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on Monday, 01 October 2018
in Business in China

The Challenges of WOFE Deregistration

Case Study 1

Company X was training individuals as support workers for other companies. The Chinese government invested a lot of money into the company, giving them grants and loans, as an incentive to set up in China. The process to recruit and train the support workers was time-consuming and expensive, eventually after several years the company decided to shut down after not seeing enough returns for the time it had invested.

The  Core Challenges

The process of WOFE (Wholly-owned Foreign Enterprise) deregistration is long, it ranges from 6 months to approximately 2 years. A longer process incurs greater expenses, as the WOFE needs to remain active for the entire deregistration. There are a number of risks of deregistration, the most significant is that the owner/shareholder could end up on the ‘black list’ due to a simple clerical mistake that may cause a snowball effect.

The two-main departments involved in the process of WOFE deregistration are the Financial and HR. 

Firstly, looking at the Financial aspect, even before the start of the deregistration, there are steps a company needs to take. Before deregistering, an enterprise should close all their outstanding contracts and try to collect all their account receivables. The company will then need to make an announcement in the newspaper stating that they are closing. This gives those who have outstanding debts against the company the opportunity to claim them, if they do not do so within 45 days, they will lose their chance to claim. The company then needs to clear their taxes; this includes VAT, CIT and smaller tax like Stamp Duty.

The Tax authority is the main governmental institution that will be involved with the deregistration process. A company wishing to liquidate will need to clear their tax and submit the Tax Clearance Declaration Report. The WOFE must provide the tax authority: all the bookkeeping from at least the last 3 years prior to deregistering and the financial Liquidation Audit Report from the day that the entity began the deregistration process. The difficulty with the Liquidation Audit Report, is that by the end of the process, the owner’s equity and cash should be the only items left on the balance sheet, the rest should be clean. The company will then receive a “notice of cancellation of tax registration”. The submissions need to be made physically and all documentation should be in Chinese. If the cancelation goes smoothly, it will take minimum of 3 months working alongside a CPA. If any complications occur, the company will most likely have to pay fines. Once the financial aspect has been completed, the company needs to deregister their Business licence through the Administrator of Industrial Commerce (AIC), which is a much simpler process compared to the tax declaration. Finally, they need to close their bank account.

A further challenge is that those that invested in the company want a refund of their money, whether it was a loan or grant depending on the terms agreed upon.

The overall cost of deregistering when using a third party to help complete the process, starts from around 60,000 RMB. While some may wish to go through the process alone, in the long run it may be more expensive, as there is a greater risk of missing documents, which may lead to more fines, thus creating more problems.

The HR department is another significant department when deregistering a company. During this process, HR’s main focus will be on terminating employees. When terminating employees in China, there are very strict but straightforward Labour Laws to follow. As per the Labour Contract law, if a company wishes to terminate at least 20 employees or 10% or more of their total employee numbers, then they will need to report to the local labour department. In doing so, they will need to report how many employees they plan to lay off and go over the compensation measures. The government procedure can be time consuming and more complicated, as the law stands on the side of the employees. It may be better to get a lawyer involved or someone with extensive HR knowledge. Where employees have signed a clear contract with their employees, keeping it up to date and have an equal policy for compensation and termination among their employees, the process should be significantly easier.

Solution

PTL managed the entire process of the shutdown making sure that all documents were provided in a timely manner, using the official process. We also worked closely with the government to quickly resolve any issues that arose. With deregistering a WOFE there are many stages that are sometimes unclear, which greatly contrasts the ease of setting up a WOFE that has a very clear, straightforward process.

Financial Solutions

PTL helped prepare the Liquidation Audit Report, it also reviewed and corrected the accounting reports, before the start of the deregistration to complete all the closings. We also helped the company sell their assets. PLT communicated with the Tax authorities, providing all financial documents and information.

HR Solutions

Prior to a WOFE deregistration PTL reviews contracts and gives suggestions to clients as to what they should do with regards to employment and how such contracts should be made. In this deregistration case, PTL calculated the employee compensations and terminated some of the employees contracts.

Our Advice

  • Don’t rush into an entity, doing business in China successfully does not require this!
  • Pay close attention to the terms and conditions of contracts from the government for loans or grants.  
  • Closely audit your HR and Financial operations, from the very beginning.
  • If you want to deregister your WOFE avoid initiating the process between Jan-April, we advise you start from May.
  • If you plan on liquidating your company, start mentally preparing your workers in advance to ease the process. Share with them the policy, process and compensation.
  • With regards to the law, contracts always prevail in China. 
  • It may be cheaper to set up a company in a remote location, but bear in mind, that it may be more difficult to close it there.

Conclusion

Many companies expect quick returns from the Chinese market, however, the reality is that it is a long process that requires patience and dedication. Influence of incentives in China may be tricky in some cases, leaving those in a difficult situation when they are trying to liquidate their entity. Lots of companies are lured into setting up a WOFE, when they don’t understand the full implications of having an entity.

This is one of the reasons the unique PTL incubation model is more favourable, the company can be shut down within a month and there is no liability or risks in china for the company at all, these are all held by PTL.

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