau.
Close Your Company Bank Account
It’s normal for a company to have two or even more bank accounts. Most have a general account at the RMB, and there’s also a potential capital account and maybe even a general account to take into consideration. Just be sure to cancel your RMB account last because that is normally the company’s main bank account. You can’t cancel an account that still has cash in there, so you must spend or take out the remainder of the funds to cancel properly.
Destroying Company Chops and Seals
We really are now at the point of no return. So the final act after deregistering at all the above places, is you now need to dispose of or destroy your official company chops and seals. In fact, closing the company is not officially complete until you have disposed of them. You needed the chops during the deregistering process, but now you are done, they need to be destroyed. If you don’t destroy or dispose of them, it’s actually punishable by law.
Final Thoughts on Closing a Company in China
Did you ever think that closing a company in China would be as complicated as starting one? It’s not quite as difficult as starting a company in China as a foreign investor but it can still be thwarted with so many potential problems and issues, especially if you don’t properly prepare before you begin the liquidation process. It can be complex, time-consuming, and energy-draining, and that’s if you correctly follow the liquidation process.