How and Why to Put Your China WFOE into Hibernation

Earlier this year, after a week in which I got more phone calls from companies looking to close down their China WFOEs than I get in a typical year, I came out with How to Close a China WFOE. With China’s economy on a pronounced downswing, my firm’s China lawyers are still receiving many calls/emails from foreign companies wanting help in closing down their WFOEs. Some of these companies are asking about our ability to close down their WFOEs by year-end, which is very likely impossible. With these companies, and with companies that remain uncertain about whether a full closure would make sense, we often discuss another option: putting their China WFOE into “hibernation”.

This hibernation essentially involves reducing your WFOE to its bare minimum. This involves properly terminating all of your WFOE’s employees and winding down your WFOE’s operations to the point that it ceases to receive any revenue. The goal is to keep your WFOE officially operating by complying with all of China’s (and your locality’s) corporate requirements, but reducing your costs as much as possible.

Hibernation requires that you continue filing all required tax returns and annual reports with China’s State Administration for Market Regulation. But because your WFOE is doing almost nothing, your tax returns will become relatively simple. You will also need to maintain a company bank account and some sort of physical address. The actual physical location required varies by city and some cities are far looser than others in terms of what is required. You can move to a less expensive address, but that new address will require government approval, and thus moving seldom makes sense.

Our China lawyers have helped put a number of WFOEs into hibernation, but whenever we do so we always make clear this should not be considered a permanent situation.

We say this for three reasons.

First, it does not make sense to endlessly incur costs with no real benefit beyond delaying the inevitable (shutting down the WFOE). A WFOE hibernation usually only makes sense if you want/need to buy time to come up with more funds or to decide on a long-term plan.

Second, most Chinese cities will not allow a WFOE to remain in hibernation forever. Usually after a couple of years of virtually no activity, the WFOE will start getting shut-down threats from the government and at some point that will really happen.

Third, the Chinese government does not like companies that do not pay what it views as its fair share of taxes and it is not uncommon for them to impute profits and assess taxes on companies with no or virtually no earnings.

But putting your WFOE is an alternative to shutting down a WFOE and it sometimes does makes sense, especially now when so much is uncertain.

If you think this may be a useful interim solution for you as you evaluate your medium-term China plans, please get in touch.