Is the simplified de-registration a suitable option to close a company in China?

It seems to be a common perception that dissolving and de-registering a company in China, as a foreign investor, is even more complicated and time-consuming than establishing it.  

In the second video on how to close a company in China, our expert Kai Kim will therefore discuss the rather new option of a “simplified de-registration”. He will talk about what makes it simplified and what its main flaw is.

The simplified de-registration was only introduced in 2017. It is generally available for all types of enterprises, for example limited liability companies or partnership enterprises, that have either never engaged in any business activities, or that have already settled all their creditor's rights and debts prior to applying for deregistration. There are also certain scenarios in which a simplified de-registration may be excluded, for example in case of foreign-invested enterprises whose business activities fall into one of the categories listed in the Negative Lists. 

But what makes the simplified de-registration ‘simplified’, compared to, for example, a de-registration following a liquidation?

Firstly, a simplified de-registration is a lot less time-consuming. Any eligible enterprise can make a public announcement on its proposed simplified de-registration online via the national enterprise credit information publicity system for a period of only 20 days. During this period, both the relevant authorities, such as the tax authority, or any other relevant party will have the chance to file an objection against the proposed simplified de-registration. If no such objection was filed, the company may then apply for a simplified de-registration within another 20 days following expiration of the announcement period.

Secondly, the simplified de-registration also requires a lot less application materials.  The two main documents that will have to be presented to the relevant authority are the application form for simplified de-registration and a commitment letter signed by all shareholders. This commitment letter, however, could also be seen as the biggest flaw of the simplified de-registration.  Since no liquidation report or similar has to be provided, the shareholders need to confirm in the commitment letter that they have fully completed the liquidation of the company and that there are no outstanding taxes, expenses, salaries etc. If this statement later turns out to be false, the competent authority could theoretically revoke the de-registration and bring the enterprise back into existence. Besides, the enterprise may then be subject to civil lawsuits and the shareholder themselves may even be subject to criminal liability.

Therefore, while being a lot less complicated and time-consuming, the simplified de-registration may only be a suitable option for enterprises that have never commenced business activities, or that have already fully wound down their operations a while ago.