Can a Chinese company be put into hibernation?

Is it possible in China to retain a limited liability company with no business activities? And what is the benefit of formally registering that a company is "out of business" (歇业)?

In the first of four videos on ‘how to close a company in China’, our expert Kai Kim will discuss these two questions.

As for the first question, China’s Company Law expressly states that if a company voluntarily suspends its business for a period of six consecutive months or longer, the relevant authority shall revoke the company’s business license. Additionally, the Company Law also indicates that a company whose business license was revoked, shall be dissolved. Now, practically, one may find that it is sufficient if a company continues to be reachable under its registered address and also continues to fulfil its annual reporting and tax declaration obligations in time. But legally speaking, if the annual reports and tax declarations indicate that the company is out of business, there will be a risk that the company at one point is considered to operate abnormally and may ultimately have to be dissolved.

But what is the difference between simply ceasing all business activities, as just described, and actually formally registering that a company is "out of business" (歇业)? The latter is a rather new option that has only been introduced by Chinese regulators in early 2022, apparently to address businesses that are struggling from the Covid prevention measures in China. This new option allows companies to get registered as being “out of business” for up to three years, if they are facing economic difficulties caused by certain circumstances, such as natural disaster, or the pandemic. One of the main benefits is, that a company registered as being “out of business” will be exempted from the obligation to have a physical address, which means that a company can instead register a mail address for the service of legal documents and otherwise temporarily save rental costs. 

On the other hand, such company will not be exempted from its annual reporting and tax declaration obligations. Besides, being registered as “out of business” will not create any extraordinary termination rights for the company, for example, in order to lay off employees or terminate its lease agreement. In essence this means that a company may first have to negotiate all employment relationships and other operative agreements, before it gets registered as being “out of business”.