Co-blogger Steve Dickinson recently did a two part series on how to close down a WFOE in China. In Part 1, he discussed what you need to do to close a China WFOE properly. In part 2, Closing Down a China WFOE: You Can Run But You Can’t Hide, he discussed the repercussions of failing to properly shut down a WFOE.
It being the end of the year and China’s economy on a pronounced downswing, those two posts have led to our China lawyers receiving a bunch of calls/emails from foreign companies wanting help in closing down their WFOEs. Some of these companies inquired about our ability to help get them closed down by year-end, which is impossible. With those who were just not certain that a full closure would make sense we discussed another option: putting your China WFOE into “hibernation.”
This hibernation involves essentially reducing your WFOE to its bare minimum. This basically involves your WFOE stop receiving any revenue and properly terminating all of its employees. Your 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 low as possible.
This hibernation will require you continue filing all required tax returns and your required annual reports with China’s Administration of Industry and Commerce (AIC). But because your WFOE is doing almost nothing, your tax returns will become relatively easy. You will also need to maintain a company bank account and some sort of physical address (the actual physical location required varies by city). You can move to a less expensive address, but that new address will require government approval.
We have helped to put a number of WFOEs into hibernation, but whenever we do so we always make clear this should not be considered a permanent situation, for two 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 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 years of virtually no activity, the WFOE will start getting shut-down threats and at some point that will really happen.
But it is an alternative to shutting down a WFOE and it sometimes does makes sense.