Incorporating a company in China has become easier and faster now, but despite the government’s recent efforts to try and simplify the procedure, shutting down a company remains complicated and time consuming. Some foreigners think they can just give up their companies without annual inspection procedures and tax settlement. However, this is a grave mistake and they are extremely wrong by trying to “simplify” the process this way. Such an approach will only lead to more problems later on.
1. Legal consequences of not conducting annual inspections
a) Direct consequences
A direct consequence of not conducting the annual inspection procedures and tax settlement is that the business license of the company will be revoked and the company can’t do business anymore, but it doesn’t mean all obligations with regards to the company will cease. Many liabilities including taxes, government fees and employee salaries are still to be born. More importantly, the company will be put on a blacklist.
b) Personal liability
First of all, the legal representative, directors and shareholders of the company will be put on a blacklist which will be issued to all SAIC offices in China, and to the border control authority of the PRC. Usually, people on the blacklist will not be permitted to do any investments or managing a company in China for three years. Furthermore, their entry to the PRC will be denied if they want to revisit China someday. Moreover, if the company owes taxes, fees, salaries or other debts, the legal representative and directors could be prosecuted by PRC authorities.
2. ABC – Always be closing – but properly
Technically, based upon the PRC bankruptcy laws anyone who does not have enough funds to operate the company can file for bankruptcy with the court. However, it seems that few companie are going through this procedure, likely because it is complicated as well as time and money-consuming. Most investors choose to deregister their companies with their local AIC.
3. The specific procedure is as follows:
1）Pay all debts, especially all debts to employees (salaries) and to the government (taxes);
2）Hire experienced accountants to review your books within three years till the final closure before you go through the drawn-out government audit. They will do an initial audit for you and will help to assess your tax risk and provide an opinion accordingly. If you are working with an experienced accountant, then congratulations! They can do it for you.
3) Only after aforementioned steps were taken you may finally start the winding-down procedures officially:
a) Make all required social insurance contributions and close the company’s social insurance account;
b) Go through a tax check and settlement and close the tax account;
c) Put a deregistration notice in the local newspaper and wait for 45 days;
d) Deregister your company with local AIC;
e) Close all your bank accounts.
4. Conclusion
The entire process could take 3 – 6 months or more. The most important part or tricky part is the tax settlement, and it’s mainly up to you- if your accountant has done a good job for you in the past. That’s why lawyers always say you should work with an experienced accountant instead of a cheap one ( You may check our previous article for more information: Why A Good Accountant Is So Important).
Considering all aforementioned points, it’s strongly recommended that you do it rather sooner than later and have a sound plan with regards to both timing and funding of the entire winding-down procedure.
Useful link:
State Administration for Market Regulation
