Closing business after COVID-19 outbreak
Closing your business in China is not as easy as stopping operations and simply abandoning your company. Under China law, this can lead to major and personal repercussions including legal sanctions if liquidation procedures are not followed. On the other hand, it is quite understandable that running out of financial resources can be a huge hurdle to formally liquidate the company. This is because liquidation entails payment of remaining taxes, government fees, and employees’ economic compensation.
It is impossible to liquidate a company if such financial obligations are not met. Therefore, employers need to set priority in addressing this problem first before closing business.
Practical methods on continuing or closing your business
1. Keep your business running but save cost.
If you think your business seems to be surviving with less revenue than usual, it might not yet be the right time to give up. Thus, if you find it hard to keep your employees’ paycheck, you may consider negotiating a special working period. This means that you can agree with your employees to work less than the normal working days. Although that would require a pro-rated salary which is not less than the local minimum wage (i.e. Shanghai, net compensation = RMB 2,480).
2. Let your employees run your business.
Your employees or a third party may be interested in taking over your company. If you feel that you cannot carry on, transferring ownership to your employees or an interested party is another option. However, remember that you are not selling the company to them but instead passing it on for free. Selling your company will require you to pay for capital gain taxes (CGT), which may not be practical if you are already lacking financial resources.
3. Sell it.
It may be a good idea to sell your company, however, it is quite obvious that buyers or investors may not be confident to shell out their money during this global economic crisis. But it is worth a try, especially if you think your business has established a brand value that can be profitable for the next owner.
Check out further details of the Tax Implications of Selling Your Company in China
4. Put your company in a sleep mode or become dormant.
Going dormant means keeping your business registration active while stopping all operations and ending labor contracts. The advantage of this is that you can resume your business any time the situation becomes better. While your business is active, you can also avoid paying taxes since you won’t generate revenue. Instead, you will undertake a “zero filing” process where you declare your “profit and loss” figure limited to bank charges and maintenance costs only.
You may find more useful information through our free guide for business continuity in COVID-19 times. You can also book an appointment with our consultants to advise you on the specific advantages or costs of going dormant.
5. Liquidate your company and give away fixed assets.
As discussed in our previous article on company closure, you ought to follow proper procedures on liquidating your company to avoid penalties. This includes paying your employees’ severance pay which could amount from RMB 50,000 to RMB 300,000 depending on the years they have stayed in your company.
If you are concerned about paying your employees’ severance pay, there is another way you can deal with it. Again, you can negotiate with your employees and pay with your company’s fixed assets. Let us just hope that your employees are up to it. Otherwise, you cannot get away from terminating your employees without giving them their lay-off compensation.
Liquidating your company is much more complex than it seems. There are several procedures you should go through and ensure that all taxes and debts are paid. Payments also include your office rental which you can also negotiate with your lessors. According to the new measure implemented by the Chinese government, small business owners renting a state-owned property are exempted from paying the rental cost for the first quarter of the year (3 months). In the case of privately owned property, the government also encouraged lessors to reduce or postpone the payment of rental fees by small and micro enterprises heavily affected by the crisis.
Run or Escape? Do not do this!
You might just leave China and never come back. But if you think that escaping can simply make all your problems go away, you must first be ready to face its grave consequences including being blacklisted and being criminally liable.