Foreign investors may have a wide variety of reasons to decide to close their Chinese subsidiary. These reasons can vary from a lack of demand, problems to adapt to the local market to increasing costs within the country, or one of many other reasons. However, when a company does decide to liquidate the Chinese operations, it is important to follow the correct procedures to liquidate the company. Failure to do so can severely negatively affect the company’s future reputation in- and ability to do business with China, resulting in stringent fines or penalties by the Chinese authorities and can cause blacklisting for its registered personnel, possibly banning them from entering or leaving China.
Properly liquidating a Chinese company is a time-consuming process. The full liquidation process can easily take up to 1 year or more. Particularly the deregistration at the Tax Bureau can be difficult since the Tax Bureau generally has a non-cooperative position to avoid the loss of tax revenue in their district.
This article discusses the important factors to consider when deciding to liquidate a Chinese subsidiary and provides a detailed step-by-step liquidation process.
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When a Foreign Invested Enterprise decides to discontinue its operations in China, the company...
Company Liquidation in China
Considerations before liquidation process
As mentioned in the introduction it is essential to follow the proper liquidation procedures and abide by the relevant laws and regulations when liquidating a Chinese subsidiary. To facilitate a smooth company liquidation, significant planning and preparation is required.
If the company does not complete the deregistration procedures or fails to pay taxes, its employees or major creditors, the company and its registered personnel may face serious consequences. Consequences can include fines and penalties for the company, personal liability for the Legal Representative or even the Legal Representative being denied entry into China.
In order to be able to fulfill all requirements in the liquidation procedure and to obtain the necessary approval to deregister the Chinese entity, several important aspects should be considered prior to the liquidation procedures.
1. Termination of labor contracts
The Chinese law is very protective of employees and the company will need to reach settlement with each individual employee. Therefore, the termination of all labor contracts is a significant and time-consuming event, which must be considered prior to the official liquidation procedure and must be settled before settling outstanding tax liabilities.
2. Ongoing legal disputes
As per Chinese law and regulation, all legal disputes or ongoing legal cases must be settled before a company can be liquidated and the liquidation procedure will be put on hold in case of any dispute arising. Therefore, the company will have to ensure that any ongoing cases are completed before it can commence the liquidation procedures.
3. Annual Statutory Requirements
During the liquidation procedures the authorities (particularly the tax authorities) will generally inspect audit report(s) and tax filings. Based on our experience, for companies with a significant operating period (over 5 years) and significant activities, the authorities likely require at least the audit reports for the last 3 financial years and may request information on additional years.
4. Registered address
During the liquidation process, a company needs to have a valid registered address. Because a landlord may require the company to continue to pay rent (partially), as no 2 companies can be registered at the same address at the same time, companies may consider changing its registered address prior to the liquidation procedures.
Liquidation process
Below we provide a step-by-step process to follow in order to liquidate a Chinese company:
1. Set up Liquidation Committee
Within 15 days of the decision to liquidate a company, a Liquidation Committee must be formed. The committee’s main responsibilities are to manage the liquidation procedures and report back to the shareholders.
The Committee must include at least 3 members. In practice, the company appoints the members of the Committee, which usually includes the Legal Representative.
2. Selling the assets of the WFOE
Once the Liquidation Committee has been formed, it can start with liquidating the company’s assets.
The receipts of the sales will be used to settle outstanding costs and debts in the following order:
1. Liquidation expenses.
2. Outstanding employee salaries, social insurance fees and severance fees.
3. Outstanding tax liabilities.
4. Other outstanding debts.
Any funds that are left after all outstanding debts and costs are settled can be distributed among the shareholders. If the receipts of the sales of the assets are not sufficient to pay off the outstanding debts, the Liquidation Committee will have to file a bankruptcy declaration with the people’s court. The main difference between a liquidation procedure and a bankruptcy procedure is a loss of control over the entity.
3. Registration of the liquidation with the AMR
Once the Liquidation Committee has been formed, it will file a record with the State Administration of Market Regulation (formerly known as the AIC) to register the intent to liquidate the company.
4. Newspaper announcement
Within 60 days after the establishment of the Liquidation Committee, the company must make a newspaper announcement of the liquidation. This announcement gives creditors a period of 45 days to declare their claims to the Liquidation Committee.
5. Creditors register their claims
During the declaration period (45 days) the creditors can submit a statement to the Liquidation Committee regarding their claims, pledges to the claims and evidence of these claims.
6. Settlement of debt with creditors
Once all creditors and their claims have been identified, the Liquidation Committee can handle the settlements of the debts of the company.
7. Registration of the liquidation with the MOFCOM
Next to registering the liquidation with the AMR, the company also needs to submit the shareholder resolution (stating the intent to liquidate the business) to the Ministry of Finance and Commerce (MOFCOM).
8. Liquidation approval by Tax Bureau
One of the most difficult and time-consuming procedures in the liquidation process is to obtain the approval by the Tax Bureau. As the liquidation of a company means the loss of tax revenue for the district tax bureau, the district tax office will do everything in their power to delay the liquidation process.
Once the tax office approves the liquidation, a tax clearance certificate will be issued.
9. Deregistration at Customs Bureau
Before the company can be officially deregistered, the existing Customs license (if applicable) must be cancelled. During the customs deregistration process the original certificates will be returned.
10. Cancellation of company specific licenses
If the company is in possession of industry or company specific licenses such as, for example, a Food & Beverage license or an Alcohol license, these must be cancelled before the company can officially be deregistered by the AMR.
11. Liquidation of company with AMR
Upon handling the deregistration at the tax office and cancellation of company specific licenses, the company can initiate the formal liquidation application with the AMR.
During this procedure the original and duplicate of the business license have to be returned. After which the company is officially deregistered and thus legally no longer exists.
12. Deregistration at other relevant authorities
As discussed in the previous point, once the company business license has been cancelled by the AMR, the company no longer officially exists. After that, companies have to deregister at the Social Security Bureau and the State Administration of Foreign Exchange.
13. Closing bank account
In general, a company has two to three bank accounts; the RMB basic account, the capital account and possibly the general account. The RMB basic account has to be closed last, as it is the company’s main account. Since it is not possible to close a bank account when there are still funds in it (or interest built up), the remaining funds on the account must be spent or withdrawn.
14. Disposal of company chops
After all the aforementioned deregistrations and procedures are completed, the company chops have to be disposed of. Please note is important to wait with this step until all other procedures are finalized, as the chops may be required with the preceding deregistrations. Continued usage of the company chops after the company has been formally liquidated is punishable by law. Therefore, the company should ensure the proper disposal of the company chops.
Closing Remarks
As can be understood from the procedures covered above, the liquidation of a company in China can be a complex and time-consuming undertaking. The complete procedure from the moment of the decision to liquidate, to handling outstanding problems, termination of employees’ contracts and as well all deregistrations at relevant authorities and the bank could easily take at least 1 year.
Nevertheless, to avoid negative consequences in the future, it is essential to properly follow all the required procedures.
You can request a free copy of our Company Liquidation White Paper to learn more about the specific requirements to liquidate a company, all important considerations and further explanation on the difference with a bankruptcy procedure.
For any advice about this procedure or in case of requiring immediate support in the company liquidation procedure, please do not hesitate to contact us at [email protected]
