Compliance issues for corporate executives to address before closing a China business
For various reasons, an international business might be thinking about exiting China. Compliance issues are often the top on the list in terms of knowing ahead what you’ll need to consider. Here are some insights for corporate executives to consider before closing a China business.
What to check if you are considering exiting China?
Every time a corporation restructures its supply chain or adjusts its global strategy, there are international subsidiary companies that will close.
Closing and liquidating a business is a complex project anywhere in the world. This task can be even more intimidating if it takes place in a foreign legal jurisdiction.
We have invited a top-ranked, experienced corporate lawyer to share what he thinks are the most important things for closing a business in China. These tips can act as a checklist for an international business in the year 2022. They can help you smoothly close a subsidiary company, branch company, or representative office in China (referred to as “China Subsidiary”).
1. Have enough funds ready to settle accounts payable
2. Keep a complete record of foreign exchange compliance
China has strict foreign exchange controls.
While preparing for business closure, business owners need to check the compliance record related to the capital account, as well as the foreign exchange registration and filing procedures. For example, be sure to confirm whether the corresponding expenditure vouchers after each foreign exchange settlement have been submitted to the China Subsidiary’s bank.
Incomplete records can lead to unnecessary delays when the China Subsidiary needs to remit any remaining funds back to the parent company.
3. Check whether the China Subsidiary has any unpaid tax
Before closing, a company in China needs to pay its unpaid taxes, if any. It is advisable to hire an accounting firm to verify the accounts as early as possible; this is also a necessary preparation for the accounting firm to issue a liquidation report as part of the liquidation process.
4. Check the lease contract signed by the China Subsidiary
The lease term should be sufficient to cover the liquidation period. If the lease term is insufficient, you should negotiate an extension with the lessor as soon as possible. Alternatively, you can relocate the company to a shared office with a more flexible lease term.
5. Avoid disputes and lawsuits during the termination of labour contracts
The company should hire experienced local lawyers to sort out the labour contracts signed by the China Subsidiary. These lawyers will be able to review and confirm two very important issues:
– The termination rights that the company can enjoy in all the signed labour contracts;
– The statutory termination rights and restrictions due to the company’s liquidation as stipulated by relevant Chinese laws.
In addition, severance payment and legally required compensations due to termination of the employment contracts can arise out of the proposed liquidation. Calculate these as early as possible, and include them in the accounts payable by the China Subsidiary. It is advisable for the local management team to communicate properly with employees.
The goal is to avoid labour arbitration or litigation with anyone: full-time employees, part-time contractors, or employees on extended leave (such as those on maternity leave). Labour disputes can substantially delay the liquidation process.
6. Make the necessary filings with government agencies in a timely manner
Before the liquidation is finalized, the China Subsidiary often needs to complete annual filings, including the tax declaration and industrial and commercial declaration. Any delay in these filings will also have an impact on the liquidation process.
Agents who are not lawyers typically handle these filings. Thus, the same lawyer responsible for the entire project should coordinate the agents completing the various types of government filings.
7. Keep at least one accountant until the last minute
When all the employees are leaving, at least one accountant should be retained for as long as possible to cooperate with the external accountant responsible for the liquidation. This is very important for the smooth progress of the liquidation.
With respect to the termination of this accountant’s labour contract, the best option may be to terminate his or her labour contract (“劳动合同” in Chinese, Lao dong he tong) together with those of the other employees. At the same time, sign a contract or agreement (“劳务合同” in Chinse, Lao wu he tong) with the remaining accountant so that he or she can continue to work until the liquidation process is complete.
Mr. Haiping Deng
Trustiics Recommended Lawyer
Qualified lawyer in China and U.S. State of New York.
Partner at Jingtian & Gongcheng law firm, Beijing Office
He is also a former corporate lawyer at Clifford Chance. He has over 20 years of experience in advising international companies’ business activities in China. He is qualified in China and the State of New York, U.S.