When people wish to cease their business operations in China, many misunderstand the importance of deregistration. According to Chinese laws and regulations, if a company stops operations but is not deregistered, the company may be punished by the authorities for not submitting a tax and business report. In addition, the shareholders and the legal representative might be put on a blacklist and forbidden to conduct other business ventures.
Therefore, as the detailed requirements of company deregistration vary in different areas, we hereby provide you with an overview of the procedures of company deregistration for reference if you wish to cease business operations and close your company.
Step 1: Form a Liquidation Group
To deregister a company, the shareholders, as the owner of the company, need to first form a liquidation group and appoint at least three members of the group. The responsibilities of the liquidation group are as follows: 1) liquidate the company’s assets and produce a balance sheet and schedule of assets; 2) notify the company’s creditors by way of notice or public announcement; 3) manage and clear the remaining business of the company; 4) pay outstanding taxes and any tax liabilities incurred in the course of the liquidation; 5) pay the company’s accounts payable and recover its accounts receivable; 6) dispose of the company’s residual assets; and 7) represent the company in any civil litigation to which it is a party.
According to Chinese Company Law, the members of a liquidation group for a limited liability company shall be the shareholders themselves. In practice, many companies only have one shareholder, or the shareholder is another company, which cannot be a member directly. Under such circumstance, the shareholders need to appoint the company’s legal representative as one of the group members, and appoint any other relevant people, such as lawyers and accountants as the other members.
Step 2: Register the Liquidation Group and Announce the Deregistration
Once the shareholders have confirmed the members of the liquidation group, they need to register such information in the local administration of market regulation. After registration, they will need to announce the company deregistration in the local newspaper.
In some areas, the shareholders can choose to directly register the information of the liquidation group in the National Enterprise Credit Information Publicity System and make the announcement via this system. Under this path, the procedure is simplified, and the cost of the newspaper announcement can be saved.
Whether the information is registered in the local authority or the online system, the announcement period shall be 45 days, which means that, even if the company has cleared all other matters for deregistration, it still needs to wait until the 45 days have passed to apply for the deregistration with the authorities.
Step 3: Liquidate the Company
After the registration of the liquidation group and the deregistration announcement, the liquidation group will start to liquidate the company and clear all unsettled matters. The following aspects are the main concerns for most companies, especially foreign-invested companies:
1) Credit and Debt
When the company is liquidated, it may still have some unsettled business relationships and undue credits and debts to other parties. For example, the office leasing agreement between the company and the landlord may not have expired when the company is deregistered.
Regarding undue credits, according to the Chinese Civil Code, the company may transfer the credits to a third party, such as the shareholders. At the same time, the company shall also inform the debtor of the credit transfer .
As for undue debts, if the company wants to transfer the debts to a third party in order to clear the company’s own debts, it must obtain the consent of the creditor. In practice, it is possible that the creditor will reject the transfer without sufficient guarantees. Under such circumstance, the company will need to clear the undue debts in advance. Once the creditor raises the objection of deregistration during the announcement, the procedure will have to be suspended.
From a financial and tax perspective, in order to avoid the challenges and concerns raised by the competent tax officers during the tax de-registration, normally, the settlement of outstanding debts and pending credits are advised to be conducted.
2) Labor Relationships
According to Chinese Labor Contract Law, when the company is closed, its labor contracts with employees shall be terminated as well, and the company needs to pay economic compensation to its employees.
The economic compensation is based on the number of years the employee has worked for the company at the rate of one month’s wages for each full year worked. If the monthly wage of the employee is three times greater than the average monthly wage in the previous year for employees as announced by the government at the municipal level directly under the central government or at the city-with-district level where the company is located, the rate for the economic compensations paid to him/her shall be three times the average monthly wage of employees and shall not be for more than 12 years of work.
In practice, it is necessary for the company to negotiate with the employees for termination issues in advance, discuss the detailed payment amount/s and period/s, so as to better facilitate the entire deregistration procedure.
For import and export companies which have been registered in customs, it is necessary to clear all matters related to customs, such as custom tax, imports and exports.
Before preparing for tax de-registration, it is strongly suggested that companies should firstly carry out a self-examination on the tax compliance matters for a period of at least three years prior in order to solve any pending tax exposure for tax clearance before the submission of an application for tax de-registration. In fact, the competent tax authority may inspect the company’s compliance of tax obligations for even longer periods if deemed necessary. Pursuant to the Law of the People’s Republic of China on the Administration of Tax Collection, revised in 2015), in the event that a taxpayer or withholding agent fails to pay taxes or underpays taxes due to its own errors such as a miscalculation, the tax authorities may, within three years, pursue the payment of the tax amount and late payment fines. In special circumstances, such a time period for pursuing payments may be extended to five years; however, in the cases of tax evasion, tax refusal or tax fraud, the tax authorities shall not be restricted by the aforementioned time limits.
Thus, it is crucial to ensure the company’s full tax compliance before proceeding with its tax de-registration at the relevant authority, in order to avoid the risk of incurring the payment of late payment fines (0.05% of the amount of tax in arrears, commencing on the day the tax payment was defaulted) and fines (normally from 50% to five times the amount of taxes unpaid or underpaid) in addition to any outstanding amount of tax unpaid or underpaid.
Furthermore, as the level of scrutiny could vary – e.g., by reasons of the company accounts’ complexity, the procedure of tax de-registration may be expected to take a significant amount of time, once initiated.
The focus of the preliminary tax examination and assessment shall be on a company’s relevant Chinese taxes; i.e. value-added tax, local surcharges, corporate income tax, individual income tax, stamp duty, urban construction tax, withholding tax, etc.
Furthermore, an analysis of the company’s financial position prior to de-registration is important in order to ensure that the liquidation report is limited to cash and bank balance in the ‘total assets’ section and equity balance in the ‘total liabilities and equity section’ of the balance sheet. Some of the more delicate areas on the balance sheet to consider are the account payable, account receivables, inventory, fixed, assets, other assets, other liabilities, and undistributed profit (if any).
In July 2021, the State Administration for Market Regulation and the State Administration of Taxation jointly issued the “Notice about the further refinement of simplified deregistration procedure in order to facilitate the exit of market of micro, small and medium-sized enterprises”, providing that an entity (excluding listed companies limited by shares), that has never had credit and debt issues, or has settled all outstanding credits and debts, may have a chance to apply for deregistration through a simplified procedure.
Although the simplified procedures facilitate companies to exit the market, the companies should also evaluate its eligibility according to the specifications of the Notice.
5) Foreign Exchange and Bank Account
Foreign exchange account clearance would need to be conducted. Please note that after the closing of the bank account, the company would generally not be able to make bank transfers.
Step 4: Apply for Deregistration
After all of the abovementioned procedures are finished, the company can go to the local authority and officially apply for deregistration. The authority will check whether the relevant matters have been completed. If completed, the authority will approve the deregistration and withdraw the business license of the company.
Since the authority does not withdraw the company chops, it is advised to damage all company chops, including official chop, financial chop, legal representative chop, contract chop, etc. after deregistration.
For companies with a long business experience in the marketplace and complicated company structure, the deregistration procedures can be long and complicated. If shareholders perform the deregistration by themselves, they may face many problems and be unable to effectively close the business in time. Under such circumstance, it is useful to appoint professional legal and financial teams to handle the entire procedure. If you have any inquiries or want to know more about company deregistration, you can send e-mail to: email@example.com.