Under the influence of the seemingly everlasting pandemic, companies in China that suffer business difficulties may consider seeking suspension of business operations so as to save costs for an interim period, rather than entering a liquidation procedure. In order to support business activities in such sensitive periods of time, the Chinese government has issued regulations and guidelines effective since March 1st, 2022, which enable companies to register their dormant status.
In order to better understand dormant company status in China, in continuance of the introduction on the application of dormancy in our previous article, we are going to further analyze the advantages of dormancy as well as provide legal compliance advice.
Advantages and Legal Compliance Advice
1. What will be the simplified or advantageous measures that are applicable for dormant companies?
According to the Regulation on the Registration of Market Entities (“Regulation”) and the Implementation Rules for the Registration of Market Entities (“Implementation Rules”), dormant companies may use the address for service of legal documents in replacement of their domicile address (principal place of business, place of business). Such companies need to submit a letter of confirmation to the registration authority and ensure that important legal documents could be delivered during the dormant period.
In addition, the Regulation also stipulates that enterprises should negotiate with employees on labor issues before transferring to dormancy. The enterprise can negotiate with the employees to terminate the labor contracts, or lay off certain employees following due procedures, or pay living allowances in line with legislative standards.
2. What are the main special policies in respect of taxation during dormancy?
Compared to the normal operating period for businesses, during dormancy, a simplified policy in respect of tax declaration is applied.
In fact, you can choose to pay Natural Resource Tax (excluding Water Resource Tax) on a quarterly basis, and eligible enterprises can choose to file the Corporate Income Tax and Personal Income Tax Returns on a quarterly prepayment basis. If an enterprise resumes operations, it can file Resource Tax Returns as per the standards before dormancy status, same as for Corporate Income Tax and Individual Income Tax returns, but in this case, it can also continue to file on quarterly prepayment returns, and for those that resume operation in the same year of dormancy and the period for filing the advance payment has been adjusted, it shall not be changed in that year.
For enterprises that have been identified as abnormal by the tax authorities, the simplified tax return filing method is not applicable during dormancy until the abnormal status is lifted.
3. Should companies carry out annual reports during dormancy?
Yes. Article 63 of the Implementation Rules stipulates that a market entity shall, from January 1st to June 30th of each year, submit an annual report for the previous year via the NECIPS and disclose to the public. Dormant market entities shall disclose their annual reports on time.
Even in dormancy, the company should still bear relevant corporate responsibility, such as submitting required reports to the regulatory authorities, legal documents to the judicial authorities and confirmation of the address, etc.
4. Is an annual audit report required during dormancy?
With the implementation of the annual corporate reporting policy, companies are not required to submit a financial audit report when filing their annual report. However, other laws (such as the Company Law) stipulate that an enterprise (company) shall have an audit financial report made by an accounting firm in accordance with the law at the end of each fiscal year. Enterprises (companies) should consciously comply with this obligation.
For example: According to Article 60 of the《Rules for the Implementation of the Law on Foreign-funded Enterprises》foreign-funded enterprises shall conduct independent accounting. The annual financial statements and liquidation report of foreign-funded enterprises shall be engaged to a Chinese certified public accountant to verify and issue a report.
5. A dormant state company needs to be reported to the tax authorities?
According to the Regulation, the maximum period of dormancy shall not exceed 3 years. Those companies which have been dormant for accumulatively 3 years will be deemed to have automatically resumed operation. If a company decides to stop operations, it should apply for deregistration, otherwise the company may face legal risks such as cancellation or revocation.
Conclusion
In short, a dormant company may enjoy advanced policies to simplify the management procedure and reduce operation costs. At the same time, the company should also abide by the corresponding compliance requirements during the dormant period to maintain a legal status.
D’Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal compliance, tax advisory support and consultancy to address any concerns related to this issue. If you are interested in dormant companies, feel free to contact us at info@dpgroup.biz.
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