Doing business in China, while lucrative, can be a minefield to the uninitiated. This regular column by Deloitte will provide specific information to give businesspeople the tools they need to facilitate this process.

Liquidation is one alternative for a South African investor who decides to withdraw from China. This article focuses on the procedures for a foreign investor to close a representative office (RO) or to dissolve and liquidate a foreign-invested enterprise (FIE), including a wholly foreign-owned enterprise (WFOE), an equity joint venture (EJV) and a legal person cooperative joint venture (CJV), or a foreign-invested partnership (FIP).

Representative office

Since an RO is not a legal entity, an RO will be deregistered rather than liquidated. The main deregistration steps are as follows:

• Deregister with the relevant tax authorities;

• Deregister with the relevant Customs authorities (if the RO was so registered) and the Foreign Exchanges Bureaus;

• Deregister with the relevant Administration of Industry and Commerce (AIC);

• Close all bank accounts; and

• Cancel any other registration certificates with government authorities.

Foreign-invested enterprise

An FIE that has sufficient property to discharge all of its debts can liquidate voluntarily; otherwise, a bankruptcy liquidation is required. However, even in the case of a voluntary liquidation, certain conditions must be satisfied to apply for dissolution, for example, the FIE's term is expiring, poor management or heavy losses resulting from force majeure, such as natural disasters, war, etc. This article focuses only on the procedures for a voluntary liquidation.

» Step 1: Dissolution

The shareholder (for a WFOE) or the board of directors (for a CJV/EJV) of the FIE must pass a resolution to liquidate an FIE. The FIE then must submit a written application for termination, along with the original approval certificate and other required documents to the Ministry of Commerce (MOFCOM) or its local branches to apply for dissolution. The MOFCOM will review the documents and formally approve or disapprove the dissolution. 

» Step 2: Liquidation committee

Once the FIE obtains approval from the MOFCOM, the liquidation process formally starts. The FIE must set up a liquidation committee that has to be registered with the AIC. During the liquidation period, the liquidation committee replaces the FIE's highest authority and succeeds to all of its powers.

The liquidation committee must notify creditors of the FIE within 10 days from the date the committee is established and publish an announcement of the liquidation in a newspaper within 60 days.

Creditors must declare their claims to the liquidation committee within 30 days from the date of receiving a written notification, or for creditors that did not receive a written notification, within 45 days from the date the announcement is published.

» Step 3: Tax deregistration and distribution

Once the FIE's property is disposed of, the FIE must settle all tax issues and apply for tax deregistration with the tax authorities. If the FIE has any outstanding tax issues, these may surface during the deregistration process and will have to be addressed. Tax underpayment must be paid and late payment interest or penalties may be levied.  

The entire liquidation period will be treated as one fiscal year in calculating the liquidation income. EIT will be levied on the liquidation profits at a rate of 25 percent.

Payments must be made in the following order: liquidation expenses, staff wages, social security expenses and statutory compensation, taxes such as liquidation EIT, taxes liabilities from previous years and debt obligations of the FIE. After these liabilities are settled, any remaining assets can be distributed to the shareholders.

» Step 4: Liquidation report 

After completion of the above procedures, the liquidation committee must prepare a liquidation report and submit it to the shareholder or the board of directors for approval. Once approval is obtained, the liquidation committee must submit the report, as well as the FIE's internal approval certificate, to the MOFCOM. Once approval is obtained from the MOFCOM, the liquidation committee can proceed with the subsequent miscellaneous deregistration.

» Step 5: Miscellaneous deregistration

The final stage of the liquidation procedures is as follows:

• Deregister at the AIC;

• Return the original and duplicates of the business license;

• Distribute remaining assets to the shareholders in accordance with the liquidation report;

• Cancel the foreign exchange registration certificate;

• Close the company's bank accounts; and

• Cancel any other registration certificates with government authorities.

Liquidation and deregistration is complete once an announcement is published in a newspaper.

Foreign-invested partnership

The liquidation steps of an FIP generally are similar to the liquidation steps of an FIE, with the exception of the requirement to apply for dissolution approval from MOFCOM because no pre-registration approval from the MOFCOM is necessary to set up an FIP. However, the calculation of gains or losses and their treatment upon liquidation of a partnership is a pending issue and needs to be further addressed in future.

For further information, contact Kevin Ng (kevng@deloitte.com.cn) and Delia Ndlovu (delndlovu@deloitte.co.za)