Company Liquidation in China

When a Foreign Invested Enterprise decides to discontinue its operations in China, the company must complete an essential, yet time-consuming deregistration process. Due to, among others, strict annual compliance regulations and the implementation of the Corporate Social Credit System, it is essential to follow the proper procedures to liquidate a Chinese company. Failure to properly deregister your Chinese operations can result in serious negative consequences for the company’s registered personnel and the future ability of the company to do business with China.

What is a Company Liquidation?

Company liquidation refers to the process in which a limited company officially dissolves itself from the official registry in its place of operation. Formally, all assets of the company is sold and operations are fully terminated. The liquidation process also entails the lawful process of employee contract termination, collection of outstanding debts and distribution of proceeds to creditors.

Reasons to Liquidate a Company

In accordance with the Company Law of the People’s Republic of China, there are five reasons or conditions to which a company can be liquidated.

  • In the case that the terms specified on the business license and Articles of Association expires.
  • In the event of company dissolution as decided upon by the board of shareholders
  • In the case of a merger or company division that requires company dissolution
  • Revocation of the company’s business license or an order has been placed for the company to terminate operations
  • The company is ordered to dissolve by the people’s court

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Considerations Before Liquidation Process

The company and its registered personnel can face the following legal consequences if deregistration procedures are not properly executed upon, and if employees, creditors, and taxes are not paid in full.

  • The tax bureau can subject the company to strict and costly fines or other penalties
  • Personal liability may be placed on behalf of the company’s Legal Representative
  • For three years, the Legal Representative is prohibited from serving as Manager, Director or Supervisor of a Chinese company
  • A restriction period of three years for be placed on the shareholders of the company, which prohibits them from investing in a Chinese company

1. Termination of Labor Contracts

Each individual employee is legally protected in China and required to reach a settlement with the company.

2. Ongoing Legal Disputes

Prior to liquidation, all ongoing legal conflicts and cases need to be resolved. It is required that the company confirms that all cases are settled before liquidation procedures can begin.

3. Annual Statutory Requirements

Three statutory requirements must be carried out each year by all foreign-owned entities in China, including the statutory audit, and is to be completed at the end of each year of commercial operation. General inspection with regards to tax filings and audit reporting will be performed by tax authorities during liquidation.

4. Registered Address

A company is required to have an accurate registered address in China until the license is retracted during the liquidation process.

Company Liquidation Process

The steps to liquidate a company can be long and tedious but need to be carefully followed to ensure full compliance with regulation. Below we briefly explain the first few steps of the liquidation process, whereafter we list the remaining steps. The liquidation process is as follows:

1. Set up Liquidation Committee

A Liquidation Committee must be formed within 15 days of the date that a decision to liquidate the company is made. The company’s creditors can have members of the committee appointed through an application made to the court.

2. Selling the Assets of the WFOE

The liquidation of assets can commence once the Liquidation Committee is formed.

3. Registration of the Liquidation with the AMR

A record is to be filed with the State Administration of Market Regulation (formerly known as the AIC) once the Liquidation Committee is established. This is to register the intent to liquidate the company. To file the application form, the documents that are needed include the list of members of the Liquidation Committee, the application form and shareholder’s resolution.

4. Newspaper Announcement

A newspaper announcement of the liquidation is to be made within 60 days of the formation of the Liquidation Committee. The purpose of the announcement is to provide creditors a 45-day period to disclose their claims to the Liquidation Committee. Additionally, the announcement allows creditors who have not received notification about the liquidation to be informed of the decision.

5. Creditors Register their Claims

Creditors can submit a statement to the Liquidation Committee with regards to claims, pledges to claims and evidence of the claims during the period of declaration, 45 days starting from the newspaper announcement.

6. Registering of the Liquidation with MOFCOM

The Ministry of Finance and Commerce (MOFCOM) must be notified through a submission of a shareholder resolution, which demonstrates the intent of liquidation.

The Following Additional Steps Need to be Completed:

7. Approval of liquidation by the Tax Bureau

8. Cancellation of licenses

9. Liquidation with AMR, incl. retraction of business license

10. Deregistration with other authorities (Social security Bureau, State Administration of Foreign Exchange, Customs Bureau)

11. Closing of bank accounts

12. Disposal of Company Chops

The Difference Between Liquidation and Bankruptcy

The primary distinction between the procedures for liquidation and bankruptcy has to deal with control over the entity.

For a bankruptcy procedure, a committee will be established, and its members will be appointed by the Chinese government. The committee is responsible for following through with procedures such as debt settlement, payment of employees, the sale of all company assets as well as overseeing the deregistering of the company.

Company Liquidation Cost

The costs for a company liquidation depend on many factors which have been listed below.

Firstly, during the liquidation process the company will have to file for the liquidation with several authorities, including AMR, MOFCOM, the Tax Bureau, the company’s bank, the Customs Authority (if applicable), and any other authorities the company is registered at. Third-party service providers can complete all these procedures on behalf of the company. Service fees for such support depend on the following items among others:

  • Length of company operations
  • Type and complexity of company operations
  • Industry
  • Number of employees
  • Outstanding debtors and creditors
  • Company assets to be sold
  • Recent level of activity
  • Ongoing or past litigations
  • Taxpayer record
  • Past or current irregularities with authorities (for example blacklisting)

Generally, a review of the company’s most recent audit report is sufficient to estimate the costs for the liquidation process.

Secondly, during the liquidation process, the company will likely need to provide a liquidation audit report. Such an audit report is generally more expensive than a normal audit report. The fee for a liquidation audit report depends on similar factors as a normal audit report, as well as the items highlighted above.

Finally, you may incur other costs during the liquidation procedures, including costs related to staff terminations, settling of legal disputes and settlement of debt with creditors. Other costs may include costs for the newspaper announcement, as well as any potential penalties from the AMR or Tax Bureau in the case of any irregularities arising.

Company Liquidation Services

As a corporate service provider, we are able to assist with the following company dissolution services. We provide:

  • Advisory and support with regards to the termination of labor contracts, which includes the evaluation of contracts, drafting of termination agreements and financial compensation for individual employees.
  • Facilitation of the disposal of company assets, and preparation for the settlement process with creditors with materials such as balance sheets and list of assets.
  • Assistance to companies with the preparation of required documentation for company dissolution, cancellation of business licenses and other procedures for legal company deregistration. Additionally, we help companies settle any outstanding liabilities and guide any necessary negotiations with the local tax authorities.
  • Assistance with the closure of any registered bank accounts and help companies successfully repatriate funds to their home countries.

Will Companies Leave China?

For many foreign based enterprises, it is common to decide to liquidate their business and leave China, for a number of different reasons. Often it can be attributed to changes made in terms of business scope, changes in local regulatory policy, industry-specific crisis and more recently due to the restrictions and handling of the COVID-19 pandemic.

Despite many companies opting to leave China, the long-term outlook still remains strong with investment potential and opportunities for development in the future. In light of the current COVID-19 outbreaks and associated lockdowns, investor confidence has been affected considerably and short-term investment plans have been put on hold and in some cases have been ended all together. While revenue projections for 2022 have significantly decreased and many foreign enterprises are deciding to leave China after measures are lifted, many companies do still see the potential and opportunity in the Chinese market.

Closing Remarks

In China, the liquidation process can be a complicated and drawn-out process. From the start of deregistration, and dealing with outstanding issues and employment contracts, the entire process can easily last up to 1 year at the minimum. Despite this, it is vital that all the necessary procedures are appropriately followed to prevent problematic consequences in the future.

Company Dissolution in China

If you are considering dissolving your enterprise in China, you need to make sure that you follow the correct procedure and regulations. Serious consequences can impact the registered personnel of your company if proper liquidation procedures are not carried out, and your ability of the company to do business in China in the future could be jeopardized. As the process to liquidate your Chinese subsidiary can be complex and time-consuming, we have provided this white paper to cover a list of topics in extensive detail such as considerations before liquidation, and a procedural overview to guide the entire process.

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