While many foreign investors continue to be lured in by China’s wealth of attractive business opportunities, other investors, however, wish to shut their operations for one reason or another. As your entrepreneurial journey in China is drawing to a close, there are a host of formalities that you must consider prior to your departure. The bad news is that they can be as complex and time-consuming as the procedures that you went through to form a company in the beginning. Deregistering your company in China can, therefore, be an onerous and drawn-out process, requiring painstaking preparation and careful handling to ensure compliance.
This guide helps you navigate both types of procedures for company closure and explains why simply abandoning your company in China would be a very misinformed decision.
Guide to Closing a Company in China
What are the common reasons for company closure?
Although the reasons for dissolution are often specific to the company’s circumstances, here are some of the common reasons for a definitive exit:
- Inadequacy of resources to sustain operations;
- Lack of profitability and consistent losses;
- More cost-effective locations elsewhere in the region;
- Unprecedented and disruptive changes in the external environment rendering it unviable to do business in China;
- Irrelevance of product or service offering, i.e., the original opportunity no longer exists. The business has effectively run its course in the absence of alternative offerings;
- Irreconcilable differences between key decision-makers;
- Failure of succession planning, i.e., there are no successors to take over the business;
- Completion or expiration of a time-sensitive endeavour for which the company in China was specifically set up;
Can you simply abandon your company in China?
Given the elaborate and protracted procedures to which companies are subjected in order to shut down their businesses, it is often tempting to simply walk away and leave everything behind in China in the hopes of circumventing all the paperwork hassle.
This approach, unfortunately, cannot be more misinformed.
Not going through the necessary formalities to deregister your company and simply “forgetting” about its existence can expose your shareholders and management personnel to harsh penalties and personal liability. According to China’s Company Law, if a company suspends its business operations for six months or longer consecutively, its business licence shall be revoked. Furthermore, a company shall be dissolved where its business licence has been revoked.
Upon revocation of its business licence, a company must, besides ceasing operations, settle all its liabilities, including taxes, salary payments and other miscellaneous fees owed to authorities, as well as be dissolved pursuant to the procedure set forth in Company Law.
If your company is simply abandoned, its legal representative and directors can incur personal liability for damages suffered by creditors due to non-compliance with the liquidation requirements, as stipulated by Company Law. In such a scenario, the legal representative and directors will find themselves in a vulnerable and precarious position, where the corporate veil is lifted, meaning that the protective distinction between them as individuals and the company collapses. They may, therefore, be deemed personally liable for the debts taken on by the company, even though the latter is, in the eyes of the law, a separate legal person.
More alarmingly, if your company does not undergo the proper liquidation procedure, its key personnel, including the legal representative, directors, shareholders as well as the general manager, will be blacklisted. The blacklist is usually circulated among local Administration for Market Regulation (“AMR”) branches and border control authorities. Note that this would still be the case where no liability whatsoever is owed. If your company, however, is abandoned without its financial obligations being fully discharged, the repercussions will be much more dire. The legal representative and directors may face criminal prosecution – instead of administrative sanctions – for your company’s failure to discharge its liabilities in respect of taxes, other fees and debts to its creditors as a result of non-compliance with the liquidation procedure, as provided for in Company Law.
Evidently, even if your company has discharged all its obligations satisfactorily, as long as the rules of liquidation have not been properly observed, the consequences are still severe. The misstep will also lead to restrictions being imposed on your ability to conduct future investment activities in China. For example, the legal representative will be barred from assuming executive positions of another company in China for three years, and shareholders will be forbidden from investing in another company in China for three years.
Can your company go into hiatus?
You have the option to register your company as “out of business”, which enables you to suspend business operations for up to three years. This is a relatively new alternative introduced by Chinese authorities in 2022 in light of financial difficulties caused by pandemic-related disruptions.
Companies registered as “out of business” shall be exempt from the requirement to have a physical address and can use a mailing address instead, thereby allowing for savings in rental costs. However, this option does not free companies from their annual reporting and tax filing obligations.
What types of deregistration procedures are there?
Recognising that the onerous and time-consuming deregistration procedure had only been hurting its business-friendly appeal, China comprehensively streamlined and simplified the process in 2017. Companies that fulfil certain criteria, as stated below, are eligible to deregister under the simplified procedure, while ineligible companies have no choice but to follow the lengthy standard procedure.
Who is eligible for the simplified deregistration procedure?
According to the State AMR’s Circular on Further Improving Simplified Deregistration to Facilitate the Withdrawal of Micro-, Small- and Medium-Sized Enterprises from the Market released in 2021, companies that have settled all their debts and creditors’ rights are eligible to apply for deregistration under the simplified deregistration procedure. Entities, including limited liability companies, non-corporate legal persons, sole proprietorships, partnerships, non-listed companies limited by shares, bar listed companies limited by shares, as well as companies that have not commenced any business activities since obtaining their business licence, can opt for the new deregistration procedure.
The obvious advantages of the new method are efficiency and fewer documentation requirements. First and foremost, it is significantly less time-consuming with the full procedure taking around 40 days or less to complete as opposed to a year. In addition, the two primary documents required for submission are the application form for deregistration and a commitment letter signed by all shareholders, the implications of which will be explored below.
The simplified deregistration procedure is not applicable to the following entities:
- Foreign invested enterprises operating in industries on the Negative List for Foreign Investment;
- Companies placed on the lists of companies deemed to have abnormal operations or have committed major transgressions;
- Companies whose assets are mortgaged, or whose equity is frozen or pledged as collateral;
- Companies subject to administrative sanctions, compulsory administrative measures, judicial assistance or investigation by authorities;
- Branches of companies that are not separate legal entities and have yet to be deregistered;
- Companies that have been told to abort the deregistration process in the past;
- Companies that must seek prior approval for deregistration, as required by the law and the State Council.
In practice, though, this procedure would be most suited to a company with a simple structure, or whose operations have already ceased or have never commenced.
What are the implications of signing the commitment letter?
As mentioned above, a commitment letter signed by all shareholders, in lieu of a liquidation report, must be submitted as part of the simplified deregistration procedure. In the commitment letter, the shareholders must affirm that the liquidation has been duly completed, and all liabilities in respect of taxes, salary payments, etc. have been settled. The underlying risk is that if what is stated in the commitment letter proved to be untrue later down the line, the deregistration can be rescinded, and the company “resurrected”. Furthermore, the company may even be put on the “gravely dishonest entities list” and publicly shamed on the National Enterprise Credit Information Publicity System.
Such an eventuality is no doubt far from ideal, since it would considerably drag out your departure from China, harm your company’s credit record and create additional hurdles for your subsequent attempt at deregistration.
What documents are required for the simplified deregistration procedure?
As mentioned previously, the documentation requirements are fewer than those under the standard deregistration procedure. The following items must be presented to the local AMR, with the first two being the main documents required for submission:
- Application form for deregistration;
- Commitment letter signed by all shareholders;
- Tax clearance certificate (if applicable);
- Business licence;
- Power of Attorney.
What is the simplified deregistration procedure?
Prior to submitting your formal application to deregister your company with the local AMR, you must log on to the government’s designated online deregistration platform, upload the letter of commitment signed by all shareholders, and then make a public announcement of the proposed deregistration via the National Enterprise Credit Information Publicity System. The announcement will remain in public view for a period of 20 days, during which government bodies and other relevant parties may raise objections against your company’s deregistration, including the tax bureau and social security bureau. If no objections have been raised, you can then proceed to make a formal application for deregistration with the local AMR within 20 days of the end of the public announcement period.
In addition, it is important to note that before you start the deregistration procedure, you are required to obtain a tax clearance certificate attesting that your tax affairs are in order, and all tax liabilities have been discharged. Exemption from this requirement is granted to applicants under the simplified deregistration procedure meeting one of the following conditions:
- Companies that have never administered tax matters;
- Companies that have previously administered tax matters but never issued invoices, and have settled all tax liabilities and fines.
When the company deregistration is complete, you must also deregister with other relevant government departments, including the State Administration of Foreign Exchange (“SAFE”), social security bureau and customs office, as well as close your bank accounts and cancel company chops with the public security bureau.
What are the document requirements for the standard deregistration procedure?
Before or following your deregistration with the local AMR, you will also be required to deregister with other government departments, including the tax bureau, Ministry of Commerce (“MOFCOM”), SAFE, social security bureau, as well as close your bank accounts and cancel company chops with the public security bureau. Documentation requirements may differ according to the specific department or bank.
What is the standard deregistration procedure?
What can CW do for you?
At CW, we understand that closing your company in China is a difficult decision – one that should by no means be taken lightly. The level of complexity and number of formalities involved in deregistering a company could expose you to the risk of non-compliance at every turn. Since the legal implications of certain deregistration formalities are often not immediately obvious, there may be risks that you might not see or anticipate, the repercussions of which are, however, very serious. It is, therefore, extremely important to follow the deregistration procedure, as stipulated by Company Law, by the book.
Taking a holistic approach to risk management and with our profound knowledge of the different deregistration procedures, we can help you plan and implement your exit from start to finish, and ensure full compliance with the various rules and regulations to make your departure from China as smooth and effortless as possible.
To close your company in China with peace of mind, contact us today.