How to Satisfy the Compliance Requirements When Closing a Business in China?
Closing a business in China is subject to complex compliance requirements.
WFOEs (Wholly Foreign Owned Enterprises) must take the following regulatory steps to complete the liquidation:
Make a filing with the local State Administration of Market Regulation (SMAR)
The newly formed liquidation committee of the local company formally notifies the SMAR of the decision to close the business.
Make a filing with the local Department of Commerce (local counterpart of MOFCOM)
The liquidation committee notifies the MOFCOM of the decision to liquidate the company.
Proper settlement of employee layoff/termination
This is a crucial step that must be handled carefully to ensure that employees are treated fairly and in compliance with Chinese labor laws.
Tax de-registration with the local and state tax bureaus
This is often the most challenging step in the process of liquidating a company in China. Upon completion, the company will receive the tax clearance certificate.
Formal Liquidation Application with the SMAR
Upon completion of this step, the SAMR releases the deregistration notice, and the company will be legally deregistered and cease to exist as a legal entity.
Additional De-registration Formalities
This includes deregistration with the Social Security Bureau, State Administration of Foreign Exchange (SAFE), and the Customs Bureau.
Closing of bank accounts
Upon remitting any remaining balance to shareholders’ overseas accounts (after converting local currency into the U.S. dollars or other currency), the company’s bank accounts can be closed.
Cancellation of company chops
The company chops should finally be disposed of with the Public Security Bureau.
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Legal Q&A
How long is the liquidation process in China?
Liquidation can take up to 6 to 12 months or longer, depending on factors like the number of employees, local requirements, pending lawsuits, and unsettled debt or tax issues.
What's required to start the liquidation process in China?
A shareholders’ resolution is required, and the overseas holding company must approve the dissolution of the local subsidiary. A liquidation committee must also be formed.
What are the liquidation committee's responsibilities in China?
The committee must draft a liquidation plan, manage the termination of employees, liquidate assets, pay creditors, and conclude leases. It must also notify creditors of the business closure and draft a balance sheet.
What's a Pre-Liquidation Audit Report in China?
It’s a report to ensure the company’s accounts are in order prior to liquidation. An external provider can offer a more accurate investigation.
What happens after the issuance of the Audit Report in China?
The liquidation committee liquidates the company’s assets and sells them to pay off expenses, debts, fees, and taxes. If assets are insufficient, the company files for bankruptcy.
How can the requirement for notifying creditors be satisfied in China?
The company must make a public announcement, informing creditors about the liquidation and giving them time to declare their claims to the Liquidation Committee. A minimum of 45 days is required before proceeding to the next step.
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