Due to several factors, foreign investors can choose to shut down their business operations in China. This could result from the inability of the organization to adapt to the domestic market, lack of demand, inability to respond to changes in the business environment, and other unfavorable business factors. Although, once a company chooses to liquidate its operation in China, it must follow the proper procedure.
There are provisions and processes which must be strictly followed in liquidating a company in China. Failure to adhere to the process would negatively affect the company's reputation. This would hinder the ability of the organization to do future business in China and with any business entity in the country. In the worst scenario, the company could be penalized, and the registered individuals of the company could be blacklisted from leaving or entering the country.
Liquidating a company in China is time-consuming and can take up to a year or beyond. Some agencies in China, such as the Tax Bureau, try to ensure a company fully pays off its liabilities before liquidating. This tax clearance process becames the main factor slowing down the liquidation process.
Step by step approach for liquidating a company
Appointing Liquidation Committee: the first step that the company must do is establish a liquidation committee that shall be in charge of the process. Once the decision to liquidate is taken, the committee must be installed within fifteen days. It is expected that the committee shall report to the shareholders all relevant activities. A minimum of three board members must be included in the committee. In reality, the organization appoints the committee, and in most cases, the legal representative is also designated as a member.
Asset disposal: The committee can commence with asset disposal or sales of the company’s properties. The proceeds realized from the asset disposal shall be used in paying off any outstanding debts or cost in the following sequence:
- Expenses incurred during the liquidation process
- Employees unpaid salaries, severance fee, and social insurance fee
- Any tax liability yet to be paid
- Any other debt owed by the company
Where all liabilities have been settled, and there are still available funds, those funds will be shared among the company's shareholders.
Liquidation registration: the committee shall register the company's liquidation with the Administration of Market Regulation (AMR). Upon this registration, the AMR has been notified of the intention of the company to liquidate.
Public notice through newspaper: upon setting up the committee, the company is within 60 days required to notify the public of its intention to liquidate through newspaper publication. By this notice, creditors are expected to make known to the committee within 45 days what the company owes them.
Registration of claims by creditors: within 45 days, creditors register their claims and show proof to the committee.
Debt settlement: The committee shall settle all debt once creditors and their corresponding claims have been identified.
Registration with MOFCOM: the resolution of the shareholders stating their intention to liquidate must be submitted to the ministry of commerce.
Tax Bureau Approval: the approval at this agency is time-consuming. Due to the potential loss of tax revenue upon liquidation, there is no incentive for tax authorities to process the clearance quickly. A certificate shall be issued once approval is made.
Customs license deregistration: where a company has import and export activities, their license must be deregistered and retrieved by customs.
Cancellation of other licenses: any additional permits issued to the company must be returned and deregistered—for instance, food and beverage licenses.
Company liquidation with AMR: This must be done after all licenses must have been returned and deregistered. The company is expected to return its business licenses to AMR during this phase. Once this is done, the company is considered to be legally non-existent and liquidated.
Deregistration at any other relevant agencies: as earlier noted, the company is officially liquidated once the business license is retrieved and canceled by AMR. However, the company still has to deregister at the Administration of Foreign Exchange and Social Security Bureau.
Closure of all Bank Accounts: most business entities have over 2-3 bank accounts to carry out financial transactions. They have a general account, RMB basic account, and the company's capital account. The RMB account is the last to be closed since it is the company's primary account and still contains funds at the point of liquidation. The company is expected to withdraw the fund from the account or spend it.
Chops disposal: a liquidated company is expected to dispose of its chops once the previous steps have been completed. The company must wait until other processes are complete, since the chop may be required at any phase of the liquidation process.
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