Many businesses have been considering pulling out of China since the pandemic began. If this is something you are considering for your business, this article will benefit you.
Leaving the China market or closing down a business in China can take time and effort. If you are still trying to figure out where to start, trust assured that you are not alone. In this blog post, I aim to provide a simplified overview of the process to make it easier for decision-makers outside China to understand.
This process is also referred to as "de-registration" or "liquidating a subsidiary" (the subsidiary is a wholly foreign-owned enterprise, WFOE.) that can involve some tedious and time-consuming actions. The entire process can be broken down into five major steps, and in each step, there can be more than one action to take.
Five steps to close a business in China - a checklist for liquidating a WFOE in China
Step 1. Engage with service providers
Step 2. Make public announcements and notify creditors
Step 3. Terminate employment contracts
Step 4. Government filing
Step 5. Remit remaining funds out of China and close local bank accounts
Step 1. Engage with service providers
If a company is incorporated in China and owned by foreign shareholders, it is often referred to as a wholly foreign-owned enterprise or “WFOE.” Shareholders and the board of directors of the WFOE need to pass resolutions on dissolution and liquidation. The resolutions will decide the establishment of a so-called “Liquidation Committee” and appoint its members.
The WFOE needs to engage an accounting firm to conduct an asset assessment and prepare the liquidation audit report. In the meantime, most companies will also hire a local Chinese lawyer to at least prepare the required documents and assist in making government filings. Given the complex process, the lawyer often lead the entire process.
Step 2. Make public announcements and notify creditors
This is when the WFOE needs to make public announcements and notify its creditors of the establishment of the Liquidation Committee. The WFOE also needs to create a clear record of all outstanding debts.
Step 3. Terminate employment contracts
The WFOE needs to sign Severance Agreements with and pay severance pay to each of its employees according to the employment laws in China. After that, it will cease making contributions to the employees’ social insurance accounts.
In addition, business contracts will cease to operate. The WFOE should notify the contract counterparties from office leases to sales contracts as early as possible. It will calculate and pay off its outstanding debts and settle all disputes. The WFOE can dispose of its remaining property and use the proceeds to settle its debts.
Step 4. Government filing
There are multiple government authorities involved in the process of company dissolution and liquidation. Different regions in China sometimes have slightly different practices. In general, the following government filings are applicable:
- Foreign-invested enterprise de-registration
The first filing is with the local authority that is in charge of approving foreign investments, which is usually the same authority that approved the establishment of the WFOE in the first place. In some regions in China, however, this step is not applicable.
- Tax de-registration
Before a WFOE applies for tax de-registration, it shall pay the taxes due, the overly refunded (exempted) taxes, the late fees, and the penalties, and shall hand in un-used invoices (Chinese Fapiao) and other tax certificates.
- Customs de-registration
If the WFOE is a Customs Declaration Enterprise (subject to due diligence), it needs to apply for the “Certificate of Non-Registration in Customs of Foreign-funded Enterprise.”
- Foreign exchange de-registration
China has strict foreign exchange controls. Therefore, to de-register its foreign exchange filing, the WFOE must file to the local foreign exchange authority, sometimes through its bank.
- Business license cancellation
The WFOE then needs to apply to the local company registry authority to cancel its business license.
- Housing fund account cancellation
The WFOE will then also cancel the housing fund account.
Step 5. Remit remaining funds out of China and close local bank accounts
If there are any remaining funds in the WFOE bank account, the WFOE can remit the funds out of China to its overseas shareholders. Then the WFOE can close its bank accounts.
Now that you understand the process of closing down a WFOE in China. Here are a few questions you may ask with answers provided.
How long does it take to close a business in China?
If everything goes smoothly and the business’s operation in China is simple, it takes about 6 to 9 months to complete the process. If, however, the business operation involves bank borrowing or is involved in a lawsuit, it can very much extend the procedure to years.
Therefore, if you anticipate closing your China operation within the next couple of years, you should start the planning and preparation process.
A final reminder on closing your subsidiary in China
The above list is a snapshot of the complex legal process provided by lawyers with relevant experiences. There are always different considerations in each case. In addition, other regions in China also have additional local practices. Therefore, the process requires a case-by-case analysis by experienced legal counsel to help you avoid mistakes and unexpected risks. If you anticipate closing your China operation within the next couple of years, you should start the planning sooner rather than later.