Increased competition, end of tax incentives, increasing cost of labor, and/or other market conditions, can make some companies decide to stop their operations in China and exit the market.
Ending your companies’ operations in China is not considered an easy task, since liquidation procedures are difficult and generally time-consuming. Some of these types of exits may even take up to 2-3 years’ time and could result in having to pay any outstanding taxes due (which were not paid in the past correctly) before being able to officially close the company. These challenges have even led some company owners (i.e. legal representative) to consider just leaving China and their company, and never to return. However, in this situation, if the company owners would ever return to China, it is expected that he or she would be held in custody in China until any outstanding taxes has been paid and the correct formal procedures have been completed to close the company. We would strongly advise against any company to choose this option.
Though these types of procedures of exiting the Chinese market generally takes much time and are subject to various requirements, it is certainly possible to exit the Chinese market in the right way and which makes best sense to your business. To provide a better understanding on how to exit the Chinese market and which options are available to foreign invested enterprises in China, we have prepared an overview of 3 separate ways to exit the Chinese market:
1. Liquidation of your Company in China
You can choose to leave the Chinese market by liquidating your company. During this procedure, the company would need to de-register itself with all relevant government authorities, close its bank account and return all remaining assets (if not sold already) and capital back to the investor of the company. This is generally considered to be a difficult procedure in China and could take up to 1 to 2 years’ time.
The general procedure in China to liquidate your company goes as follows:
(A) Provide notification to relevant authorities for closing the company: When you make the decision to liquidate the company, you need to consult first with various government authorities such as the AIC, Customs and MOFCOM authorities. A list of documents should be presented to the local office of MOFCOM, and corresponding approval must be received, which could take up to 2 to 4 weeks’ time. For instance, the WFOE company must present a tax audit report for the past year, and statutory audit reports for the past 3 years; along with various other documents signed by the representatives of the firm. Most documents relate to proper payment of taxes and auditing during the time of your business activity.
(B) Organize a liquidation committee: After receiving approval from the relevant authorities to close the company, a liquidation committee needs to be set up. This committee usually consists out of the legal representative, accountant and agent responsible for closing the company. Committee members manage the liquidation process and are responsible for keeping the shareholders informed about the progress. After the liquidation decision has been taken, company should stop its business activities, but must still proceed with its accounting and tax filing obligations until the company has been de-registered at the tax authority.
i. After the liquidation committee being organized, the company will have to go through a pre-liquidation audit. The requirements of this pre-liquidation audit can vary by location, size of the company, the sector, how many years that the company has been operational, etc.
ii. Following, the company has to publish a public announcement of liquidation in a newspaper.
iii. Import and export businesses, along with trading companies, should deregister their Customs registration.
iv. Company is required to pay all its outstanding debts to debtors during the liquidation procedure.
v. The employees during the liquidation should be laid off, although firms can have some staff support them in this procedure.
vi. Once this has been completed, you can continue with the last audit. This audit is similar with the first audit conducted in the process, and is completed to see if the transactions during liquidation has been undertaken properly.
vii. Submit liquidation report.
viii. De-register with tax authority, AIC (and any other government authority) and close bank account at bank branch of the company.
Most challenging part in this process would be the deregistration of the company at the Tax Bureau. Since Tax Bureau will lose tax revenue when closing the company, they are generally not supportive within this procedure and will want to examine if any outstanding tax is due by the company. Only the de-registration procedure at the Tax Bureau could already take 6 to 12 months’ time. This will be further complicated if in the past the company have experienced any tax or compliance issues.
It is furthermore also important to realize that liquidation of the company and bankruptcy of a company are two different procedures. However, both processes generally still follow the same steps in liquidation. A company, for instance, does not have to be bankrupt to decide to close the company. In case the company is bankrupt, the company would have to pay normally all his debtors and make sure all registered capital (since this is the commitment of the shareholders to the company) has been paid up.
2. Selling Your Company in China
Another option to leave the Chinese market by selling your company. This basically means the Chinese company remains to exist, but you as an investor are leaving the Chinese market.
When selling your company in China, you should be aware of the following:
(A) Regulatory Procedure to sell the Company: After receiving approval granted by MOFCOM to sell your company (and other authorities pending on your business scope), the share transfer of the company need to be registered with the AIC during the 30 days period following the grant of approval from MOFCOM. Usually the required documents are similar to the approval documents that need to be used for MOFCOM. Within this procedure, an official valuation of the company may also be required before being able to sell the company. Furthermore, a Purchase and Sales Agreement should be signed between the seller and the buyer, on the details of the acquisition to conclude on the details of the sale of the company in China.
(B) Capital Gains Tax: When you sell your company as a foreign investor in China for an amount which is larger than your registered capital, you would also have to bear in mind that your capital gain on this transaction will be taxed at 10%. It is also important to consider that when you sell the HK company owning the Chinese subsidiary, the local tax authorities in China (as mentioned in specific provisions of the Corporate Income Tax Law) have the right to levy a withholding tax of 10% on the capital gain of the company as per “Indirect Share Transfer” regulations.
(C) Liabilities of the Chinese Company: When you sell any company, this sale does not only include its assets, but also the equity and the liabilities of the company. Your buyer would preferably not want to be responsible for any tax or other liabilities, therefore it is important to clear these as much as possible before the sale or have a good agreement with the buyer.
(D) Business Scope: In China, the official business scope of your company draws a definite line to the business activities that you are allowed to perform. A company can only do what it is mentioned in the business scope, this would not depend on who owns the company (the investor). Basically this means that if you are a company that sells sports goods, your prospective buyers cannot just buy your WFOE and start selling immediately baby milk products. Since the sold company will have the same business scope, it will have the same WFOE registration and should continue the main activities as described in the business scope, whether before or after the acquisition.
3. Selling Assets of the Company & Remain “Dormant”
You could also decide to sell all or most of your assets in China, but keep the company registration minimally active, or more or less “dormant”. In China, however, there is no official “dormant” status, so this means your company would still need to continue with the monthly accounting and tax obligations. You will still have costs, but they will likely be confined only to rent of the office, administration fees, salary of perhaps one employee and any other out-of-pocket expenses. expenses. In this situation, it is advised to keep a very small office (i.e. 1m2) to lower the operational expenses. This option could work well for companies that currently have no good business in China, but want to postpone the decision to fully leave the market.
Compared to selling your company, there are additional tax obligations if you only sell your assets. Whereas you only have to pay corporate income tax and stamp duty when you are selling your company, when you are only selling your assets, you would as well need to declare VAT and possible other Taxes pending on the type pf assets of your company.
Conclusion
Pending on your firm’s situation, one of these options would be most suitable when choosing to exit the Chinese market. Although these procedures seem difficult at first, it is certainly possible to complete and have a clean exit of the Chinese market.
Throughout our presence in China, we have successfully helped companies with these procedures and provided advice on the exit strategy most suitable to their business. If need more information, or need help deciding how to exit China, please do not hesitate to contact us at [email protected].
