4 Steps to liquidate a wholly foreign owned enterprise

Going through liquidation is a complex and often long lasting process. Failure to comply with existing regulations might result in severe legal consequences for shareholders. These are the most important steps to consider when closing a wholly foreign owned enterprise.

Reasons for liquidating a WFOE include:

• Terms of operations expire.
• The WFOE has to be dissolved due to financial difficulties.
• The company is unable to continue business operations because of external forces such as natural disaster and war.
• The WFOE is terminated by the government. Examples include illegal acts or acts damaging the public interest.
• The WFOE is closed due to a merger.
• Any other reasons specified in the Articles of Association of the WFOE occur.

The following are the most important procedures when liquidating a WFOE:

STEP 1: NOTIFY THE RELEVANT AUTHORITIES

• The shareholders as well as the board of directors, or executive director if only one is appointed, need to decide together to close the WFOE and inform relevant authorities once the liquidation process has started.

STEP 2: ORGANIZE A LIQUIDATION GROUP

• The registration authority must be provided with details of the liquidation group members after the group is set up.
• Shareholders or a representative thereof need to be part of the liquidation group
• Known creditors have to be notified and have to report their claims within the following 30 days after receipt of the notice.

Responsibilities of liquidation group include:

• The liquidation group will be the legal representative of the WFOE
• Preparing a balance sheet and detailed list of all assets
• Formulating principles for properties evaluation and computation
• Formulating and implementing a liquidation plan
• Paying debts, overdue taxes, outstanding wages and settling unfinished claims
• Legally representing the company in civil lawsuits

• Notifying known creditors in written form
• Preparing a liquidation report, subject to approval by the shareholder board

STEP 3: SUBMIT THE LIQUIDATION REPORT

• Once all liquidation procedures have been completed by the committee, a liquidation report, including the WOFE dissolution application form and the business license have to be submitted to relevant authorities.

 STEP 4: DEREGISTER WITH RELEVANT AUTHORITIES AND CLOSE THE BANK ACCOUNT

• Tax authorities: The deregistration with the local Taxation Bureau and State Administration of Taxation Bureau is required. For this step, a final tax audit needs to take place, in order to guarantee that all taxes are lawfully settled.
• Customs Office: Business license, dissolution application and customs registration certificates must be submitted to the local Customs Office.
• State Administration of Foreign Exchange (SAFE): Deregister with SAFE or let the deregistration be handled by an authorized bank.
• Industrial and Commercial Administration Bureau:  Dissolution permissions and liquidation reports must be submitted to this authority.
• Other agencies: There might be other agencies where a deregistration is necessary, for example agencies, which are specific to the registered business scope of the WFOE, such as the Administration of Quality Supervision and Quarantine (AQSIQ) for food importing enterprises.
• Bank account: To close the bank account, the dissolution application, the dissolution permission from the Administration of Industry and Commerce (AIC) and other relevant documents have to be submitted.
• Company stamps: The official destruction of all remaining company stamps by the relevant authorities
• Audit & report: A liquidation audit as well as a liquidation report are needed for deregistering with most agencies

DID YOU KNOW?

During a liquidation process a company might still be able to engage in sales and purchases.

EXAMPLE:

ECOVIS provided legal assistance to a German SME software firm. During the liquidation process, a large corporation wanted to purchase software licenses from our client. Not abiding by liquidation related laws can result in severe legal consequences. Therefore ECOVIS was consulted for further help on the issue. According to regulations a firm can engage in sales and purchases as long as the tax certificate is not de registered. In this case, the client was able to continue selling software licenses for a few more months until the final deregistration at the tax bureau. 

Please note that this article only contains the most basic information about the process of WOFE liquidation. For further, more comprehensive information and assistance please contact richard.hoffmann@ecovis.com