5 Steps to liquidate a WFOE

By Richard Hoffmann, ECOVIS Beijing China

Going through liquidation is a complex and often long lasting process. Failure to comply with existing regulations might result in severe legal consequences for shareholders.

Most important procedures for WFOE-Liquidation

Reasons for liquidating a WFOE include:

• Terms of operations expire.
• The WFOE has to be dissolved due to financial difficulties
• The company is unable to continue business operations because of external forces such as natural disaster and war
• The WFOE is terminated by the government. Examples include illegal acts or acts damaging the public interest.
• The WFOE is closed due to a merger.
• Any other reasons specified in the Articles of Association of the WFOE occour.

The following are the most important procedures when conducting WFOE-Liquidation.

Step 1:  Notify the relevant authorities

• Relevant authorities must be notified within 7 days once the liquidation process has started and the board decides to close the WFOE.

Step 2: Organise a liquidation committee

• The registration authority must be provided with details of the committee members within 10 days after the committee is set up.
• Formation of the committee must occur 15 days after the WFOE-Liquidation process has started.
• Known creditors have to be notified and have to report their claims within the following 30 days after receipt of the notice.

Responsibilities of liquidation committee include:

• Choose a member of the committee to be the legal representative
• Prepare a balance sheet and detailed list of all assets
• Formulate principles for properties evaluation and computation
• Formulate and implement a liquidation plan
• Pay debts, overdue taxes, outstanding wages and settle unfinished claims
• Legally represent the company in civil lawsuits
• Notify known creditors in written form
• Prepare a liquidation report, subject to approval by the shareholder board

Step 3: Announce publicly that the WOFE will be resolved

• An announcement in at least one provincial newspaper  must be published within 60 days once the liquidation committee is set up.
• Unknown creditors have to report their claims within 45 days as of the public announcement date.

Step 4: Submit liquidation report

• Once all liquidation procedures have been completed by the committee, a liquidation report, including a WOFE dissolution application form and business license have to be submitted to relevant authorities.

Step 5: De- register with relevant authorities and close bank account

• Tax  authorities: De-registration with the local Taxation Bureau and State Administration of Taxation Bureau is required.

• Customs Office: Business license, dissolution application and customs registration certificates must be submitted to the local Customs Office.

• State Administration of Foreign Exchange (SAFE): Deregister with SAFE.

• Industrial and Commercial Administration Bureau:  Dissolution permissions and liquidation reports must be submitted to this authority.

• To close the bank account, the dissolution application, the dissolution permission from the Industrial and Commercial Administration Bureau and other relevant document have to be submitted.

Within 2-4 months the WFOE will receive a “Notice of Cancellation” from  the Tax Bureau (local and national) and the State Administration of Industry and Commerce.

Audit

2 audits are required:  one audit when the termination application is submitted and one audit when all dissolution procedures have been completed.

Did you know?

During a liquidation process a company might still be able to engage in sales and purchases.

Example

Ecovis recently provided legal assistance to a German SME software firm.  During the liquidation process,  a large corporation wanted to purchase software licenses from our client. Not abiding by liquidation related laws can result in severe legal consequences. Therefore Ecovis was consulted for further help on the issue.  According to (legal paragraph)  a firm can engage in sales and purchases as long as the tax certificate is not de registered.  In this case, the client was able to continue selling software licences for a few more months until de-registration at the tax bureau.

Please note that this article only contains the most basic information about the process of WOFE liquidation. For further, more comprehensive information and assistance please contact richard.hoffmann@ecovis.com

Disclaimer: the information provided in this blog is of general nature, purely informative and does not address any individual or certain entity. We always strive to provide the most accurate and timely information but due to the nature of information we cannot guarantee it is accurate as of the date and know any future implications. Without professional advice and consultation the information shall not be used for decision making or be the decisive factor for any actions.