China’s new Foreign Investment Law has changed the business landscape for WFOEs. This article discusses the law, its implications and its impact on starting a business in China.
PTL Group specializes in company registration in China. We make sure that China company registration is done right, because doing so will help us focus on the real goal: long-term WFOE management. To help our clients, we provide extensive operational support for registered entities. This is where our knowledge and expertise really make a difference.
We hope you find the following information useful.
WFOE Shutdown – The Legal Aspects
The New Foreign Investments Law (FIL) and WFOE shutdown
The updated Chinese Foreign Investments Law came into effect on January 1st, 2020. Its main implication is that it 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 also apply to WFOEs.
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.
If you are considering a WFOE deregistration, it can be assumed that 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 when it comes down to shutting down a Chinese business procedure, you must deregister legally, in a manner that will not harm you in the future and may leave an open door for impending operations in China. Therefore, you must remain patient and pursue the entire process.
Doing things right is worth it
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 said 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 may 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.
Review the financial aspects of a WFOE shutdown.
In summation, the answer to the question “how to close a business in China” may be complicated, but it comes with one strict recommendation that we hope you follow: comply with the law.
Last updated: February 2021
Regulations in China change relatively frequently. For the most up-to-date regulations, please check in with us.