How to Close a Representative Office in China: Step-by-Step Process
Representative offices (commonly referred to as rep offices or ROs) are the simplest and fastest way for foreign enterprises to enter China.
As the lightest investment structure, ROs are easy to set up and are low-cost entities. An RO cannot serve as a legal entity with registered capital or have independent rights and liabilities; they are instead subordinated to a foreign parent company.
Accordingly, ROs have a limited range of activities – marketing and networking activities on behalf of the parent company overseas. They are not able to engage in any for-profit businesses.
Many overseas headquarters use ROs as an entryway to the Chinese market, or as an extension of their businesses in China.
However, for a variety of reasons, there may come a time when foreign headquarters need to close their ROs. For example, when a foreign headquarter looks to transform its RO to a WFOE to expand for-profit businesses, it will need to deregister its RO first.
From a legal perspective, China’s regulations stipulate that a foreign enterprise must, within 60 days, apply to the State Administration for Market Regulation (SAMR) to deregister the RO when any of the following circumstances occur:
- The RO is required to shut down in accordance with the law;
- The RO no longer engages in business activities upon the expiration of residency;
- The foreign enterprise terminates its RO; or
- The foreign enterprise terminates its business (meaning the parent company is being closed).
Simply walking away without closing the RO is not feasible as the RO will soon be in noncompliance with tax and other regulations. In these cases, the registration authority may order the RO to make corrections within a time limit and impose a fine ranging from RMB 10,000 (US$1,420) to RMB 30,000 (US$4,260).
In case corrections fail to be made within the prescribed period, the RO’s registration certificate may be suspended or revoked and the foreign enterprise may face being barred from setting up a new RO in China for the next five years.
The deregistration procedure
The processes of closing an RO and closing a WFOE share similarities, but the former is much simpler, as there are no complex liquidation procedures or large-scale employee terminations.
Closing an RO typically takes six months to one year, or longer if irregularities are found.
1. Employee termination
When preparing the documents for the RO’s deregistration, the foreign enterprise can start dismissing the RO’s employees. An RO typically employs fewer people (one to 50 employees), making the dismissal process a little easier than for a WFOE (ten to 150 employees).
However, there are a few points that need to be taken care of.
First, an RO’s local employees are dispatched by a labor dispatch agency, such as the Foreign Enterprise Human Resources Service Company (FESCO).
This means that the local employees sign labor contracts with the dispatching company instead of with the RO and the RO does not have any direct employment relationships with its local employees.
As a result, the RO needs to work together with the labor dispatch agency to deal with employee termination process when laying off a local employee.
To be noted, if the RO terminates its local employee illegally, although the local employees may sue the labor dispatch agency rather than the RO, all the costs will still be borne by the RO, because in most cases, the service agreement between the RO and the dispatch agency includes this provision.
As for the RO’s foreign employees, including one chief representative and one to three general representatives of the RO – their dismissal must be handled by the RO’s headquarter.
2. Tax audit
The formal deregistration of an RO starts with the application to the relevant tax bureau for tax clearance and tax deregistration. This step is often considered the longest – around six months – and perhaps the most difficult part of the entire deregistration process, as the tax bureau will ensure that the RO properly and fully paid all the taxes.
As part of the tax deregistration process, the RO must hire a local Chinese certified public accountant (CPA) firm to audit its accounts for the last three years. The latter will then generate a three-year tax clearance audit report for submission to the tax bureau.
During this phase, it is important to note that the monthly tax filing of the RO shall still be carried as an on-going activity until all tax closures are completed with the tax bureau.
3. Tax deregistration
The RO will then need to submit the three year tax clearance audit report (up to the current month), the tax deregistration application form, the tax registration certificate, vouchers, tax filing records, and
other tax-related documents to the tax bureau for review.
If all the taxes are proved cleared, the tax bureau will issue a tax deregistration certificate to the RO.
However, if any unpaid taxes or irregularities are found, the tax bureau may conduct tax clearance for outstanding tax issues or possible on-site inspection of the RO.
The RO may then be required to settle the unpaid taxes, submit additional documentation, or pay penalties.
4. Deregistration with SAFE and customs
After the tax deregistration is done, the RO will also need to deregister the foreign exchange certificate with the State Administration of Foreign Exchange (SAFE) and deregister the customs certificate with the customs authority.
Obtaining the deregistration certificates from both the SAFE and the customs authorities is a mandatory step of the RO deregistration process, irrespective of whether the RO has ever obtained a registration certificate from either of these two authorities.
5. Deregistration with SAMR
The next big step is to officially deregister the RO with the local branch of the SAMR with the following documents:
- The deregistration application letter;
- The tax deregistration certificate;
- Proofs issued by the customs authority and SAFE proving that the RO has deregistered the customs and foreign exchange or has never gone through any registration procedures; and
- Other documents as the SAMR prescribed.
After review, the local SAMR will then issue the ‘notice of deregistration’ stating the official registration and termination of the RO. An announcement of the RO’s deregistration will be listed on a media outlet
designated by the SAMR. At this point, all the registration certificates will be cancelled, as well as the chief representative’s work certificate.
Further, it is important that the business registration and the office lease of the RO will need to be valid up until the official deregistration notification is issued by the SAMR.
6. Bank account closure
Last, the RO will need to close its bank accounts. Unissued checks and deposit slips should be returned to the bank and money in the account should be transferred out.
If the RO intends to transfer the account to the parent company, it will be required to provide reasoning for such actions and seek approval from the bank.
After the RO has completed the deregistration, it is important that the parent company requests the return of and keep all accounting records and business documents to safeguard the interest of the parent company.
Finally, the company chops must be cancelled – where applicable – although in practice, the public security bureau may expect the firm to destroy the chops rather than return it to them.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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