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New regulation : the dormant status for a China company

By C.i. Process (Shanghai)
 
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dormant company in China
 
  Publication updated on July, 14, 2022      
 
Home > regulations and news > The rules to put a company in dormant status in China
 

1. A new regulation includes the possibility of a temporary stop of activity

  • Effective March 1, 2022, the new "Regulations on the Registration and Administration of Market Entities" in China (中华人民共和国市场主体登记管理条例), hereinafter referred to as the "Regulations", introduces and allows for the first time a regime of business dormancy.

  • It illustrates the possibility recognized by the authorities that investors and entrepreneurs can temporarily suspend or stop their activities without having to close a company or terminate its Chinese licenses.

  • The Regulation applies to all forms of companies operating in China: Chinese-owned companies, Sino-foreign joint ventures and wholly foreign-owned enterprises (WOFE).

  • This provision provides for the possibility to legally suspend the activity of a company. It is often referred to as parking mode or dormant status in other countries. It has long been in force in neighboring Asian jurisdictions such as Vietnam, but also in Hong Kong and Taiwan. Their respective regulatory frameworks, however, are distinct from that of the People's Republic (PRC)

2. The legal procedure that allows a company to be dormant in China

Since the emergence of Covid-19 in the beginning of 2020, many companies have been severely affected and temporarily unable to conduct their business. Even for those who still had the will and human and financial means to do so. In order to reduce the monthly costs or fixed entreprise charges and to protect their rights and interests, the Chinese authorities have been inspired by foreign practice in this regard.

They introduce for the first time and through the Regulation, the regime of dormant mode of enterprises.

It provides for the possibility of a temporary cessation of activities for companies (market entities in the administrative jargon) in difficulty. This means that registered companies remain legally registered with the Chinese authorities. Their company names, licenses, bank accounts, tax registrations, other permits and certificates are retained. They remain valid for future use and can therefore be re-used when the business resumes.

The regulation literally states: "in case of operational difficulties caused by natural disasters, disastrous accidents, public health incidents, public safety incidents, etc., market entities may decide on their own initiative to suspend their activities for a certain period of time".

The official text does not specify any authorized duration or maximum time allowed for the suspension of activity. Depending on circumstances to be explained at the time of application, this period may be 2 to 3 years. To be evaluated for approval and decision by the Administration in charge. In most countries, a company can be put in dormancy for a 1 to 3 years.

Nevertheless, this new procedure can not be used to hide persistent difficulties of cash flow. It is reserved for companies that have a normal operating status. Indeed, if a company is in a situation of cessation of payments, its legal representative (director) must file the company's bankruptcy. This leads to the organization of other formalities related to the legal closure of the entity, until its complete deregistration. Failure to carry out specific formalities for the closure of a company in China leads to sanctions. These sanctions affect not only the company which will be blacklisted (blacklisted) but also its managers, Chinese or foreign.

3. Rules and formalities to be respected to request the dormant status

  • The company must, in accordance with the law, discuss and negotiate with its employees the issues related to the management of contractual relations. This includes the status of employment contracts, salary, indemnities and other types of compensation.

  • Managers must submit a formal application for temporary suspension of operations to the relevant Chinese authorities. It is necessary to obtain their formal approval. Therefore, keep in mind that the mere internal decision to suspend is not sufficient to make it effective. Beyond the decision or the announcement to the employees, it is a logic of approval that prevails in a formal request to be presented to the administration.

Then, the authorities officially publish the dormancy status information on the Chinese National Enterprise Credit Info Publicity System. This publicly accessible platform is designed to inform third parties about the status of a company.

 

4. Other consideration and points of attention

Beyond the rules, it is practically also a question of suspending or stopping other contracts. For example:

  • Terminating the office lease agreement and/or the company's registered address
  • Terminate, suspend or transfer recurring contracts with other suppliers
  • Make prior arrangements with banks and social security institutions
  • Finally, inform clients and business partners of the decision to temporarily suspend the activity.

5. Resuming the company activities and invoicing again from China

During the authorized period of business suspension, if a company conduct activities (movement on the bank accounts for example), it is considered to have resumed its business. It can no longer be officially classified as dormant.

It is then necessary to publish the end of its dormant period to third parties. This announcement must also be made in an official manner and the new active status shown on the platform of Social Credit for Enterprises.

6. Choosing the dormant status or close and liquidate a company?

If the resumption of activities is envisaged in the short or medium term, the dormancy mode is a flexible and rather quick option to implement. It also has the advantage of maintaining the confidence of business partners and key employees you wish to keep.

The possibility is kept to take over or sign new contracts with the same Chinese legal entity. This means being able to invoice customers with the same bank details. It is also possible to issue the usual official "fapiao" invoice that they expect for payments in Chinese currency (CNY, RMB).

Otherwise, a company registered in China that wants to stop its activities must stop all its operations and close its accounts.

In this case, a dedicated team for the liquidation of accounts must be nominated. It will be responsible for conducting the dissolution formalities with the local authorities.

Depending on the situation of the company and its past declarative situation, there are two possible regimes of accounting and tax closure. A so-called "simplified" regime and an "ordinary" regime.

After the tax bureau (Chinese tax authorities) has issued a tax clearance to the company, its business license can be terminated with the Chinese Commercial Registry (MSA).

The MSA issues an official letter confirming the company is closed as of a specific date. Additional licenses or certificates issued by other administrations must also be terminated, and at least with the Chinese customs for companies that have an import-export activity.

To legally close a company in territories like Hong Kong or Singapore takes about 1 year. In China, this is at least the time it takes for the ordinary liquidation formalities of a business.

For foreign companies having a China Representative Office, the transformation into a commercial business (100% foreign-owned company or sino-foreign joint venture) is not directly possible. As the supervisory authorities are different, it is necessary to open first the company and then close the representative office. Proceeding in this order allows to transfer the employees contracts to the new entity.


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