what we think

By Maarten Roos

It should not surprise that in recent years, we have supported many clients to close their business in China. In some instances this was because the Chinese business could not make (sufficient) profit; in others, the decision to close was due to a re-alignment of resources and priorities. China’s economic and commercial environment has gone through huge changes over the years; a company set up in 2005 may well have out-served its purpose by 2025. All in all, it is not surprising that we see a lot of international companies make difficult decisions to close their business in China – even as others are entering China to take their place.

Key Issues to a Company Liquidation

Based on the many projects that we have handled for our clients, we usually divide the closing of a Chinese entity into several main components:

• Terminating employees. Closing of the business is a legal ground for termination against severance (often referred to as "n"), though many international companies are willing to offer a little more to ensure full cooperation on the part of their leaving staff. The ideal scenario is to have all employees accept their settlement packages, so that no further disputes remain.

• Resolving business issues. Vendor contracts need to be terminated, which includes the lease contract for the rented office or factory building (or if the company has purchased, the property will have to be sold). Contracts with customers and other business partners may need dissolving as well. Often this is relatively straightforward as long as creditors get paid.
• Tax liquidation. In China, one of the key steps of company closure is to complete liquidation with the tax bureau. Before commencing, adjustments may be needed (e.g. to AR, AP, inventory) to reduce the risk of a high tax bill at closure. The relationship with the local tax office will need to be managed until the very end.
• De-registration with various authorities, closing of bank accounts. The formal part of the liquidation involves formal filing of the liquidation and establishment of the liquidation committee (team), which is in charge of completing de-registration with the AMR (registration authority), SAFE (for foreign exchange), Customs, the social insurance bureau and the housing bureau, etc. Also, bank accounts must be closed, and remaining funds transferred out. These processes are not necessarily complex but are often very bureaucratic.

The role of former employees

One question that we are often asked, is in how far existing / former employees need to support the liquidation process. Their knowledge may be useful or even crucial when it comes to details of past operations, including the proverbial skeletons in the closet. And so yes, their input can be very helpful. However as long as the company was operated in a compliant way, this kind of support is especially useful at the start of the liquidation process. On the other hand, we generally do not recommend allowing (former) employees to take charge of the whole liquidation process due to their unfamiliarity with the relevant procedures, but also because their interests may no longer be fully aligned with the foreign shareholders.

Timing

How long does the whole process? In the 2010s a complex liquidation project could easily take 9-12 months, but nowadays many procedures are more streamlined and so around 6 months is often a fair estimate for a regular (non-simplified) liquidation. This does presume that the company was operated in a compliant way, and there are sufficient funds to pay off remaining debts – including severance packages of terminated employees.

Conclusions

One piece of advice? Involve the experts as soon as possible when considering whether to close the China business, so that you have a comprehensive view of not only costs, but also the risks and potential consequences of a liquidation project.

At R&P, our team has extensive experience supporting international companies through the entire process of closing their business in China. We also provide strategic guidance on engaging former employees and managing project timelines to ensure smooth, compliant liquidation. If you are considering closing your China business or need assistance with any aspect of the liquidation process, contact Maarten Roos ([email protected]) or your trusted R&P contact.

This was originally published on LinkedIn as an edition of Maarten's China Law Focus Newsletter. Subscribe here to get regular updates.