Every few months our China lawyers get a call from someone wanting to shut down their China WFOE (Wholly Owned Foreign Entity). These calls usually come from companies that 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 operation’s lack of profitability or lack of cost-effectiveness. Surprisingly often, they say 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 your WFOE in China is easy. Essentially, all you need do is get all of your people far away from China and then just let your company wither.
What you do not do is go to China and tell anyone that you plan to shut down your company and leave, because that can lead to trouble:
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 previously wrote about the risk of being taken hostage in China, We Have A Problem. A Mostly True Story.
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 dissolve the company. This is done by paying all existing debts, especially all debts to employees and to the Chinese government. Doing this correctly (and complying with China’s myriad labor laws) involves going through a long drawn out government audit that typically takes at least a year. The advantage to shutting down this way is that you satisfy the government and both your company and its employees can freely return to China and legally open a new business. Without a formal dissolution, there is a good chance neither your company nor any of its higher level employees of whom the Chinese government is aware will ever be able to return to China problem-free.
2. File 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 but it has yet to make sense for any of our clients 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 company doing the following, at minimum:
a. Terminating all Chinese employees with an agreed upon severance package and a signed release of any claims they might have against the company. It is critical this be done pursuant to China’s employment laws.
b. Either buying out any lease(s) or letting any existing lease(s) expire. We have generally found Chinese landlords not terribly willing to give decent discounts for one time lease termination payments.
c. Pay 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 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 Chinese government will start imputing higher taxes or demand a formal shutdown. The big benefit of this petering out method is that it is fairly cheap and if you are uncertain as to whether to stay in China or go, it will buy time while clearing off your books so that any subsequent formal shutdown should be a bit quicker and easier.
The beauty of this option is that if you do eventually decide to revive your China operations, you have an existing company in place for doing so.
What do you think?
