Closing a Representative Office in China - China Briefing News

Closing a Representative Office in China

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By Dezan Shira & Associates

A Representative Office (RO) is a popular corporate establishment model for foreign investors entering China.

An RO is an extension of a parent foreign enterprise, and does not form its own separate legal entity. They are often used by foreign companies to facilitate activities in China, such as communicating and liaising with China-based agents and distributors.

For various reasons, however, foreign investors might come to a point where they must close their RO.

For example, an investor needs to close its RO when:

• The RO is required to shut down in accordance with the law;
• The RO no longer engages in business activities upon the expiry of its period of residence;
• The foreign enterprise terminates its business (meaning the parent company is being closed);
• The foreign enterprise terminates its RO; or
• The RO is no longer suitable for facilitating foreign investor’s business in China, as ROs are unable to engage in profit-making commercial activities.

Investors should note that one cannot simply walk away from the RO without properly closing it. As the RO will soon be in non-compliance with taxes and other regulations, fines and penalties will be imposed.

If no rectification is made, the RO’s license may be revoked. At this point, the foreign company and the RO Chief Representative will be blacklisted and barred from setting up a new RO in China for the next five years.

Professional-Service_CB-icons-2017 Company Deregistration Services from Dezan Shira & Associates

The deregistration procedure

As an RO is not a legal personality, the term “deregistration” is used instead of “liquidation”, though the two processes share many similarities.

The procedures are as follows:

Step 1: Prior to actual deregistration, the RO must apply to both its local tax bureau and the state tax bureau for tax audit and tax deregistration. To do so, the RO must first undergo an audit by a local Chinese CTA firm for taxes owing from the past three years.

Once the audit is completed, the enterprise should submit to the tax bureau a board resolution affixed with the signature and seal of the chairman of the board of directors, as well as a cancellation application signed by the chief representative of the RO.

Should any unpaid taxes or other irregularities be found by the tax authorities at any point during this process, the RO may be required to submit additional documentation, pay penalties, or settle unpaid taxes with the authorities.

Step 2: The RO should then deregister its foreign exchange registration at the local SAFE and customs registration in the local Customs. In case it does not have such registrations, it still needs to get corresponding official statements from the bureaus in charge as proof.

Step 3: The enterprise should close its bank account. Unissued checks and deposit slips will need to be returned to the bank and any funds remaining in the account should be transferred out. If the RO intends to transfer the account to its parent company, it will be required to provide reasons for doing so and seek approval from the bank.

Step 4: The enterprise can then proceed to deregister with its local AIC where its application will be processed within 10 workdays of receipt. If successful, the enterprise will be issued a “Notice of Deregistration” and all the registration certificates will be cancelled, as well as the chief representative’s working card (工作证).

Announcement of the RO’s deregistration must be listed in a media outlet designated by the AIC. The RO’s business registration and office lease must be valid up until the official notification of deregistration has been issued by the AIC.

Step 5: The enterprise should conduct deregistration in the Quality and Technical Supervision Bureau and Statistics Bureau in case the RO has not received its five-in-one business license.

Step 6: Notification of the RO’s deregistration should then be filed with the Public Security Bureau to cancel its chops.

Related-Link_CB-icons_2017 RELATED: Company Relocation and Land Appreciation Tax in China

The total time required for deregistration is typically three to six months (depending on the region), but can take over a year in cases containing irregularities, particularly in the tax deregistration phase.

To be noted, obtaining a deregistration certificate from both the SAFE and customs authorities is a mandatory part of the RO deregistration process, regardless of whether the RO has ever obtained a registration certificate from either of these authorities.

Moreover, if the RO business license has expired before this date, the investor will need to pay a fine.

RO-Deregistration-Procedure-and-Timeline

 

Establishing-and-operating-a-business-in-ChinaThis article is adapted from “Establishing and Operating a Business in China 2018“. Establishing and Operating a Business in China 2018 is designed to explore the establishment procedures for the Representative Office (RO), and two types of Limited Liability Companies – the Wholly Foreign-owned Enterprise (WFOE) and the Sino-foreign Joint Venture (JV) – along with related business considerations that decision-makers should examine at the pre-investment, setup, and operational stages of the expansion cycle.

 

This article was originally published on June 3, 2008 and has been updated with the latest regulatory changes.


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China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices in ChinaHong KongIndonesiaSingaporeRussia, and Vietnam.. Please contact info@dezshira.com or visit our website at www.dezshira.com.

13 thoughts on “Closing a Representative Office in China

    Edward Kim says:

    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.

    David says:

    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,

    Andy Scott says:

    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,

    Junior Park says:

    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,

    Van says:

    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

    Andy Scott says:

    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,

    June says:

    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?

    Andy Scott says:

    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,

    Andy Scott says:

    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,

    Wayne says:

    I am the Chief Rep for a American Co. in China. I gave them the required 30 day notice and my last day is the end of the month. I want to know once I leave the company I am no longer legally responsible for the company and its business dealings in China? Correct? To my knowledge the company has not assigned a new Chief Rep. and my questions regarding this go unanswwered.

    Editor says:

    Dear Wayne,

    You will need to de-register from the position of Chief Representative with registration authority. Until you do that, you will still remain the legally responsible Chief Representative. Termination of the employment contract with parent company alone is not strong enough to release you from the Chief Rep’s liabilities.

    Regards,

    sajid Mahmood says:

    There are news/rumors, in 2012,no representaive offices going to renew or extend. Pls comments.

    Karen Ko says:

    I would like to deregister the RO but over one year after I paid the deregistrstion fee to one firm still they said not yet done and still checking my china stay passport record. I suspected the firm has not been done anything and they don’t disclose any documents to me. The whole experience is terrible in shanghai and the firm told me I have to bribe the officer so the procedure is easier. Is this the case? Of course I will not do but it is so scary to hear this today. Either the firming is lying or is china has any problem. My RO has not operations for few years so decided to deregister instead but waited so long, still at beginning process. If any can advise what shall I do? Thanks Karen

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