If you are setting up a WFOE in China, it is important to also understand the costs of closing it down. This article, which is part of our series on financial services in China, examines WFOEs from the disestablishment perspective.
The Cost of Closing Down
Closing a company in China? China WFOE deregistration is a long and intricate process, and must be executed properly. Improper shutdown will bear severe legal consequences.
One aspect of liquidation that requires full compliance with the laws is paying all liquidation expenses. These include:
- Expenses for public announcements
- Legal fees
- Remuneration to relevant parties
- Full employees’ wages payments
- Outstanding debts
- Outstanding tax liabilities
- New tax liabilities
- If the closing is performed after July, the annual inspection service fee should also be paid
Failure to comply will result in a fine in the sum of 2,000-10,000 RMB.
In this article, which is a part of our series on financial services in China, we will discuss issues pertaining to tax liabilities.
Read more about the closing down process in our WFOE Regulations Guide/
Outstanding tax liabilities
Simply put, foreign companies that have enjoyed any kind of financial incentives or tax reliefs, and have operated for less than 10 years, would have to repay the amount of tax exempted.
Take into consideration that this regulation varies between different provinces across China, so specific local adaptations may be needed.
New tax liabilities
Several steps during the liquidation process might create additional tax liabilities:
Individual Income Tax
In addition to the full payment of salaries to the terminated employees, the company is also required to pay the employees a certain amount of severance.
The one-time compensation paid to an individual due to the termination of labor relationship consists of the economic compensation, living allowance and other subsidies paid by the employer.
Any type of assets possessed by the company (such as vehicles, real estate, etc.) will have to be transferred including paying any remaining taxes.
Custom and VAT duties
If the liquidating company wishes to sell or transfer imported goods, the selling price will be the goods’ true value (while depreciating the import duties rates).
Corporate Income Tax
The annual Corporate Income Tax amount shall be paid, regardless of the time in which the company has terminated its business activities.
The remaining balance in the bank that is paid to the shareholders as dividends can be considered withholding tax.
Last updated: July 2022
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