Closing a Business in China: What is the Simplified Deregistration Procedure?
As the size of the Chinese market grows, and the absolute number of players entering and exiting the market largely increases, the Chinese government has begun issuing policies to improve procedures for setting up and closing businesses, including foreign-invested enterprises (FIEs).
To expedite the market exit of businesses in China – which rose from 0.5 million in 2014 to 1.8 million in 2018, the Chinese government has introduced simplified deregistration procedures for certain types of enterprises, including the simplified State Administration for Market Regulation (SAMR) deregistration procedure and simplified tax deregistration procedure.
How to use the simplified deregistration procedure
Since March 1, 2017, State Administration of Industry and Commerce (SAIC, that is, the current SAMR) and its local branches have been implementing a simplified deregistration procedure for qualified enterprises.
Compared with the traditional SAMR deregistration, the simplified SAMR deregistration procedure provides one-stop online service platform, requires fewer documents to be submitted, and doesn’t require the establishment of a liquidation committee or newspaper announcement.
To apply for the simplified SAMR deregistration procedure, the eligible enterprise must be registered as one of the following company types:
- Limited liability company (LLC);
- Non-corporate legal person;
- Sole proprietorship; or
- Partnership enterprise.
Pursuant to Guo Shi Jian Zhu  No.237, in pilot areas, including cities like Beijing, Hangzhou, Ningbo, Shenzhen, Zhuhai, Dongguan, etc., unlisted joint stock (limited) companies and office branches of these enterprises are also allowed to apply.
Meanwhile, the applicant should meet one of the following circumstances:
- Has not started operation after obtaining a business license; or
- Has started operation but already settled all their claims and obligations.
However, enterprises do not qualify for the simplified deregistration procedure if they are under any of the following circumstances:
- FIEs involved in special administrative measures as stipulated by the country (industries featured on the negative lists);
- Enterprises recorded on the list of enterprises with abnormal operations, or list of enterprises which have committed serious violations;
- Enterprises whose equity (investment rights and interests) is frozen or pledged, or whose assets are mortgaged;
- Enterprises under investigation, compulsory administrative measure, judicial assistance, or administrative penalty;
- Non-legal person branches of the enterprise that have not yet been deregistered;
- Enterprises who have previously been ordered to terminate the simplified deregistration procedure; and
- Enterprises that need approval before deregistration according to laws, regulations, and the State Council’s decisions.
Foreign enterprises that meet the above conditions can apply for a simplified SAMR deregistration procedure. Here are the main steps.
I. Notice of pre-application
To apply for the simplified SAMR deregistration, the enterprise applicant must first log on to China’s National Enterprise Credit Information Public System (http:// www.gsxt.gov.cn/) to submit a commitment letter and make a public announcement for its intended application.
Once the announcement is posted online, the system will automatically allow for any objections for 45 consecutive days (this 45-day period is being shortened to 20 days in pilot areas, according to Guo Shi Jian Zhu  No.237).
Simultaneously, the SAMR will pass the related deregistration information of the enterprise to the relevant tax, HR, and social security authorities. For FIEs, the information will also be forwarded to the relevant commerce department for review.
These government departments and other interested parties can raise an objection and state the reasons through the system.
If there is objection, the local SAMR may reject the application of the enterprise. If there is no objection, within 30 days after the announcement period, the enterprise can apply to the local SAMR for the simplified deregistration procedure.
II. Submission of deregistration document
Within 30 days after the announcement period, the enterprise can physically submit the following documents to the local SAMR for the simplified deregistration:
- The commitment letter of all investors;
- The application letter for deregistration;
- The power of attorney to agent; and
- The original and duplicate business licenses.
After receiving the submitted documents, the local SAMR will issue a decision on the simplified deregistration of the enterprise within three working days. If agreed, this means the business has been officially written off.
To be noted, the submission of false statements, or fraudulent concealment, during the simplified SAMR deregistration procedure may result in rejection and may be listed as violation of the law. This can result in a blacklisting of the entity through the National Enterprises Credit Information Public System. Parties affected by such conduct may claim damages from the investors in the enterprise, and depending on specific circumstances, investors may also face administrative and criminal punishment.
It is estimated that the simplified SAMR deregistration procedure can save 20 to 30 percent of time compared to the normal procedure, and even 50 percent in the pilot areas, although that, in practice, also depends on how well the policy is implemented in a particular region.
How the simplified tax deregistration procedure works
No matter whether the company follows the traditional or simplified SAMR deregistration procedure, it generally needs to complete tax deregistration and get a tax clearance certificate prior to the SAMR deregistration procedure.
This can be very tedious work due to the complexity of tax matters.
To expedite the tax deregistration, SAT has introduced the tax clearance certificate exemption service, optimized the on-site tax deregistration service, and simplified document submission requirements and application procedures.
We break down key aspects of the procedure below.
Tax clearance certificate exemption service
Pursuant to Shui Zong Fa  No.149, taxpayers who apply for the simplified SAMR deregistration process, and meet one of the following circumstances, are exempted from getting a tax clearance certificate from the tax bureau prior to the deregistration with the SAMR:
- Those who have never handled tax related matters with the tax bureau; or
- Those who have handled tax-related matters, but have never applied to issue invoices, and have no outstanding tax (including overdue fine) and penalties.
Despite the exemption, if these taxpayers need a tax clearance certificate and applied to the tax bureau, they can still immediately obtain one.
Optimized on-site tax deregistration service
Taxpayers may get tax clearance and obtain a tax clearance certificate on site even when there is information missing by ‘making a commitment’ (a commitment of a resubmission within a specified period), if they satisfied the following conditions:
- They do not have outstanding tax payments (including overdue fines) or other penalties; and
- They have handed in the special value-added tax (VAT) invoices and VAT invoices machine to the tax bureau for cancellation.
And at the same time:
- They are taxpayers with class-A or class-B tax credit rating;
- They are taxpayers with class-M tax credit rating whose parent company has a class-A tax credit rating;
- They are enterprises whose founders are talents introduced by a provincial government or recognized by industrial associations above the provincial level;
- They are individual businesses that are not included in the evaluation of tax credit rating and make regular tax payments of fixed amounts; or
- They are taxpayers who have not reached the VAT payment threshold – individual taxpayers (excluding individually-owned businesses registered as general taxpayers) whose sales amount do not reach the VAT threshold and can be exempted from paying VAT.
However, if the commitment is not fulfilled in the stipulated time period, the tax authorities will categorize the applicant’s legal representatives and financial managers with a class-D tax credit rating.
Simplification of documentation and procedures
The tax bureaus also promised to facilitate and optimize the tax deregistration process through the following measures:
- Simplify the information: Taxpayers who have conducted real name authentication are exempted from providing tax registration certificates and personal identification documents.
- Open a special window: A special service window for tax deregistration will be set up in the tax authorities and adjust the number of these windows according to the situation.
- Offer a ‘combo’ service: Integrate the pre-approval items for tax deregistration, plus the service of acceptance at one window, internal circulation, completion of handling tax-related affairs within a prescribed time limit, and window delivery.
- Strengthen the ‘first asking duty system’ and ‘one-off notification’: When the taxpayer goes to the tax authorities to handle tax deregistration, the tax collector approached first is responsible for asking the situation, distinguishing the matters and complexity, classifying the relevant notice that needs to be handled, communication and counseling.
- Optimize internal work and duties: It is necessary to innovate working methods, simplify the process, have division of labor, achieve interconnectedness, and handle within a time limit.
Although these policies have been implemented to different degrees in various regions, eligible foreign companies may seek advice and expertise from local authorities to take advantage of simplified deregistration procedures.
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