In late December of 2021, even as the Standing Committee of the People’s Congress released a draft of a new revision to the China Company Law, the responsible ministries released Announcement [2021] Number 48, titled Announcement on Promulgation of the Guidelines on Business Deregistration (Announcement 48), which took effect on December 28, 2021 and details the process and requirements for dissolution, liquidation and deregistration of companies licensed in China. The intent of Announcement 48 is to provide more detailed operational administrative guidance than previously available under Notice [2019] Number 30 and improve the system for companies to exit the Chinese market.
In general, the major steps to winding up a business in China include making a declaration of dissolution in accordance with the law, setting up a liquidation team to carry out liquidation of company property and assets, paying taxes, settling any creditor’s rights and debts, and paying wages and social insurance premiums to company employees. After completion of liquidation, the company shall prepare a liquidation report, complete deregistration formalities, and make a public announcement of its termination.
1. Dissolution of a Company
A company may voluntarily dissolve based on the will of its shareholders, including:
- dissolution due to expiration of the term of business
- dissolution due to issues outlined in the company Articles of Association
- dissolution by resolution of a shareholders’ meeting
- dissolution due to company merger or division.
Companies may also be ordered to dissolve, such as when the competent administrative authority determines the company is violating laws and regulations, or when there is a judicial decision because of serious operational or management difficulties that may cause material losses to the shareholders’ interests. In any case, once dissolution is announced, the only business the company is allowed to conduct is the business of liquidating and dissolving the company.
2. Liquidation Committee and Process
A dissolving company has only 15 days in which to establish a liquidation committee, and within 10 days of establishment, the committee must issue notices to all creditors and provide for public announcements in newspapers for a period of 45 days. The liquidation team is then responsible for liquidating company property; collecting and/or paying any outstanding debts; paying the liquidation expenses; paying taxes; paying employees’ wages, social security premiums and statutory compensation; preparing a liquidation report; and finally, distributing the remaining assets, if any, to the company’s shareholders.
3. Two Paths to Deregistration
Announcement 48 now allows for two possible pathways for deregistration of a liquidated company; the ordinary deregistration process and the simplified deregistration process.
The ordinary process entails:
- application for deregistration with the tax bureau and receipt of a tax clearance certificate;
- application for business deregistration and business license cancellation;
- application for social security deregistration; and
- application for customs deregistration.
The simplified process is offered to companies that have no outstanding debts, taxes, social security premiums, or employee compensation, or any administrative issues that must be resolved. In this case, the company can use an online “one-stop shop” to deregister with all government agencies simultaneously, and as long as the company has no outstanding tax payments or unresolved tax disputes, no tax clearance certificate is required.
4. Problem Resolution
Announcement 48 also offers options for resolution of a number of difficulties that may arise for a company wishing to dissolve. This includes:
- options for resolving situations where a shareholder cannot be contacted or is uncooperative during the process
- loss of the original business license
- company seals or other necessary documentation
- certain tax non-compliance issues
- company insolvency
- and other problems that may delay deregistration.
With regards to insolvency, the People’s Court generally will manage the entire process, as has been the case under previous guidelines.
5. In Closing
Announcement 48 certainly clarifies many of the issues related to winding up a company in China, whether the company is domestic or foreign-invested. Although the announcement details offered with respect to any given government agency are minimal, any company contemplating its dissolution will most likely find these new guidelines to be helpful both during the planning stages and the execution. It is notable that the tax clearance and deregistration process and potential issues is given substantial discussion in the announcement. Tax clearance has commonly been the most difficult step in deregistration, as tax officials tend to scrutinize tax-related documents from the most recent three years, and can go back as far as ten years if deemed necessary for investigative purposes.
Lastly, it should be noted that penalties for a company and its shareholders not performing the detailed legal process for winding up a company in China are considerable. Especially for any foreign-invested company and/or its overseas shareholders, the advice and assistance offered from a knowledgeable advisory firm in China should be sought during the earliest planning stages for dissolving a business in China. Given that no problems or non-compliance issues exist, the entire process for winding up should go smoothly and be completed within a reasonable period of time.
For more information, please contact:
Ms Flora Luo
Director of Foreign Investment, China Tax and Legal Advisory
CLA Global TS Shanghai Office
floraluo@nexiats.com.cn
Dr Scott Heidecke
Senior Consultant
CLA Global TS Shanghai Office
scott@nexiats.com.cn
