Company Liquidation: A comprehensive guide on how to proceed [4/4]

By Richard Hoffmann and Michelle Yan, ECOVIS Beijing

Doing business will always have its success and failures. However, in the case where it really comes down to needing to liquidate your company, there are formal steps in which you should closely follow. The process is long, involving multiple application, de-registration and negotiations. We can help you with the proper completion of application forms, deregistering of certificates and answering & explaining to the tax authorities your actual situation.

In the final part of the four-part company liquidation series, we finally round up the loose ties and ends by deregistering. By the end of this section, you would have fully liquidated and closed down your company so that it is no longer an existing legal entity anymore.

Third Phase

1. Post-liquidation Audit

After the settlement of assets and the distribution of proceeds, a second audit report will need to be done. This audit process would be similar to the first audit except with a focus on the balance sheet regarding the liquidation. Where the first audit was a plan of the liquidation process, this audit will be verifying the actual transactions during liquidation. This should include liquidation expenses, revenue from the assets and the distribution of proceeds.

2. Deregistration

Once the post-liquidation audit report has completed, the deregistration processes can then commence. Certificate approval, business licenses, tax registration certificate, foreign exchange certificates, financial certificates, statistical certificates will all need to be filed for deregistration. This will involve various authorities such as the Ministry of Commerce, the State Administration of Industry and Commerce, the customs administration, the tax authorities and the State Administration of Foreign Exchange. Figure 3 below shows the summary of necessary deregistration authorities.

Figure 3: Summary of Deregistration Authorities

One of the key challenges a company will face during the process is the settling of outstanding and new taxes with the tax authority. The sources of possible taxes vary between each company depending on their situation and trade.

In terms of outstanding taxes, a company may sudden face a spike in outstanding taxes due to its choice to liquidate. Companies who were originally enjoying the fruits of tax holiday or discounted taxes sometimes may end up needing to pay the difference. The reasoning for this is because in practice these tax reductions are given under the assumption that the companies will be operating for the whole 10-year term.

In terms of new taxes, a range of taxes can emerge during the liquidation of assets. Where there is revenue, there often comes tax. The taxes that may arise include: asset tax, import VAT and custom duty, turnover tax, individual income tax & corporate income tax.

3. Final Distribution of Funds and Closing down of bank accounts

To tie up loose ends, the remaining funds after deregistration should be then distributed to the shareholders and all company bank accounts should be closed down.

Main Obstacle

Throughout the liquidation process, with careful financial planning and truthful reporting, everything can potentially run very smoothly. However, whilst liquidating, there is the risk of a miscalculation or lack of receivables that may ultimately result in the company going bankrupt.

Most companies enter liquidation under the impression that their assets and receivables are able to cover both the costs of liquidation as well as its debts. However, due to the wide range of variables that can alter the company’s ability to pay, i.e. receiving less for assets or increase of taxes paid, bankruptcy may occur. Just one unsatisfied creditor is enough to file for the company’s bankruptcy.

In the case of a bankruptcy, the liquidation process and the company is then placed in the hands of court. An independent administrator will then takeover the process and be in charge of further action.

Consequences of non duly liquidation

Non-duly liquidation can come from a spectrum of different activities. These include: bad faith asset disposal, failure to file Liquidation Audit Report, failure to properly notify creditors of the liquidation proceedings, as well as unpaid taxes, debts, salaries or social insurance contributions. The consequences depend on the action, but can generally result in fines, imprisonment and asset confiscation.

However, it’s not just about immediate penalties. Non-duly liquidation can become a barrier for future investments in China. In fact, to prevent foreigners just leaving China and their unfinished business behind, the Chinese government has prohibited individuals that face civil lawsuits, criminal charges or have unfulfilled employee payment obligations to leave the country. This means that fleeing individuals can face the probability of a travel restriction that may lead to freezing of assets and a no-departure restraining order.

Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. Moreover, Ecovis was awarded the No. 1 auditing firm for mid-sized companies in Germany in 2013.If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com