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How To Shut Down Or Sell Your China WFOE

Posted in China Business, Legal News

As China’s economy continues to contract, our China lawyers are getting an increasing number of inquiries from companies seeking to sell their China WFOEs. In fact, we are aware of the following currently on the market:

  • A Shanghai consulting WFOE
  • A Beijing consulting WFOE
  • A Dalian manufacturing WFOE

Back in May, in Buying And Selling China WFOE Shell Companies. Not In My Lifetime? we wrote about the difficulties inherent in selling/buying a China WFOE:

The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone who is interested in doing IT outsourcing in that second tier city. Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city, and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure that it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE is going to be safer and probably equally as fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.

In WFOE Shell Company? You’re Kidding! The China Business Hand Blog nicely sets out how difficult it can be to sell a China WFOE, and this from someone who actually did it!

The China Business Hand blogger, Steve Barru, formed a WFOE in China in 1993 but when he took a job in 2005 he sought to get out from under that WFOE. As he puts it, he “could close the business and walk away or try to sell it, [but] …. it turned out that neither option was simple or straightforward.”

At first Barru thought that closing it down would be easy, but it being China, he was wrong about that:

Closing down the business and moving on seemed the easiest way out. Until I discovered that terminating a WFOE license involved getting approval to do so from the long list of government agencies that had approved the license in the first place. To make matters worse, shuttering the business would cost me around $2,000 in fees of one kind or another.

If I had been leaving China altogether in 2005, I would have settled up with my two employees, gone to Hong Kong to convert the company’s remaining Chinese funds to US dollars, and gotten on a plane home, letting Chinese government officials sort out what to do with an abandoned WFOE. Alas, my new job was in Beijing, so this was not an option.

I went to the primary licensing authority, the Bureau of Industry and Commerce, to ask if there was a formal procedure of some kind to make the company inactive (aka: a shell company). Nope. As long as the company existed, I would have to file monthly tax reports, complete the statutory annual audit and license renewal procedures, and meet all of the many reporting requirements of other agencies. The fact that the company would not be engaged in any business activity made no difference whatsoever.

It being so difficult and expensive to shut down his WFOE, Barru then sought to sell it, which too proved difficult:

Selling the company, even for next to nothing, quickly moved to the head of the line. But transferring the business license and my legal person status to the wannabe new owner involved far more than filling out a couple of forms.

It was the buyer who had to jump through the bureaucratic hoops. For all intents and purposes he went through the same process one goes through to establish a WFOE. With one key difference – he did not have to invest new capital in the company. The original US $70,000 in registered capital (that I had put in and had later managed, for the most part, to take out) was all that was required. Since registered capital for a WFOE had increased to US $200k by 2005, there were demands for additional investment, but rather convoluted negotiations eventually got around this obstacle. Fortunately, the buyer was located in Nanjing. The need to move the WFOE to a new locale would have been a deal breaker.

Eventually, after several months of discussions and chopping forms, all the questions about registered capital, business scope of the company, the good character of the new owner, and the license transfer had been answered and the sale was complete. The price probably covered my express mailing costs and bought me a couple of dinners. But I was out from under what had become an enormous, very time consuming headache.

As Barru so accurately observes, forming and running and even closing a business in China is going to require you to get up close and personal with your local bureaucrats:

The fact is, when you are doing business in China, the local government where you operate is your de facto partner. Chinese bureaucrats were involved in every aspect of my business over the years, sometimes in reasonable ways but on occasion as meddlesome pests sticking their noses into strictly business decisions. Even the end of my days as a WFOE owner involved getting government officials to, in effect, give me permission to let my business go.

The same holds true today, though just recently there have been some efforts in China to make WFOE formation easier, but so far we have yet to see it.

  • David Oliver

    While acquiring an existing WFOE sounds like it has a lot of pitfalls would the process be easier if it was owned by a HK/ offshore entity, and the transaction took place at the parent company level? Or do the Chinese authorities still need to be involved?

    I heard that this week a new regulation came out stating that annual inspections will no longer be required, although what this means in reality is not clear.