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LEHMAN, LEE & XU
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May 2010
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Deregistration of a Representative Office in China |
There are several reasons a foreign investor may wish to close down
a representative office ("RO"). The foreign investor might
wish to expand their China operations by establishing a new entity such
as a Wholly Foreign-Owned Enterprise, or in the opposite, terminate
its business operation in China. If the parent company of the representative
office declares bankruptcy, it is legally mandated that the representative
office be deregistered. Alternatively, the foreign investor may simply
wish to allow the representative office to expire when it reaches the
normal three year expiration period. Full deregistration of the representative office requires the approval
of the State Administration for Industry and Commerce, tax authorities,
Customs bureau, Quality Control bureau, the bank, as well as other bureaus,
certifying that all deregistration procedures have been completed and
the representative office's liabilities have been cleared. Any outstanding
liabilities of the representative office will be borne by its parent
company (ie the foreign enterprise). Completion of the deregistration
process normally requires three to six months depending on the completeness
of the required documents submitted. The most complicated and time-consuming process is to obtain a Notice
of Tax Certificate Deregistration from the tax bureaus. This process
can be made even more complicated because some local tax bureaus may
have exempted some representative offices from tax filing when these
representative offices were set up in China. However, year later during
the tax deregistration process, the national and local tax bureaus will
take a second look at the tax filings of the representative office and
may make a determination that rep office has not properly filed its
tax returns and has not fully paid its tax liabilities from prior year.
This situation could arise from a number of reasons, including different
legal interpretation of the relevant laws and regulations by different
tax officers, changes of the standard practices of the local tax bureaus
over the years, or intentional misrepresentation by the local government
to the foreign investor in order to induce investment in a given locality.
Also, all statuary documents in setting up the representative office
must be submitted to the relevant authorities before the representative
office is allowed to complete the deregistration procedures. It is common
to find that required documents, such as licenses and registration certificates
cannot be located and are missing. It is therefore recommended that
the representative office conduct a full self-review before proceeding
with the deregistration process in order to identify and rectify any
irregularities prior to the deregistration process. The below summarizes the major legal and tax issues which might arise
in the deregistration of a representative office in China: 1) Certificates issued by the tax authorities, Customs office and banks
which certify that taxes, debts and other related matters have been
cleared should be obtained before officially approval is granted for
deregistration of the representative office. 2) The representative office should apply for the deregistration of
the tax certificates with the original local tax authorities prior to
the cancellation of registration in the State Administration for Industry
and Commerce or other relevant authorities. 3) All the tax documents and payments before proceeding the deregistration
process of the representative office should be submitted to the tax
authorities. 4) A chief representative's Individual Income Tax has to be withheld and settled before he/she departs from China. |
Deregistration of Tax Certificate |
The detailed steps for obtaining tax clearance from the tax authorities
are: Step 1: Apply to the national and local tax bureaus for deregistration. Step 2: Tax clearance for any outstanding tax issues and on-site inspection
by the national and local tax bureaus. Step 3: Formally deregister the Tax Registration Certificates. All relevant
documents must be submitted by the representative office to the national
and local tax bureaus. A Notice of Tax Certificate Deregistration would be issued by the tax
authorities upon all outstanding tax liabilities have been cleared. For deregistration of the tax certificate with the tax authorities, the
individual income tax position of the chief representative should also
be cleared. Article 44 of the Administrative Law of the People's Republic
of China on the Levying and Collection of Taxes, provides that a taxpayer
or its legal representative owing tax in China, is required to settle
all tax liabilities within seven days prior to his or her departure from
China. If the tax is not paid, the tax authorities shall notify the frontier
authorities to prevent the legal representative from leaving China. Some foreign investors may question the necessity of going through such a lengthy and bureaucratic deregistration process. The option of simply letting the representative office's license expire and then quietly exiting China seems tempting. However, failing to properly close a representative office could result in significant fines and the foreign enterprise may be put on a government "black list" and subject to heavier penalties. Not complying with the law and being placed on government watch lists could seriously jeopardize potential future business activities of the foreign enterprise in China. Also, if the foreign investor does not legally deregister the representative office, the foreign investor will be liable for any later actions taken and any debts incurred by former employees claiming to be acting on behalf of the rep office. Finally, the Chinese government has already stated that it intends to prosecute foreign executives and legal representatives who do not properly fulfill their statutory obligations when closing a business in China. Therefore, it is always recommended to properly and legally close a representative office.
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