CLOSING A WFOE (A SUBSIDIARY) IN CHINA



July 31, 2020



Closing a wholly foreign-owned enterprise (WFOE) in China is often time consuming, but simplified procedures are now available for many companies that have a positive inspection record, owe no taxes or fines, and have no record of debt evasion or non-compliance. In this note, we outline the recent closure of a WFOE to illustrate the time savings that can be realized by using the simplified procedures.



Note that the State Administration for Market Regulation (SAMR) was formed in 2018 from the former State Administration for Industry and Commerce (SAIC), China’s company registration authority, and several other agencies. Applications for company deregistration now go to SAMR or its local counterpart. Some local agencies still use the term SAIC (or AIC) rather than SAMR.



SAMR and the State Administration of Taxation (SAT) administer separate simplified procedures. The applicant WFOE can choose the normal or (if it qualifies) simplified deregistration procedure with SAMR, but, in our experience, the SAT or the local tax bureau determines whether to accelerate the WFOE’s tax deregistration under its simplified procedure.



In contrast to the simplified procedures, full deregistration typically includes the following steps:



1. The WFOE forms a liquidation committee and reports the same to SAMR. All business activities cease, except as necessary to wind up the business. 
2. The deregistration is reported to the Ministry of Commerce (MOFCOM) or its local counterpart.
3. The liquidation committee notifies creditors and announces the liquidation in a newspaper.
4.  Procedures to terminate employment of the WFOE’s staff and workers are carried out.
5. The committee liquidates assets and pays debts, taxes and social insurance contributions.
6. It files for tax clearance and deregistration.
7. It files for customs clearance.
8. The WFOE and shareholder file with SAMR to deregister the WFOE. 
9. Any remaining funds are remitted to the shareholder and the WFOE’s bank accounts are closed.



This full procedure often requires a year to complete. In particular, a full tax clearance review may require 6 to 8 months or more.



Although the time required for the simplified procedures varies, it can often be completed in as little as 3 months. The tax clearance can be completed in some cases within one to three days. To qualify to use the procedures, the WFOE should be up-to-date on its taxes and payments to employees and creditors, have no record of substantial noncompliance in the National Enterprise Credit Information Publicity System, and have sufficient funds available to pay off creditors and employees.



To illustrate the simplified procedures, we list the steps recently completed to deregister a WFOE specialized in software that had fewer than 50 employees:



1. The WFOE first fixed the liquidation start date, and business activities ceased. The WFOE’s shareholder signed a resolution to fix the date, but no application was submitted to SAMR.
2. The WFOE was not required to file a report to the local counterpart of MOFCOM for approval or for the record.
3. Outstanding amounts owned to creditors were paid off.
4. The employees’ severance pay was calculated, including payment in lieu of notice; severance payments were adjusted to include additional payments to several employees on leave due to pregnancy and illness.
5. The WFOE’s managers notified the employees of the dismissal and requested each to sign a termination agreement to receive his or her final payments. Two management staff stayed on for two months to assist with disposal of the assets and tax and social insurance deregistrations.
6. The WFOE issued a notice to its landlord to terminate its lease. Its assets were sold or stored to be shipped to its shareholder in the U.S.
7. The managers who stayed on completed deregistration of social insurance with the Social Insurance Bureau and the WFOE paid the final social insurance contributions.
8. The managers also filed an application for tax deregistration. The application was granted within one month and no audit was required.
9. Following the social insurance and tax deregistrations, the WFOE published a public notice of deregistration.
10. Forty-five days following the date of the public notice, the WFOE filed an application with SAMR for deregistration, accompanied by a Letter of Undertaking from the shareholder representing that the WFOE had no unsettled liabilities.
11. The Notice of Deregistration of the WFOE was issued by SAMR within one week of filing the application.
12. The WFOE’s bank account was closed after remitting the remaining funds to the shareholder.



Results may differ according to the WFOE’s industry and location, and we recommend consulting an attorney even for the simplified deregistration procedure. Our attorneys in California and Beijing are available to answer your questions and assist you.



In a second note to follow, we will outline common pitfalls regarding timing, staff and payments that regularly come up, and recommend steps to minimize their impact. 



By Allan Marson with Jeff Sun. Allan is the founder of Marson Law P.C. in Palo Alto, California, and Jeff is a founding partner of Jaguar Law in Beijing, P.R.C.