Closing down in China – but keeping your options open

Global growth is projected at –4.9% in 2020, according to the June 2020 World Economic Outlook (WEO) forecast issued by the IMF. It said the COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.

Real GDP is predicted to decrease by 8% in the US and by 10.2% in the Euro zone and the UK over 2020. In 2021 global growth is projected at 5.4%. Overall, this would leave 2021 GDP some 6½ percentage points lower than in the pre-COVID-19 projections of January 2020.

So we can honestly say that the economy does not look in great shape and, unfortunately, this is having a ripple effect on foreign-owned business in China. Sovereign China has also felt this, with many projects delayed, postponed or even cancelled. And more upsetting, we have also seen an increase in company closures.

Although it is our mission to support our clients to succeed in China and not to fail, when things do not work out in China it is essential to close your business correctly and leave the option open for a stronger comeback. If you do not do it correctly, the door may be shut forever and it could also lead to penalties, sanctions, even criminal liabilities, as well as the ‘black listing’ of the legal representative and directors of a Foreign Invested Enterprise (FIE).

Here are some basic steps that anyone preparing to dissolve a FIE should take, together with some tips to make is just a bit easier.

De-registration steps

1. Form a liquidation committee to formulate and implement an internal liquidation plan for assets and creditors, for the termination of employee’s contracts and the conclusion of the lease.
2. Liquidate the assets and then settle any liquidation expenses, outstanding employee salaries or social security payments, tax liabilities, and then any other debt.
3. File a record with the State Administration for Market Regulation (SAMR) by submitting a shareholder resolution.
4. Publish newspaper announcements to inform creditors of the business closure.
5. File a shareholder resolution with the Ministry of Commerce (MOFCOM).
6. Begin terminating employee contracts (our suggestion is to do this as early as possible).
7. Obtain tax clearance (this is the part that generally causes delays). Only when a company has settled all its tax liabilities, will it be allowed to de-register from its corporate income tax, individual income tax, value-added tax (VAT) and stamp duty obligations.
8. Obtain SAMR de-registration by submitting the liquidation report and the shareholder’s resolution report.
9. De-register with other departments – the State Administration of Foreign Exchange (SAFE), Social Insurance Bureau and Customs Bureau – and cancel any relevant licences.
10. Close the company bank accounts, finishing with the RMB basic account.
11. Cancel the company chops with the Public Security Bureau.

Tips to avoid delays in the de-registration process would be as follows:

• Ensure you have all the statutory documents to hand.
• Ensure you have the full cooperation of the board and the legal representative.
• Ensure your accounting books are accurate and up-to-date – the tax authorities do not like to lose a paying customer and they will find any reason to get additional taxes from you. Poorly kept or inadequate accounting books will give the tax authorities more ammunition.
• Follow the instructions carefully. This means submitting no double-sided printed documentation and using only a black ink rollerball pen (Have a look here to learn the difference).
• Ensure you do have any outstanding taxes.

We have seen the de-registration process drag on for as long as two years. If mistakes are made, a considerable amount of time can be lost on reissuing company chops, reactivating businesses licences, ensuring the authorising legal representative is still available, and resetting passwords and bank signatures, where necessary.

What will speed up your de-registration?

• Be compliant, keep maintaining correct books and conduct your annual inspection and audit.
• Keep your office (yes, you need to have an office during the closure).
• Arrange everything with your staff if you still have any. Pay out any severance and make sure the staff sign off on the package.
• Ensure that you do not have creditors or are involved in any lawsuits.
• Before moving to de-registration make sure you have zero funds in the bank (this will really speed up the work).

So, when an investor decides to close an FIE, making a plan is essential if you are to stay ahead at each stage of the closure process. This will avoid lengthy delays, added costs and potentially serious consequences.

For any questions or more detailed advice, you can contact Sovereign.