Closing a company in China is a lengthy process but need not be complicated. Kristina Koehler-Coluccia from Woodburn Global walks through the main steps companies will need to follow before closing in China, including necessary documentation
There are many reasons why a company in China may decide to close its doors. It is not always easy for foreign investors to compete with domestic rivals, manage rising operational costs or face the impact of unpredictable circumstances, such as the Covid-19 pandemic and the war in Ukraine. Or a company may simply want to relocate due to a change in strategy.
Whatever the reason, investors should not simply “walk away”. Doing so would result in serious consequences for the legal representatives and compromise any other future project or business in China. There are a series of steps to go through to liquidate and deregister a company in China, which involve dealing with multiple government agencies, including industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities.
The Chinese tax authorities tend to scrutinise and carefully evaluate the accounting and administration of the company, making the liquidation process one of the most complex and longest to finalise. This can take up to one year or more.
While the deregistration process can vary somewhat depending on the nature of the WFOE (manufacturing, trading, or service), its associated business scope, the size and health of the company, and the duration of company operations – there are some general steps that each WFOE must follow (joint venture closure follows a similar procedure).
WFOE deregistration process:
- Appoint liquidation committee
- Audit of the company
- Liquidate the company assets
- Notify the SAMR (State Administration of Market Regulation)
- Announcement in the local newspaper
- Notify MOFCOM
- Terminate employees
- Tax account deregistration
- Deregister the company with the SAMR
- Deregister the company with other relevant departments
- Cancel social insurance and housing fund
- Close bank accounts
- Cancel company chops
According to the law and Articles of Association, this newly appointed group will be responsible for the liquidation process.
After an analysis of the financial situation, the committee will have to draft a liquidation plan and report, which will clarify how the termination of employees, liquidation of assets, payment to creditors, and conclusion of lease will be managed.
The committee will be responsible for administrative duties, such as drafting the balance sheet and recording a detailed list of all assets and properties, as well as other matters like notifying the creditors of the business closure.
Audit of the company
A pre-liquidation audit report should be completed to prove to the tax authorities that the business dealings and company accounts were in proper order prior to the liquidation decision.
Companies may consider outsourcing this process to a professional provider. A detailed investigation carried out by an external entity will provide a more accurate evaluation. Company accountants, financial officers and balance sheets will be under rigorous inspection, and eventual discrepancies or mismanagement should be identified and fixed.
Liquidate company assets
At this point, the liquidation committee can start liquidating the company’s assets which have been previously valued. This money will go towards paying fees, taxes, and outstanding debts.
After the debts have been discharged, the committee can distribute the remaining returns among the shareholders. If the company’s assets are unable to settle the debts, it will file a bankruptcy declaration with the court.
Notify the State Administration of Market Regulation (SAMR)
After the committee is appointed, the company must file a record with the SAMR notifying them of their intent to close the company. This can be completed by submitting a shareholder resolution, which reflects the shareholder(s) decision to close the business and announces the names of the members that have been appointed to form the liquidation committee.
Announcement in the local newspaper
Within 60 days of the formation of the committee and after the notification to the SAMR, the company must submit a public announcement of the business termination in the provincial- or state-level newspaper. This will inform creditors about the company’s closure and give them time to declare claims to the liquidation committee.
Following the announcement, a minimum of 45 days is required before proceeding to the next step, to give creditors enough time to handle unresolved obligations and unpaid accounts.
Notify the Ministry of Finance and Commerce (MOFCOM)
The company needs to submit the shareholder resolution (stating the intent to liquidate the company) to MOFCOM in their record filing system.
The liquidation process creates a legal basis to lay off employees. Foreign-invested enterprises should also make an employment settlement report, including details regarding termination, transfer, notice and severance pay, and identify staff that need special treatment during this stage (i.e. pregnant women, employees with work-related injuries, etc.).
Though the step of terminating labour contracts should start as early as possible, not all employees should go immediately. Some people should remain to help and support the liquidation phase.
If the company intends to maintain some sort of operation in China after the liquidation, key employees can be hired under an employer-of-record service provider.
Tax account deregistration
This step is probably one of the most difficult and time-consuming procedures, taking between four and eight months.
Companies must submit necessary documents such as the signed board resolution, evidence of lease termination, and tax filing records for the previous three years directly to the local tax bureau. Authorities will check whether the company has paid taxes based on submitted financial statements and tax returns.
During this process, all tax liabilities need to be identified and settled before deregistering the business. The tax bureau might request a liquidation report, similar to an audit report, covering the years under review for closure clearance. This audit needs to be executed and drafted by a local certified public accounting (CPA) firm and brought to the tax bureau for review.
Once the tax office approves the liquidation, a tax clearance certificate will be issued. However, during this process the business will incur ongoing tax liabilities.
Deregister the company with the SAMR
Once the tax clearance certificate has been issued, the company can initiate the formal liquidation application with the SAMR.
The liquidation committee must submit relevant documents (such as the liquidation report and the shareholder’s resolution report) to confirm the completion of tax clearances, the termination of all employees, and creditor claims settlement.
Once this is completed and the SAMR releases the deregistration notice, the company will be legally deregistered and will no longer exist as a legal entity.
Deregister the company with other relevant departments
One of the last steps is to deregister at the Social Security Bureau, State Administration of Foreign Exchange (SAFE), Customs Bureau and any other relevant departments that handle company licenses (i.e. food license, production license, etc.).
Cancel social security and housing fund contributions
Social security and housing fund contributions are mandatory for both the employee and the employer. These contributions are made monthly, but rates differ per city and province.
Some companies going into liquidation face cash flow problems, and therefore, employee benefits are the first expenses to be neglected. Doing so might lead to heavy penalties and that is why it is important for the company to handle this area carefully.
Close bank accounts
Generally, a company will have two to three bank accounts: an RMB basic account, a capital account and a general account. The RMB basic account must always be the final one to be closed as it is the primary account.
Since it is not possible to close a bank account when there are still funds in it, the remaining funds on the account must be spent, withdrawn or transferred to the legal representative or another domestic account.
Cancel company chops
After all the procedures are completed, the Public Security Bureau will advise how to dispose of or destroy company chops. Continued usage of the chops after the company has been formally liquidated is punishable by law.
To start the company deregistration in China, you will need the following documents (documents required may vary depending on cities, nature of the business, company’s situation and change in policies):
- Originals of certificate of approval, letter of approval and business license
- Taxation registration certificate (2 originals)
- Enterprise code certification (2 originals)
- Statistics registration certificates
- Foreign exchange accounts permit
- Written board resolution of cancellation
- Copy of legal representative’s passport (first page, signature page, and most recent immigration records page)
- Bank account certificates
- All chops (company chop, finance, legal representative)
- All accounting-related documents: bank statements, invoices of company expenses, etc.