Closing a company in China is not always easy and the reasons for the closure are often different. A crucial factor for a swift cancellation is ensuring the compliance of one's entity during the cancellation process. Although tempting, it not advised to 'walk away' from an entity in China. Leaving an entity unclosed will surely lead to future restrictions for both shareholders and potentially for individuals involved in the company, such as the legal representative.
When it comes to the company cancellation, one of the most frequently asked questions is the time the cancellation process takes from start to finish. The timeline is dependent on several aspects of the cancellation process. It depends on the efficiency and communication of the service provider, the status of the company, and the speed of the client and the Chinese authorities. Based on our past experiences assisting clients with company cancellations, the fastest cancellation took 6 months and the slowest cancellation took 3 years.
Can a company cancellation be shorter and simpler?
The answer to this question is yes, however not for every company. In 2017, the Chinese State Administration for Industry and Commerce's published the Guide on Comprehensively Promoting the Reform of Simple Cancellation of Registration of Enterprises which came into effect in March of that year. As the name of the legislation implies the Chinese government introduced a reform in the company cancellation process. Since March 2017 there are two approaches to cancel a company: a simple cancellation or normal cancellation. The simple company cancellation process was introduced to further promote enterprise cancellation facilitation and optimise the business environment.
What makes it simple?
In a nutshell, the company cancellation is composed of 5 major steps including liquidation committee organising, public announcement, tax cancellation, business license cancellation, and bank account cancellation. The simple company cancellation process affects 4 of these major steps. To provide a more detailed understanding of the company cancellation process, we will elaborate on the differences based on each operational step:
Normal cancellation: The Liquidation Committee
needs to be organised and put on record in the Industrial and
Simple cancellation: The liquidation committee does not need to be put on the record.
Normal cancellation: After the establishment of
the liquidation committee, at least three liquidation notices shall
be published in civic or provincial newspapers approved by the
Industrial and Commercial Bureau. Meanwhile, the length of the
announcement's time in print is usually around 45 days.
Simple cancellation: The announcement can be done through the national enterprise credit information system, and the announcement time is compressed from 45 days to 20 days.
Normal cancellation: Tax cancellation is often
the most tedious step in the whole cancellation process. There are
a whole set of documents to be prepared and submitted to Tax
Bureau, meanwhile, the Tax Bureau will check whether the company
has paid the tax based on submitted financial statements, tax
Simple cancellation: During the period of public announcement, the tax cancellation can be carried out, and the documents and procedures are simplified. For instance, the enterprise does not need to submit the clearance certificate to the Tax Bureau.
Normal cancellation: During the liquidation
period, the liquidation committee needs to prepare a liquidation
report and submit to the Industrial and Commercial Bureau for the
business license cancellation.
Simple cancellation: The liquidation report is no longer required. The cancellation of the business license can directly be submitted to the Industrial and Commercial Bureau
Other considerations you must not forget
Despite the fact that simple cancellation saves a lot of time, the following factors also affect the cancellation time in general, regardless of the type of cancellation process.
- Taxpayer category: The overall efficiency highly depends on the taxpayer category. Less cancellation time is required for small-scale taxpayers compared to general taxpayers
- Import & Export registration: If the company is engaged in the import and export business, and additional step in the cancellation process is required. The company must also go through a customs cancellation procedure with their local customs administration department
- Social insurance and housing fund account: During the cancellation process, the social insurance and housing fund account cancellation is easily overlooked. If the company does not operate anymore, the account must be cancelled through the Social Security Bureau. It is worth noting that before the account cancellation the company needs to make sure there are no outstanding insurance and housing fund payments to their employees.
Feasibility of simple cancellation
Compared to a normal cancelation, a simple cancellation saves a lot of time, however it is not always possible for every company. According to the Guide, the simple cancellation is only applicable to both domestic and foreign invested companies, including limited liability companies, non-corporate enterprise legal persons, individual proprietorship enterprises and joint ventures who have not carried out any business operations after obtaining the business license, or have no outstanding creditor's rights and debts before applying for cancellation of registration.
However, if your company is in one the following situations, then the simple cancellation will also not be feasible. The situations include:
- Foreign-invested enterprises that are involved in the implementation of special access control measures stipulated by the state
- Enterprise listed in the abnormal operation or seriously illegal and dishonest behaviours
- Enterprises with their assets frozen, or that have a pledge or chattel mortgage
- Enterprise which is under investigation or administrative coercion, judicial assistance, or administrative punishment
- The unincorporated branch of the enterprise does not cancel its registration
- The enterprise with termination history in the simple cancellation process
For companies with the above-mentioned abnormalities, it is only possible to apply for the simple cancellation after these abnormalities have been resolved. Furthermore, it is not always clear how a cancellation will be carried out differently for the companies that operate in the fields in the negative list. The only solution is to check with the local government before a cancellation project gets started.
Based on our explanation on the process of company cancellations, we hope you have obtained a better understanding on the process of company cancellation and the difference between a normal and simple cancellation. It is worth nothing that the simple cancellation can only apply for companies which meet certain requirements. If you would like to learn whether your business is eligible to undergo a simple cancellation, please feel free to reach out to us. We can make an analysis of your company to see if you are eligible, and also support you throughout the cancellation process!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.