Foreign-invested enterprises (FIEs) face economic, social, and operational pressures to maintain their business in China. The country remains a popular investment destination, confirmed by a recent statistic from the State Council’s Information Office, which said that the ratio of newly established to deregistered enterprises in China was 3.69 to 1 in 2018. Bucking trends like these can prove difficult for business leaders.
A series of legal reforms have made it much easier to start commercial operations in the country. The government has fully integrated the obtainment of company seals into the one-stop shop. Further, the “One Window, One Form” policy streamlines business filing and registration by cutting bureaucratic red tape. Foreign investors also no longer need to deal with multiple departments and offices, instead interfacing with a centralized government agency called the State Administration for Market Regulation (SAMR).
China’s established supply chain infrastructure places it at the heart of the world’s manufacturing ecosystem. This has in turn benefited linkage industries, including professional services, banking and finance, education, research and development, and logistics. More recently the government has focused on advancing China’s capacity in value added manufacturing through preferential policies. These have incentivized many foreign businesspeople to set up shop in the country, to take advantage of its labor pool, industries, logistics networks, and access to a vast market.
Still, there are many legitimate reasons to support a decision to leave China. Business leaders who have reached a consensus about leaving the country need to review their options with a local legal advisor. To start that conversation in the right direction, it is important to understand how to legally close a business, how long the process takes, and some of the most basic procedures for closing a business.
What are the common reasons for business closure in China?
The most common reasons why an enterprise may choose to deregister are a declaration of bankruptcy, the expiration of time-bound business activity defined in the company’s articles of association, merger and subsequent disbandment and dissolution, or relocation.
In terms of factors affecting business viability, multiple reasons might push an enterprise to consider closing operations. These include inability to compete with domestic rivals, a real or perceived slowdown in specific sectors, shifts in consumer behavior, rising costs of doing business, impact of geopolitical developments like recent trade tensions with the US or black swan events like the coronavirus pandemic, or local regulatory changes, such as new environmental compliances. For example, China’s homegrown electronics manufacturing firms have in recent years proven to be established market leaders, pushing out many foreign companies whose performance hasn’t matched market expectations.
While local governments competed for greater foreign investment through tax breaks and financial grants in the past, these policies have become more selective, as incentives target exclusive sectors, such as R&D and sustainable industries, or specific regions where there is lesser economic activity. Moreover, China’s climbing wage rate and social insurance payouts mean that the country is no longer the cheap manufacturing destination it was once, with multiple Southeast Asian countries competing to take its place. Lastly, businesses in certain sectors may also find it difficult to scout talent.
A combination of these factors may account for the decline of an enterprise’s financial viability, market presence, and appeal. This may result in terminal financial difficulties, bankruptcy, a reorganization or merger, relocation, or a change in strategy from the overseas parent company. In such situations, closing business operations and leaving the country may be in the best interest of the organization. Here, it becomes essential to comply with China’s established legal procedures for company dissolution and liquidation or face harsh legal and punitive consequences.
How do you legally close a business in China?
The Company Law stipulates certain requirements before triggering the closure of a company. This includes organizing the liquidation of the company prior to the cancellation of its registration, followed by the announcement of the termination of the company. Overall, the company deregistration process requires dealing with multiple government agencies, including the respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities.
How long does it take to close a business?
While each case is unique, the whole process of deregistration can take up to a year or longer. The time taken to successfully close a business depends on the enterprise’ preparedness, credit-debt record, level of compliance, and submission of information to various government departments. For example, it typically takes six months to one year to deregister a representative office (RO) and even longer in case of irregularities. In the case of a wholly foreign-owned enterprise (WFOE), it typically takes between 12 to 14 months.
Why can’t investors just “walk away”?
When an enterprise decides to leave China, but does not follow the prescribed procedures of deregistration, it results in very serious consequences for the legal representatives and the company’s future in China. This includes attracting civil liability due to credit owed or even criminal culpability, difficulty during immigration, loss of property and assets, or inability to make future investments due to damage to reputation and financial status. The enterprise can be fined RMB 2,000 to 10,000 (US$285 to 1,427) each year by the tax bureau. The enterprise will also not be able to re-register in its own name for at least three years. Subsequently, it will undergo strict screening reviews for business and taxation after being blacklisted by SAMR or its local branches.
In case of not clearing taxes owed, the company’s legal representative will not be allowed to leave the country. The legal representative’s personal credit record will be bad for a period of seven years. If a company hasn’t declared tax for a long period, it will attract the attention of tax officers leading to enquiries and blacklisting. This could affect the enterprise’ future ability to start business operations due to barriers in accessing industrial and commercial credit networks, such as setting up bank accounts, securing loans, and buying or leasing property.
Why is the business closure process so onerous?
While the bulk of reforms have made it easier to register and start new enterprises, the process of deregistration can be a time-consuming and frustrating process. The enterprise must comply with all its obligations, including the repayment of debts, payment of employee wages and social security, and clearing all outstanding tax liability. This requires a significant amount of planning, coordination, and preparation at the operational level; however, once it is completed, the enterprise can exit smoothly.
Still, there are some signs it may get easier. SAMR, the Ministry of Human Resources and Social Security (MOHRSS), Ministry of Commerce (MOFCOM), General Administration of Customs of China (GACC), and State Administration of Taxation (SAT) recently released the Notice on Promoting Enterprise Deregistration Facilitation (the Facilitation Notice), which seeks to simplify the deregistration process for eligible enterprises.
The Facilitation Notice largely seeks to achieve this by enhancing information sharing and collaboration between different government departments to protect market order and safety. Specifically, the Facilitation Notice aims to provide more convenient and efficient administrative services for law-abiding and trustworthy enterprises, strengthen disciplinary restrictions on enterprises that break the law or lose credibility, promote enterprise “metabolism”, and optimize the market structure.
What are the most basic procedures for closing a business?
The SAT has issued the Notice on Further Optimizing the Procedures for Dealing with Enterprise Tax Deregistration (henceforth Notice) to ease the difficulties of enterprise deregistration. The Notice takes measures to reduce enterprises’ repeated errands and to issue tax clearance certificates on the spot even when some enterprises submit incomplete documents.
In particular, the newly introduced commitment system presumes the integrity of the enterprise, which may be reflected in a positive inspections record, high tax credit ratings, and no tax or fines owed. In such situations, the tax clearance time will be unaffected, and only a commitment is needed from the legal representative deregistering the company to provide all tax-related information within a stipulated time period.
New government reforms will follow three directions.
- First, simplifying the SAMR deregistration. This aims to see improvement in the general deregistration system for enterprises.
- Second, simplifying tax, social security, business, customs, and other deregistration procedures as well as document submission requirements.
- Third, setting up online service platforms for enterprise deregistration and carrying out “one-stop” online services (or “one website”) to facilitate this.
Through the above measures, many expect that the cancellation time of enterprises can be reduced by at least one-third. At the same time, the government will strictly investigate business entities indulging in the evasion of debt. The names and information on enterprises that have lost credibility due to non-compliance or debt evasion will be jointly published by the respective government agencies.
What is the State Administration for Market Regulation?
In 2018, China announced a sweeping restructuring of its government institutions, under which the State Administration for Industry and Commerce (SAIC) was integrated into the State Administration for Market Regulation (SAMR). This was intended to simplify administrative procedures, provide consistent enforcement standards, and lower compliance costs. In practice, the SAMR and its local bureaus might still be referred to as AIC among business society.
The SAMR regulates a wide range of functions, including issuance of business registration, certification and accreditation, management of intellectual property rights, drug safety supervision, quality inspection, fair competition and monitoring instances of commercial bribery. In case a company is formally closing its operations in the country, they need to interface directly with the SAMR during the deregistration process.
Some of the market regulator’s areas of function are below.
- Office: Monitor daily operation of the organization and all activity from a macro perspective.
- Comprehensive Planning Division: Research, analyze, and promote market supervision, management, and reform. Draft key documents and compile market statistics.
- Department of Regulations, Law Enforcement Inspection Bureau: Draft market supervision and management-related laws and regulations. Supervise law enforcement. Promote public awareness on the legal system. Exercise market controls.
- Registration Bureau (for small and medium enterprises): Implement a unified electronic registration system for enterprises and market entities and issue business licenses. The bureau updates the list of small and medium enterprises in the country.
- Credit Supervision and Management Department: Formulate systemic measures for credit supervision and management. Implement the national enterprise credit information publicity system. Publish “blacklists” of nonconforming market entities and manage information and public information sharing systems.
- Anti-Monopoly Bureau: Set measures and guidelines and oversee the enforcement of the Anti-Monopoly Law.
- Price Supervision and Inspection and Anti- Unfair and Unfair Competition Bureau: Set measures and guidelines on supervision and inspection of price charges and anti-unfair competition. Investigate price violations and unfair competition. Firmly limit direct selling companies, direct sellers and their direct sales activities, and combat pyramid schemes.
This article has been adapted from the December 2019 China Briefing Magazine issue, titled “How to Close a Business in China“. For any queries related to doing business in China, please reach us at email@example.com.
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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