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Shutting Down A China Rep Office Without Going To Jail.

Posted in Legal News

The absolute strangest thing just happened. I was about to write a blog post on what it takes to shut down a China business, but I wanted to read my emails first. In my emails was the following email, which I have not changed even one bit:

I’ve just been browsing your Chinalawblog which is an invaluable source. I just wish I found it 5 years ago!

I have a slight conundrum which I would respect your opinion on.

We are a UK based LLP with a RO in China (under my girlfriend’s name who is Chinese). Unfortunately, due to the recent economic downturn, we have no choice but to liquidate the UK Company.

Naturally, we are choosing not to renew our office contract but have been asked to pay some charges: Service charge (that old classic), annual tax audit and tax on the rent.

What is my position regarding these payments if the UK company ceases to exist? My girlfriend has spoken to a lawyer who has told her she will be responsible for these payments as the RO was in her name.

Any advice is much appreciated.

Please feel free to post this on the blog.

Closing down a China Rep Office is not terribly difficult (it is easier than closing down a WFOE), but it must be handled correctly and a failure to do so can lead to all sorts of issues for the home company and for the person who acts as the designated Chief Representative, including jail.

The first thing we typically do when closing down a Rep Office is notify the local tax bureau, which then performs a closing audit on the office.  This audit will reveal any overdue taxes or other issues needing resolution before the dissolving of the Rep Office can occur. The local tax bureau typically will want to see, at minimum all of the Rep Office tax returns since its inception, all tax vouchers, and all tax registration certificates. It also will require you retain a local accountant to perform a tax audit, which audit must in turn be approved by the local tax bureau. 

The home company is responsible for any remaining liabilities (both tax or otherwise) of the Rep Office. In all instances that we have handled for our clients, the home office eventually paid all Rep Office debts. On a couple of occasions we have been contacted by people being held at police stations for unpaid debts of the Rep Office, but we have never been hired in that sort of situation.  I say this because we have never researched whether the police are really entitled to hold someone for the unpaid debts of a Rep Office, but I think the important point here is that they do and unless you want to hire lawyers to try to recite the law chapter and verse in an attempt to get them out, the best thing to do is usually just to pay.  

Again though, because my firm has only worked with those companies that have shut down their Rep Office pursuant to law, I would love to hear from others as to what really can happen when the law is not followed. Stories please!

  • Armand

    Dan the local tax bureau doesn’t do audits. You have to hire a licensed China firm to do that for you, who then submit it to the tax bureau for checking and approval. Your clients g/f will need to find a local audit firm to do it for her.

  • http://Www.wpiinc.com Cliff Bredenberg

    We have had a WOFE in China for about three years. Recent staff changes made us consider moving our office to a different city. Yet another vast difference between the west and China; apparently you can’t just move a WFOE. Our outside accounting firm explained that we would have to formally close the existing office,and incur all of the audits and exit taxes you mention, and then go thru the process of forming another brand new WFOE in the target destination with a new capital commitment etc etc. It also appears that different municipalities have different levels of bureaurocracy that are imposed.. This related to how bad they want to keep business from moving out on a whim, such as staff change. We are staying put.

  • http://www.chinalawblog.com Dan

    Armand,
    You are correct and I was unclear. The Rep Office itself has to do the tax audit, but that (along with everything else) is audited by the local tax bureau. In the end, the Tax Bureau audits pretty much everything and that was what I was trying to convey. To make things clearer, however, I have added a sentence to make clear that the Rep Office itself has to conduct the initial audit.

  • http://www.chinalawblog.com Dan

    @Cliff Bredenberg
    In most instances like what you describe, the best solution is neither to shut down the first WFOE and form a second WFOE nor is it to just stay put. The best solution for what you have described is usually to start a branch office in the second city, which is actually a surprisingly easy and inexpensive process. It also is possible to relocate your WFOE without having to shut it down, though that process can be so difficult that just opening a branch is often easier.

  • outcast

    Out of curiousity, under what circumstances would an improper shutdown incur jail time?

  • Armand

    @Cliff Bredenberg – you can relocate a WFOE, you don’t have to liquidate one then set up another. You need legal counsel used to dealing with Government officials in your location to lay down the law to them. You’ll need to clear up taxes and there are issues with labor etc, but there’s nothing to prevent you relocating. There’s plenty of M&A deals that have required the moving of and merging of factories to different parts of China (and don’t forget that Foxconn just relocated their factory as an example). You just need a good firm familar with FDI work and close to your location who are used to the procedures and in dealing with the local government who want you to stay put.

  • http://www.chinalawblog.com Dan

    outcast,
    The local police have been known to hold in jail those deemed responsible for the debts of a company. My firm has dealt with this issue maybe a half dozen times, but I cannot remember if any of them involved failing to pay for the taxes/debts of a rep office. In fact, just this month, we were involved in a situation where an employee of our client was jailed and not released until he paid an alleged company debt. This sort of thing is not legal, but it happens and usually the fastest best way to deal with it is not to point out the legalities of the situation but to try to resolve the alleged debt issues.
    We had one situation of a guy who had his passport detained by the police in a pretty small Chinese city over a debt of around $60,000 and he did not hire my firm nor did he pay the debt and every few weeks he would write me to say he was still there. His plan was to wait everyone out. I do not know what ended up happening (this was at least a year ago) but I’m guessing he eventually worked out a deal. I think people would like to believe this sort of thing no longer happens in China, but it does, and not just in the remote regions either.

  • Armand

    The headline is a bit OTT, I also don’t know anyone who has gone to jail for not paying taxes or skipping an audit, a lot of RO legally responsible people as foreigners (the term Dan should actually be using when describing Chief Representative) just leave China and let employees and tax man hang. The difference in the case mentioned is that it appears the LRP is Chinese, so its more serious for her. However any case in China where a debt is more than RMB10,000 can be filed as a criminal case and is punishable by up to three years imprisonment.
    The advice given to the girl by her lawyer is correct. She needs to have a good chat with her b/f.

  • Chris

    It sounds as if the Rep Office needing to be shut down is small, hence the cost of audit & taxes owed is likely to be minimal. Regardless of the state of play of the UK company, pay the Rep Office taxes and shut it down cleanly. Otherwise all associated with the Rep Office may face further future problems.
    I not with Rep Office shutdowns the Tax Office is particularly focused on expat staff arrangements, salary and benefits, and ensuring full income tax, plus the associated Rep Office mark up taxes are paid. Measures they will take include working closely with the Tax Office of the HQ company country under information sharing arrangements. If you are going to shut down a Rep Office ensure all staff income taxes have been paid.

  • George Gao

    I set up a Rep office in shanghai for a MO company and shut it down due to internal fight of Board of Directors. Office lease covered three years and early pull out incurred NO return of deposit. My boss (A New Yorker) moved all office valuable items including equipment and files overnight and relocated in another city with his girlfriend.

  • alison

    We have a wfoe which was run by a local for us. we had to mothball the company due to a change in wfoe rules (we couldnt become a manufacturing wfoe). we now wish to close the business down and repatriate our money. There are no debts and all taxes have been paid – we are having difficulty with the man running the company for us and are being told that we cannot repatriate the money for 10 years! we are also concerned that our money may have been used fraudulently – we do not wish to spend a fortune trying to get the cash back – any ideas please for a simple closure or sale of the wfoe??

  • Mike Kelly

    Having a business in the USA that is forced to close and file a bankruptcy due to economic reasons, also having a Representative Office in mainland China, what are the requirements in closing the china representative office?

  • Florence

    We are closing down the rep office of our company. We are asked to provide a 3 year audit (on top of all the yearly audits which have been done so far), and told that it costs 10,000 rmb. Is this true or are we being taken for a ride?