The Ultimate Guide to Closing a Business in China

While tax clearance has been quite time-consuming in the past and could take in the worst case up to 24 moths, it was recently simplified and now takes an average of 2-3 months. In the following, we take a look at the most important steps according to the latest policy guidelines.

The first step for the company is to apply at the tax department for a deregistration. The department will then conduct a pre-inspection of the company’s tax records. If there are any tax matters that were not handled by the company yet, it is crucial to identify them beforehand and to take the initiative to address them, in the best case with the help of an expert. It is better to let the department know any issues before the department lets you know the issues. Therefore, we highly recommend checking if there are any unpaid taxes, since it will give you the opportunity to pay them before filing the liquidation petition and thus you can avoid possible penalties.

The certificate of tax clearance will be issued immediately after the pre-inspection, in case that all information is complete. However, even if some information was missing, the tax department can send the certificate anyways to fasten the process under some circumstances. The company then needs to submit the missing information and documents within a given time limit. The specific requirements for receiving the certificate and submitting missing documents belatedly are:

1. The company has handled almost all tax matters, yet there are some invoices that it has not received yet (including invoices addressed to the company). Given that there are no belated tax payments or fines received, the company can take the initiative to go to the taxation department and ask for tax clearance.
2. The company is not under tax inspection yet and has neither tax arrears nor fines. It also needs to have submitted its VAT invoices and tax-control equipment. In addition, one of the following requirements must be met:
   • The company’s tax credit levels are A and B.
   • Companies with tax credit level M whose holding parent company’s tax credit level is A.
   • Enterprises founded by talents introduced by provincial people’s governments, or industry leaders identified by provincial industry associations and other institutions.
   • Regularly fixed individual industrial and commercial households that are not included in the evaluation of tax credit level.
   • Taxpayers that have not met the requirements for being obligated to pay VAT tax.

If your company does not fulfill the requirements for the faster process of tax clearance, or if you are facing special tax matters such as the reorganization of your company or if you are planning to change the enterprise form, the tax department will send you a Notice of Tax Matters, which needs to be finished before the tax clearance can be processed. The taxation bureau has the right to conduct a tax inspection under special circumstances.

In case of bankruptcy, the administrator can apply at the people’s court to end the bankruptcy procedure and then start with the tax cancellation process. After the application, the taxation department will issue the document for tax clearance immediately.

What do companies have to do to make sure that they pass the pre-inspection and proceed with the tax clearance process without any issues? To make sure that everything will go smoothly for your company’s liquidation, check the following list:

1. Make sure to clear all debts and liabilities to customers, suppliers, banks, and relevant government agencies (such as customs, taxes, social security bureau etc.).
2. Wrap up the discharge of employees and settlement of salaries, personal taxes, and social security payments.
3. Don’t forget to sell all fixed assets and liquidate the inventory.
4. Prepare all accounting information, including audit reports, accounting books and tax records for the last three years.
5. Cancel the taxpayer status and invoice system.
6. Sometimes, the taxation bureau requires a liquidation report. So be prepared to be able to issue one if it is required.
7. In case of foreign-invested enterprises, make sure to pay all retained earnings back to the investors, if there are any. This can be done in the form of dividends, for which an extra form needs to be issued.

Lastly, the share capital must be transferred back to the investor after you completed the tax cancellation, and you must contact your bank in advance to determine and submit the necessary information.

The tax clearance process is considered one of the most detail-oriented and complex business processes in practice. Although the steps of firm liquidation were simplified, companies can still easily get tangled up in the process and overlook certain matters and regulations. Especially foreign companies in China are navigating a complex and unfamiliar policy environment. Therefore, it is crucial to seek the support of an expert who can help you check and analyze all financial and tax records, review your history of tax return reports, and prepare you for the pre-inspection. In that way, you can make sure that everything follows the current regulations. When these important points are checked by an external expert and mistakes that slow down the process are avoided, your firm liquidation will be much speedier and efficient. It is also helpful in case that if any problems occur, you can seek advice and solutions immediately. Seeking help from an expert with local knowledge is also especially helpful since they can negotiate with the officials in charge if there are any issues.

If you have any questions regarding tax, accounting, auditing, or legal advice, please feel free to contact Ecovis Richard Hoffmann in Heidelberg or the ECOVIS Ruide China team. Our teams of legal experts have Ecovis Richard have year-long experience in supporting liquidation processes. We maintain close contact to our clients and make sure that all steps are fulfilled correctly and in accordance with the regulations. Ecovis Richard Hoffmann in Heidelberg also offers supervising services. Check out all you need to know about the role of the supervisor in China in this article. Through years of experience and specific knowledge of the German, international, and Chinese business environment, as well as legal regulations and compliance measures for China, Richard Hoffmann has successfully supported several hundred companies in navigating the complexity of legal, tax and compliance issues in China.