If you thought that company registration in China is difficult, the WFOE deregistration process is gradual, complex and time-consuming as well. It requires businesses not only to reconcile with the situation and deal with regulatory mechanisms, procedures and requirements, but also to continue with normal operations until the final shut down. In addition, the new Foreign Investments Law, which came into effect on January 1st 2020, is expected to affect foreign companies’ prospects in China in general and will specifically influence shut down procedures. What are the implications of this new law, and what is the right way of shutting down?
The WFOE deregistration decision
When a decision is made to deregister a Chinese WFOE, it is against the law to simply “clear out”. An abrupt abandonment (leaving behind unfilled reports and unpaid taxes) would lead to a revocation of the WFOE business license. The company would also be blacklisted and publicly humiliated on the State Administration of Industry and Commerce website.
Sudden and quick abandonment of a business is also not recommended for practical reasons. WFOE deregistration is a gradual process in which all business aspects are handled and terminated. During this process, the company still operates, albeit limited, until it is completely shut down. But as long as the company functions, it has to be handled legally.
The Chinese government requires every company planning to close down, both foreign and domestic, to go through a formal and sometimes lengthy and complex multi-stage process. However, there has been a recent improvement in the WFOE closing process, though only for WFOEs that have been managed appropriately and have met all requirements prior to their closing.The most important part of closing a WFOE is the company’s official liquidation, which consists of 5 main steps:
- Notifying relevant authorities within 7 days from the start of the liquidation process
- Forming a liquidation committee (to be explained below)
- Announcing the shutdown publicly through the media within 60 days from the committee’s establishment, including removal of online references concerning the company’s business activities
- Submitting documents to relevant authorities: liquidation report, company dissolution form and business license
- Closing bank accounts and tax files.
The liquidation committee
WFOE dissolution procedures require the establishment of a special committee, consisting of the company’s shareholders, within 15 days from the start of the closing process.
The committee’s main responsibilities and obligations are as follows:
- Appointing one of the committee’s members as a legal representative
- Formulating a detailed and organized list of all corporate assets, including intellectual property
- Formulating criteria for property computation and asset evaluation
- Consolidating and implementing a liquidation plan
- Paying debts, taxes, remaining financial claims, and depositing official seals (chops)
- Legal representation of the company in civil lawsuits
- Delivering written notice of closure to the creditors
- Preparing a WFOE dissolution report, with shareholders’ approval
The WFOE deregistration process takes at least 6 months, needed for closing tax files (provincial and national). This is the longest and most cumbersome phase of the process, and may last longer if unpaid fines or other irregularities have accrued. At the end of this period, approval for closing will be obtained from the State Administration of Industry and Commerce.
The duration of the deregistration process varies and depends on other factors such as the number of employees hired at the time of the shutdown, location (province, city), etc.
It’s really worth doing it right
Improper organizational activities in China have far-reaching consequences. When it comes to WFOE dissolution, abandonment without completing the official process or failure to comply with all necessary requirements will result in imposing penalties and fines on directors and shareholders. In addition, the company’s legal representative will be personally liable for any damages caused to creditors.
Any of the company’s employees, who are assumed to be related to the procedures’ violations, will be blacklisted immediately. Nowadays, with the implementation of the social credit rating system, blacklisting is updated in the national database, which creates irreversible damage.
Some possible blacklisting consequences include:
- Future engagement in investment or management of a company in China may become difficult or even impossible
- The legal representative will be prohibited to serve as a director / manager / supervisor in another company for 3 years
- Entry to China might be refused
- A ban to use the company name for 3 years may be imposed
All of the above is relevant for cases when the WFOE has no financial debt and all employee wages have been paid. But in other cases, the consequences will be far more serious. Failure to pay taxes, salaries withholding and improper WFOE liquidation (as a result of non-payment creditors) is considered a criminal offense, and therefore the legal representative and shareholders may find themselves prosecuted.
The new Foreign Investments Law (FIL) and WFOE shut down
The updated Chinese FIL came into effect on January 1st 2020. Its main implication is that is has changed the WFOE legal status. As a result, Chinese authorities will treat Chinese and foreign companies more equally, and local company regulations, including laws referring to starting a business in China and closing and dissolving companies, will now apply to WFOEs we well.
To adapt to the new situation, foreign-owned enterprises can maintain their existing structure for 5 years, during which they will have to make the necessary adjustments so that they can become like any other Chinese company.
It can be assumed that if you are considering a WFOE deregistration, then all other options have been exhausted. After a long and frustrating period, which perhaps may even include losses, you probably want to end matters as quickly as possible. However, it is important to remember that in order to deregister legally, in a manner that will not harm you in the future and may leave an open door to for impending operations in China, you must be patient and pursue the entire process.
PTL Group can help you manage the closing process as fast as possible. Our team of experts will help you deal with all liquidation issues on both administrative and operative levels, while continuing the company’s day-to-day functioning. Contact us for more information.
Read more about WFOE registration in the previous chapters: