China WFOE De-registration and Liquidation Procedures

What are the General de-registration procedures for foreign-invested companies in China?The simplified de-registration procedures ?What are situations that are not applicable to the simplified electronic de-registration procedures?

E-mail: mel2cn@evershinecpa.com

CN-DNL-005    
What is the logic of the dissolution and liquidation process for foreign companies in China?

Answer:
The dissolution and liquidation process of each country seems very complicated and difficult to understand at first glance.
In fact, to understand the dissolution and liquidation process of foreign companies, you need to understand the establishment process of foreign companies first, and you will find it clear and understandable.

In China, when setting up a foreign subsidiary, you need to apply for name pre-check, company registration and obtain a company registration number from SAMR (State Administration for Market Regulation) and its authorized provincial and municipal units.
Correspondingly, when closing the company, you need to report to SAMR. This report has two times in China, one is when deciding to close the company, and one is after the liquidation is completed.

In China, after SAMR and its authorized provincial and municipal units approve the establishment of the company, through Tax Bureau you can then apply for and obtain the company income tax number and withholding tax number, VAT number,  social medical insurance number,  and  to apply GIT (State Administration of Foreign Exchange) number, import and export number, Special  Industry Permission  license number, bank account opening, etc.
Correspondingly, after the liquidation is completed, you must cancel these  licence numbers one by one.

During this process of canceling numbers, relevant tax declarations must be attached in order to complete smoothly.

As for the concept of China’s simplified cancellation process, it is that SAMR provides a website where you can directly submit online, announce for 20 days, and if there is no objection from creditors, it is considered to complete the company closure process and start canceling related income tax numbers , business tax number, social medical insurance number, import and export number, franchise license number, bank account opening number, etc.
Of course, this must be a very simple foreign subsidiary to be applicable.
It is suitable for foreign subsidiaries so called as a “Dormant Company”  which  not really operating.

CN-dnl-010    
What is the de-registration procedures for foreign-invested companies in China?

Answer:
There are two types of de-registration procedures: General de-registration procedures and simplified de-registration procedures.

CN-dnl-020    
What is the General de-registration procedures for foreign-invested companies in China?

Answer:
For foreign-invested companies, the General de-registration procedures of dissolution and liquidation (the order of some steps can be slightly adjusted according to the specific situation) includes:
Step 1.
Preparation, including but not limited to preparing shareholder resolutions, personnel placement plans, selection of liquidation group members
Establish a liquidation committee and formulate an internal plan.
The first step to close a WFOE is to establish a liquidation committee. According to legal regulations, the liquidation committee should consist of the legal representative, representatives of the company’s creditors, government representatives, and registered accountants and lawyers. But in practice, the liquidation committee is usually composed of any three or more people appointed by the shareholders.
In the early stages of liquidation, the committee should formulate and implement an internal liquidation plan, which explains how to deal with employee dismissal, asset liquidation, creditor payment and lease termination, etc.
During the entire liquidation process, the committee will be responsible for some matters that directly involve the de-registration procedures, including notifying creditors of the company’s closure, preparing liquidation reports to be submitted to relevant departments, and more administrative tasks, such as preparing balance sheets and recording detailed lists of all assets and evaluating property.

Step 2:
Approval or filing by the Ministry of Commerce (MOFCOM)
Shareholder resolution, stating the shareholders’ intention to close the company, also needs to be submitted to the Ministry of Commerce.
Previously, foreign-invested companies needed to obtain approval from the Ministry of Commerce before closing their entities, but now there is a simplified filing system. That means this procedures can be waived if using simplified filing system.
Filing with the Ministry of Commerce (MOFCOM) might be waived

Step 3:
Establish a liquidation group and file with the company registration authority
After the establishment of the liquidation committee, the foreign-invested company must file with the State Administration for Market Regulation (SAMR), notifying them of its intention to close the foreign-invested company. This can be done by submitting a shareholder resolution that reflects the decision of the shareholder(s) to close the company and announces the names of the members appointed to form the liquidation committee.
Filing with State Administration for Market Regulation (SAMR)

Step 4:
Newspaper announcement and creditor claim declaration by creditors;
Notify creditors to declare their claims and publish an announcement that they will terminate their operations in advance and enter into a liquidation procedure;
After filing with SAMR, an announcement can be published in a newspaper, notifying creditors of the company’s closure and requiring them to declare their claims.
Although some cities have abolished the requirement to submit newspaper announcements in order to simplify cancellation, various departments still require proof of this announcement during the entire cancellation process, such as MOFCOM, SAMR and banks.
The announcement must be published in a provincial or national newspaper and include basic details such as WFOE’s name and in some provinces, names of committee members. After publishing the announcement, at least 45 days are required before proceeding to the next step. This is to ensure that creditors have sufficient notice and time to deal with unresolved obligations and unpaid accounts.

Step 5:
Liquidate assets and distribute proceeds according to legal order
Prepare a liquidation plan and have it confirmed by authorized authorities (shareholders);
Clear property and prepare property inventory; At this stage, the liquidation committee should also start liquidating the company’s assets.
Before submitting a liquidation plan approved by shareholders’ board in step one, companies should avoid paying creditors’ claims.
And distribute proceeds according to following order:
Liquidation expenses>>Unpaid employee wages or social insurance fees>>Unpaid taxes.>>Other unpaid debts owed by WFOE.
Prepare a liquidation report and have it confirmed by authorized authorities (shareholders);
Distribute remaining property.
After debts are paid off, the liquidation committee can distribute remaining income to shareholders.
If company’s assets are unable to repay debts, it will file for bankruptcy with court.

step 6:
Tax cancellation;
Now there is a simplified tax de-registration procedures for eligible taxpayers.
However, general tax de-registration procedures usually takes four to eight months. In this process, tax authorities will collect a series of relevant documents including but not limited to signed board resolutions, evidence of lease termination and tax returns for previous three years.
At this point all unpaid taxes will be determined and required to be settled before removing entity from value-added tax (VAT), corporate income tax (CIT), individual income tax (IIT) and stamp duty obligations.
Companies operating for more than one year will be required to undergo an audit with local certified public accountant (CPA) firm in order to obtain a liquidation report.
This liquidation report along with unissued invoices VAT invoices and equipment can then be brought to tax bureau for review. In some cases, tax bureau may visit office in person to understand company’s intention and reasons.
If review is successful, tax liquidation certificate will be issued, which means that entity has successfully removed itself from all tax obligations.
It should be noted that during company’s closure process, company will continue to generate tax liabilities.
Filing to Relevant Tax Bureau

Step 7 :
State Administration for Market Regulation (SAMR) cancellation
Once formal tax liquidation certificate is obtained, SAMR de-registration procedures can begin.
For this, liquidation committee must submit liquidation report signed by committee members as well as shareholder resolution report which needs to confirm following:
Company’s remaining funds, completion of tax liquidation, dismissal of all employees and resolution of all creditor claims.
Once this step is completed and SAMR cancellation notice is obtained, WFOE will be considered legally cancelled and no longer exist as a legal entity.

Filing to State Administration for Market Regulation (SAMR) for cancellation

Step 8
Cancellation of other departments (foreign exchange, social security, provident fund, customs bureau account, etc.);

At the same time, the company must cancel in the following departments (if relevant):

State Administration of Foreign Exchange (SAFE): This needs to be done through bank rather than SAFE. Entity must apply at bank where it opened its RMB basic account.
Social Insurance Bureau: SAMR cancellation notice needs to be brought to human resources bureau for cancellation.
Customs Bureau: Application letter signed by legal representative and stamped by company as well as other original certificates need to be submitted to customs bureau for cancellation.
Other permits: Production permits food distribution permits and system application and product (SAP) cancellation (for trading companies with their own websites) as well as other permits that need to be cancelled with relevant departments.

Step 9:
Bank account cancellation.

Most WFOEs will have at least three different company bank accounts each of which must be closed before account can be properly closed.
Capital account and general account are usually first accounts to be closed.
Capital account balance can be directly transferred to shareholder’s bank account while general account balance can be transferred to RMB basic account or withdrawn in cash.
RMB basic account must always be last account to be closed as it is WFOE’s main account and subject to closest scrutiny in China.
Here there are several options: balance can be directly transferred to legal representative directly transferred to another domestic account or withdrawn in cash.
However as new foreign investment law has come into effect these rules may change.
And individual bank branches may have their own policies.

CN-dnl-030    
What is the simplified de-registration procedures for foreign-invested companies in China?

Answer:

Pre-application announcement for simplified de-registration procedures

To apply for simplified SAMR de-registration procedures enterprise applicant must first log on to comprehensive government service platform visit online service area for cancellation upload commitment letter from all investors and announce its intention to apply for simplified de-registration procedures through national enterprise credit information publicity system via online platform.
After announcement is posted online system will automatically allow any objections for period of 20 days (original 45-day period shortened to 20 days according to SAMR Document No. 45).
Simplified SAMR de-registration procedures provides one-stop government service platform for enterprises (this is also why it is called “electronic cancellation”) enabling enterprises to cancel company online without having to visit local bureau in person (although in reality this may depend on local level of implementation).
It requires fewer documents to be submitted omitting steps such as establishing liquidation committee or publishing newspaper announcement which are required for general business de-registration procedures.

Document submission for simplified de-registration procedures

Within 20 days after expiration of announcement period enterprise can submit application and following documents to local market regulation department applying for simplified de-registration procedures:
• Cancellation application form;
• Commitment letter from all investors;
• Power of attorney from agent; and
• Original and duplicate copies of business license.
After submitting application enterprise can choose to submit paper documents to local market regulation department.
Eligible market entities can handle simplified de-registration procedures online throughout process by submitting electronic documents.
Upon receiving submitted documents local market regulation department will make decision on simplified cancellation of enterprise within three working days.
If agreed this means that enterprise has been officially cancelled.
It should be noted that submitting false statements or fraudulent concealment in simplified SAMR de-registration procedures may result in rejection and being listed as illegal act.
This may result in entity being blacklisted through national enterprise credit information publicity system.
Parties affected by this act can claim against investors of enterprise who may also face administrative and criminal penalties depending on situation.

CN-dnl-040    
What are the features of the simplified de-registration procedures?

Answer:
In order to speed up the tax cancellation process, the State Administration of Taxation (SAT) launched the service of waiving the tax liquidation certificate, optimized the on-site tax cancellation service, and simplified the document submission requirements and application procedures.
We break down the key aspects of the procedure below:

Service of waiving the tax liquidation certificate:
According to the SAT Notice on Further Improving the Simplified De-registration procedures to Facilitate the Exit of Micro, Small and Individual Businesses (Shui Zong Fa [2018] No. 149), “taxpayers who apply for the simplified SAMR de-registration procedures and meet one of the following situations are exempt from obtaining the tax liquidation certificate”:
• Those who have never handled any tax-related matters; or
• Those who have handled tax-related matters, but have never applied for or used invoices, and have no unpaid taxes (including late fees) and other penalties.
Despite being exempt from obtaining the tax liquidation certificate, these taxpayers can still obtain it immediately if they need it and apply to the tax authorities.

Optimizing the on-site tax cancellation service
Taxpayers who have missing information can obtain the tax liquidation certificate by making a “commitment” (a promise to submit within a specified period) on site if they meet the following conditions:
They have no unpaid taxes (including late fees) or other penalties;
And they have returned the special VAT invoices and VAT invoice machines to the tax authorities for cancellation.
At the same time:
• They are taxpayers with A or B credit ratings;
• They are taxpayers with M credit rating whose parent company has A credit rating;
• They are enterprises whose founders are talents introduced by provincial governments or recognized by industry associations above provincial level;
• They are individual businesses that are not included in credit rating evaluation and pay taxes at a fixed amount on a regular basis; or
• They are taxpayers who do not reach the VAT payment threshold – individual taxpayers whose sales do not reach the VAT threshold and can be exempted from VAT (excluding individual businesses registered as general taxpayers).
• However, if they fail to fulfill their commitment within the specified period, the tax authorities will list the legal representative and financial officer of the applicant as D credit rating.

Simplifying documents and procedures

The tax authorities will facilitate and optimize the tax cancellation process through the following measures:
• Simplifying required information: Taxpayers who have undergone real-name authentication are exempt from providing tax registration certificates and personal identity proofs.
• Setting up special windows: Setting up special tax cancellation service windows in tax authorities and adjusting window numbers according to situation.
• Providing “package” service: Integrating pre-approval matters for handling tax cancellation with one-window acceptance, internal transfer, time-limited completion and other services.
• Strengthening “first-question responsibility system” and “one-time notification”: When taxpayers go to tax authorities to handle tax cancellation, first receptionist is responsible for asking situation, distinguishing matters and complexity, classifying and informing relevant matters that need to be handled, communicating and guiding.
• Optimizing internal work and responsibilities: To innovate work methods, simplify processes, clarify division of labor, achieve interconnection, and complete within time limit.
Although these policies have been implemented to varying degrees in different regions, foreign companies that meet the conditions can seek advice and expertise from local experts or local governments to take advantage of simplified de-registration procedures.

CN-dnl-050    
What are situations that are not applicable to the simplified electronic de-registration procedures?

Answer:
. Foreign-invested enterprises involving special management measures (negative list) stipulated by the state;
https://www.gov.cn/zhengce/zhengceku/2021-12/28/content_5664886.htm
· Enterprises that are listed in the abnormal business list or the list of seriously illegal and dishonest enterprises;
· Enterprises whose equity (investment rights and interests) are frozen or pledged, or whose assets are mortgaged;
· Enterprises that are subject to investigation, compulsory administrative measures, judicial assistance or administrative penalties;
· Branches of non-legal persons that have not been cancelled;
· Enterprises that have been ordered to terminate the simplified de-registration procedures; and
· Enterprises that need to be approved for cancellation according to laws, regulations and decisions of the State Council.

*** 
Version 2023/08/10
***
Based on  our  real service experiences plus digesting  study result  from several  web-pages  about this topic,  above contents just for your references.
Law and Regulations might be changed as following by time.
Please check with your trust-able professionals   or contact us  for verifying before  making decision.
***
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