Options Available when Restructuring a China Business

July 14, 2015 Posted by China Briefing Reading Time: 5 minutes

This article discusses two of the four options for restructuring as mentioned in our June 2015 magazine “How to Restructure an Underperforming Business in China“. For more information, please refer to the magazine.

By Dezan Shira & Associates
Beijing, Shanghai and Shenzhen Offices

Option 1: Reduction of operations

Tax filing requirements

According to relevant laws and practices, foreign invested enterprises (FIEs) will need to file tax returns (monthly, quarterly and annually) with the tax bureau, even if no business activities are involved and only a few personnel are employed. The FIE must also structure its financial statements and the calculation of miscellaneous expenses (e.g. bank interest/charges, rent, office expenses, etc.) to maintain compliance with the Chinese accounting regulations.

Annual inspection/annual report with the AIC

Before March 1st, 2014, FIEs were required to go through annual inspections and update their business licenses to ensure basic compliance. However, as of March 1st, 2014, this has been replaced by an annual report submission. If the annual report is not submitted as required, the FIE shall be listed in the Directory of Enterprises with Abnormal Operations. If listed FIEs fail to publish their annual report after three full years, they will be recorded in the Directory of Enterprises with Serious Non-compliance, otherwise known as the ‘Blacklist’, which will lead to a higher level of regulatory scrutiny as well as future limitations on their ability to conduct business in China.

Maintaining proper office lease

Generally speaking, to maintain business continuity and avoid revocation of the business license, FIEs intending to go ‘dormant’ are required to have a qualified office space and pay rent. An FIE may wish to move into a less expensive office space to satisfy these basic compliance requirements. It usually takes 1-2 months to update the address at various government authorities and amend the business license. Some properties (e.g. residential properties or a partitioned space within a large office) may not be acceptable for office registration. It’s therefore advisable to ensure that the new office satisfies the corporate registration requirements before signing the lease agreement.

Maintaining corporate bank account

A corporate bank account would have to be maintained to support the FIE’s basic operations (e.g. rent, accounting, compliance expenses and other office overheads). Any change of the corporate bank account should be recorded and filed with the local tax bureau. In addition, the account balance must be reviewed and verified during the annual audit. Without a proper bank account, the FIE may not be able to complete the annual audit.

Risk involved when reducing a WFOE’s operations

Technically speaking, the WFOE is a profit-making structure. The tax bureau will therefore expect the WFOE to make money; the business license may be revoked if the company is not profitable for several years. The WFOE may be exposed to a higher risk of regulatory scrutiny by the tax bureau if it reports losses for three consecutive years.

Option 2: Conversion

The practice of “converting” an RO to a WFOE is in fact a misnomer – de-registering an RO and establishing a new WFOE are two separate procedures. As an RO is not a legal personality, the term de-registration is used instead of liquidation, though the two processes share many similarities.

The procedures involved in converting an RO

An RO de-registration begins at the tax bureau (for which the RO must conduct an audit and clear tax liabilities) and proceeds to all other relevant authorities. It can take six months to more than two years to complete. More details are shown below. Establishment of the new WFOE and the RO de-registration can be done simultaneously. However, the WFOE incorporation process should likely be started before the RO de-registration process begins, as the WFOE will need to have a business license and bank account in order to have employees from the RO transferred to the WFOE.

The WFOE establishment process will take three to five months and further involves registering with all government bureaus.

This article is an excerpt from the June 2015 issue of China Briefing Magazine, titled “How to Restructure an Underperforming Business in China“. In this issue of China Briefing, we explore the options that are available to foreign firms looking to restructure or close their operations in China. We begin with an overview of what restructuring an unprofitable business in China might entail, and then take an in-depth look at the way in which a foreign company can go about the restructuring process. Finally, we highlight some of the key HR concerns associated with restructuring a China business.

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