Every few months we get a call from someone wanting to shut down their China WOFE (Wholly Owned Foreign Entity a/k/a WFOE or Wholly Foreign Owned Enterprise). Interestingly, these calls usually come from companies who have been in China for a long time (average time, maybe ten years). Their reasons for seeking to leave China are all over the map but usually involve a decision relating to their China operations lack of profitability or lack of cost-effectiveness. Surprisingly often, they say that they might return to China in three to five years. And that is the problem.
If both you (and I will define that later in this post) and your company will never ever again be returning to China AND if both you and every other foreigner in your company will never again be returning to China, closing down is easy. Essentially, just close down.
A friend of mine who does business in China found himself not being allowed to go out of the country because of a lawsuit filed against him by a Chinese company. They are saying that he owes them money while all the while they have been cheating him (cutting corners on products, using low quality materials instead of the good quality materials agreed upon, late shipments which causes cancellation of orders). He was not notified beforehand of this lawsuit against him before he came and only found out about it when he
was about to return home and was stopped at the border crossing. Is there a way he can be allowed to leave China while the case is pending?
We have written about this same thing numerous other times:
- China Hostage Situation. Now IS A Good Time To Pay Your Debts
- China, We Have A Problem. A Mostly True Story.
- How Not To Get Kidnapped In China
- Shutting Down A China Rep Office Without Going To Jail
If you have any foreigners in China and you want to shut down your business, either get all of those foreigners out and have them never again return, or shut down your business correctly.
How then does one shut down a Chinese business correctly?
There are essentially three ways.
1. Formally dissolving the company. This is done by paying all existing debts, including especially all debts to employees and to the government. Doing this correctly (and complying with China’s myriad labor laws) involves going through a long drawn out government audit and typically takes at least a year and is far more complicated and time consuming than you would think. The advantage to shutting down this way, however, is that in the end you satisfy the government and both your company and its employees could return to China the next day (or whenever) and legally open a new business. Without a formal dissolution, there is a good chance that neither your company, nor any of its employees of whom the Chinese government is aware, will be able to return to China problem-free.
2. Filing for bankruptcy liquidation. if your company does not have the funds/assets to pay its debts, it may liquidate under China’s bankruptcy laws. We have many times looked at this option for our clients and many times we have been of the view that this option would have been a legally viable one. However, none of our clients have yet to pursue this option because in every instance it was determined that it would be cheaper and easier to go through a formal dissolution per the above. I am not even aware of a foreign owned Chinese company that has pursued bankruptcy in China. Are you?
3. An informal petering out. Due to the time and costs involved in the two scenarios mapped out above, we have “created” a third option for our clients. This option makes the most sense for those companies that really do think they will be back in China within the next few years. This option involves the compamy doing the following, at minimum:
- Terminating all Chinese employees with an agreed upon severance package and a signed release of any and all claims they might have against the company. It is critical that this be done pursuant to China’s labor laws.
- Either buying out any lease(s) or letting any existing lease(s) expire. We have generally found that Chinese landlords are not terribly willing to give decent discounts for one time lease termination payments.
- Paying all government taxes, pensions, etc. and remaining current on the same.
After completing the above, the WOFE still exists, but is essentially dormant. At this point, it must still pay its taxes (which should be minimal) and still comply with any and all government reporting requirements.This is at best a temporary solution because doing this does not stop the cost meter from running entirely and there will almost certainly come a point where the government will either start imputing higher taxes or demand a formal shutdown. The biggest benefit of this method is that it is fairly cheap and if you really are uncertain as to whether to stay or go, it will buy you time while at the same time, clearing off your books so that any subsequent formal shutdown ought to go just a bit quicker and easier. The beauty of this option is that if you do eventually decide to revive your China operations, there is already an existing company in place by which to do so.
What do you think?