June 3 - Moving from a representative office, long the business structure for sourcing from China, to legal entities that are able to sell in China as well as import and export products can be an important step for businesses looking to stay competitive in the global market.
This means either shutting down the existing RO, or keeping it going, and starting an entirely new legal entity. If an RO doesn’t suit the company’s needs, it should be closed. This closure can be implemented at the same time as the establishment of the new entity. In this article, we take a look at reasons for closing down an RO, and the steps needed to accomplish it.
Usually, ROs become unsuitable and may need to be closed down when: the holding company has closed down or changed business activities; the RO has not been operating in compliance with its business scope or the local regulations and should re-start on a clean sheet; the current location needs upgrading (bigger/smaller office space) or the company wants to move location, effectively changing the government agency regulating the RO; a local RMB billing entity is needed; the current RO business scope does not suit company requirements any longer; the company wants to upgrade their China entity.
A closing audit must be performed by the tax bureau before an RO is allowed to complete any closing down procedures. As long as the RO has no overdue taxes or other issues to be reported to the authorities, then the de-registration procedure can begin.
The first step is to obtain an approval certificate from Customs together with a declaration on the reasons behind the decision to wind up operations in China (the same written explanations shall be given to all other bureaus involved in the closing procedures). This is required in order to clear up all records at Customs involving any office equipment, cars or samples imports.
Subsequently, applications need to be made at the tax bureaus (both local and national) with related papers and the RO closure resolution of the parent company, with director’s signature and the parent company’s chop. In most cases, the following documents need to be provided: an audit report up to the current month; RO tax returns; ledgers and vouchers; tax registration certificates (original and copy with RO chops); if the RO is not subject to taxation, then a tax exempt notice from the tax bureau confirming this status has to be presented.
After the RO legal code certificate is cancelled and the check book, chops and other related documents are cancelled and given back to the bank, it is possible to close the bank account and withdraw or send back to the holding company the remaining funds.
The final step is obviously the cancellation of the business license. In order to do so, all the previous approval notices from Customs, state and local tax bureaus shall be shown to the Industrial and Commercial Bureau together with a board resolution from the holding company.
Normally such applications take around five to 12 weeks depending on the level of cooperation between the company representative and the different bureaus involved and the extent of the closing audit required by the tax bureau. It should be noted that the parent enterprise of the representative office will be held responsible for any unsettled matters of its representative office.
For an in-depth look at moving from representative offices to WFOEs or FICEs, please check out the June 2007 issue of China Briefing, Upgrading Your China Entity.
for Dezan Shira & Associates, the foreign direct investment legal and tax practice responsible for China Briefing 
A friend of mine closed a WFOE last year. He was initially told that it would take 3 months but it ended up taking more than 6. I don’t know the exact details, but I do know that the company had no real activity in the entirety of its existence. Is this a common occurrence? I know a handful of people who have recently sold their WFOE for solely the cost of changing the ownership because they thought it would be easier and more costly in the long run.
What about shutting down a WFOE (when the intention is to return to the Xhina market at a later date)? Is it possible/preferable to keep the WFOE “barely breathing” or should it be closed (what happens to the US$400k in registered capital?)?
Thanks,
Dear David,
There is no such “barely breathing” option in China. If you want to keep a company, you will need continue the daily compliance (tax, accounting, audit), regardless of if there is any revenue/cost. If you want to withdraw the capital, closure and liquidation should be performed. When you come back to China later, you will need new capital for a separate new entity.
Regards,
In accordance with its instructions, I think it will be a big trouble if RO’s employees did not pay their IIT for several months and didn’t get any tax returns from the inland revenue, won’t it? If RO’s oringinal accounting vouchers were lost for certain reasons (about half year), is it be possible to do the tax audit?
How does RO remedy those mistakes if we still want to close down it rightly?
Thanks,
My company is anxious to move me home. How critical is it to have the RO’s legal representative/chief representative in country during this closing down process? Is my company risking legal problems or dragging the closing of the RO down by sending me home too soon?
Thanks,
Van
Dear Van,
The Chief Rep is not required to stay in China during the liquidation process. However, his liability as a Chief Rep can only be released after the RO is completely de-registered in China. His individual income tax needs to be paid as usual till the cutoff day of the RO.
Regards,
In case the Representative office decides to close down & dissolved all employees, does the RO has to advise 30 days in advance or pay 1 month notice in lieu? On this situation is under Labor Law article 44 (that mean no need to have 30 days notice or pay in lieu) or article 40?
Dear June,
To answer your questions:
It is required to give prior notice or 1 month salary via Labor Dispatch Company (i.e. FESCO).
Regarding Article 44 or 40, let’s take FESCO for example. Theoretically speaking, considering FESCO is the direct employer and still legally exists, Article 40 should be followed and 30 days prior notice is required. In practice, staff professionals at Dezan Shira & Associates have double confirmed with officials at FESCO regarding the issue and they agreed with the above mentioned understanding.
Regards,
Also,
You should double check with the service agreement between the RO and FESCO. In practice, the requirement in the agreement might be higher than the legal regulations, i.e. the notice might be three months in advance rather than the one month required by the Labor Contract Law. If the requirement in the agreement is higher or stricter, then it should be followed accordingly.
Regards,