Maxxelli
10/8/2023, 1:39:34 AM

THE DEREGISTRATION OF A WFOE

Monst

Adam McWhirter

CEO at Maxxelli

If the shareholder(s) deems it beneficial, a WFOE (Wholly Foreign Owned Enterprise) may be terminated before it’s natural conclusion; this may occur if the WFOE isn’t making a profit or isn’t running in the way the shareholder would like.

Although it may be tempting to simply walk away from the WFOE, doing this is unwise for several reasons and can make it much more difficult to conduct business in China in the future. In order to close a WFOE, the shareholder must follow three stages:

  • LIQUIDATION
  • TAX CLEARANCE
  • DEREGISTRATION
Although this can be a complex and time-consuming process, it is essential the procedure is followed properly as the consequences of not doing so can be severe.

What Happens when a company does not follow the China company deregistration rules?

  • According to the Chinese law, the responsible legal representative will be blacklisted and will not be able to even buy an air ticket and train ticket in China.
  • Any overdue penalties should be paid if the legal representative of the company applies for a license for up to three years later.
  • The legal representative of a company that has been revoked is not allowed to engage in any business activities for at least 3 years in China.
  • It could even have ramifcations on flying in or out of China if there were penalities imposed; with the worst case scenario being prosecution.
Liquidation 

Liquidation involves the appointment of a liquidation committee by the WFOE’s board of directors. This should be formed within 15 days after the declaration of dissolution, and is made up of all shareholders. This committee’s responsibilities include:

  • Choosing a member to be a legal representative
  • Preparing a balance sheet and list of all assets
  • Formulating and implementing a liquidation plan
  • Notifying local authorities and creditors about the WFOE’s liquidation
  • Making a public announcement in at least one provincial newspaper within 60 days of the committee being formed
  • Preparing a liquidation report
Tax Clearance 

Next, the company will need to submit a Tax Clearance Declaration Report with both the state and local tax bureaus. These authorities will make sure that all taxes have been paid properly and in full, which is why it’s important to have a competent accountant whilst the company is in operation.

In order for this to be completed, the company must have a backlog of all fapiao’s for every single payment the company made, which must be properly accounted for and ordered. Documents that may be reviewed include company contracts, employee payments and accounting vouchers, and it’s likely the authorities will look at the documents from the past 3 years, so having these is vital.

This process is the most time-consuming stage and will take approximately 6 months if all taxes have been paid properly, or longer if there are any outstanding debts or taxes.
  
Deregistration 

Once this stage has been processed and the bureau has issued a ‘notice of cancellation of tax registration’, the next step is deregistration. For this, the stakeholder of the foreign-owned entity will need to deregister with relevant authorities, including:

  • Tax authorities
  • Customs offices
  • The State Administration of Foreign Exchange (SAFE)
  • The Industrial and Commercial Administration Bureau
Part of this process will involve providing the original document of various registration certificates, such as the Certificate of Approval, Letter of Approval and Business License, so it’s important that original documents are kept safe whilst the company is in operation.

Once this final process is complete and all taxes and employee wages have been paid, any remaining assets may be distributed to the shareholder of the WFOE. Once the business licence has been revoked, the legal status of the shareholder is terminated.

Why it’s important to deregister your WFOE?

There’s no doubt that the whole deregistration process for a WFOE is a complex and time consuming one, however, it is vital you follow the procedure properly as failure to do so can have significant repercussions.

Even if all taxes have been paid properly, improper deregistration of the WFOE can still result in all liable parties being placed on a ‘black list’ by the Chinese government, which is issued to all SAIC (State Administration for Industry and Commerce) offices in China. Because of this, conducting future business in China may prove very difficult; the legal representative will not be permitted to act as a company director for three years, and the stakeholders are not permitted to invest in another Chinese company for three years. Moreover, details of those blacklisted may be passed on to border control officials, making it difficult to re-enter the country.

The consequences are even more serious for WFOEs that have abandoned any owed taxes or debts, as failing to properly pay the required liquidation payments is a crime. If a wholly foreign-owned enterprise is abandoned with unpaid taxes or salaries, the company’s legal representatives and directors can be held personally liable and face criminal prosecution.

Are there other options as opposed to a deregistration?

Yes, it is common for WFOE’s to be sold to an external party, often just for the business license.  Maxxelli will cover selling your WFOE in a future article to be published in April 2020.

What is the Basic Timeline?

Although the process is relatively simple if the accounting is all in order, a common frustration comes from the length of time it takes to full deregister the WFOE, as it can easily be a 6 month process.  Of the 3 steps that take the longest time, the tax deregistration is where many of the roadblocks that slow the process appear.
 
During the local and state review process, once the documents are submitted, there may be questions on historic tax filings that will need to be remedied before moving onto to the next step.  It is this process that is largely out of control of the supporting deregistration firm, as we are left up to the efficiency of the local government authorities.

THE BASIC PROCEDURES:
  1. Clear the tax and submit Tax Clearance Declaration Report (an audit report prepared by CPA firm)
  2. The tax bureau will issue a “notice of cancellation of tax registration”.
  3. Online application for cancellation of WFOE
  4. Submit to Foreign Trade & Economic Cooperation Bureau
  5. Cancellation of Letter of approval and Certificate of approval
  6. Announcement on appointed local newspaper & Cancellation of Company Business Licenses
  7. Dissolution of Organizational Code Certificate (original and copy)
  8. Dissolution registration of Statistics Registration Certificate
  9. Cancellation of Alien Employment Permit
  10. Dissolution registration with customs (applicable to trading, manufacturing WFOE only)
  11. Bank accounts closure and capital repatriation
  12. Cancellation of Company stamps
  13. After all these procedures are finished, State Administration of Industry & Commerce will send a “notice of the approval of cancellation for WFOE.”
The Documents required for WFOE de-registration:

  1. Originals of Certificate of approval, Letter of approval, Business License
  2. Taxation registration certificate (2 originals)
  3. Enterprise Code certification (2 originals)
  4. Statistics registration certificates
  5. Foreign exchange accounts permits
  6. Copy of Legal Representative’s passport (first page, signature page and most recent immigration records’ page)
  7. Bank Account Certificates
  8. All chops of WFOE (Company chop, finance, Legal representative)
  9. All accounting related documents: bank statements, invoices of WFOE expenses
Monst
Adam McWhirter

CEO at Maxxelli

Joined Maxxelli in 2008. I am the current CEO and Managing Parnter supporting all operations in the APAC region. I am currently residing in Bangkok as we expand our operations to Thailand.

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