Case Study: Tax Liquidation in China – including a Step-by-Step-Guide for the Liquidation Process

The tax liquidation process in China is a complicated and sometimes time-consuming effort that can take at least 4-6 months or up to 24 months. The duration depends mainly on the right preparation beforethe actual liquidation process starts. Just as it is important to be well informed ahead of setting up a company in China, it is equally as important to plan ahead and to consider getting professional advice and support when you have decided to liquidate your Chinese legal entity.

ECOVIS Beijing strives to make this process as fast, simple and transparent as possible for its clients. Our team tailors the process steps to each client’s particular situation. Read on to learn more about the liquidation process in general and our application of the process to three very different cases.

Background

Three clients from three different branches and with distinct legal forms got in touch with Ecovis Beijing to conduct a tax liquidation procedure.

Company A is a small-mid-size WFOE manufacturing company, which was established in 2010 and decided to liquidate in April 2017.

Company B is a WFOE for consulting services. Its was established in 2009 and decided to liquidate in July 2017.

company C is a representative office of a foreign company that decided in December 2017 to liquidate.

Here is the general process, when conducting tax liquidation:

tax liquidation

1. Accounts clearance

  • AR/AP or OR/OP clearance: All those accounts should be cleared according to the related accounting rules and regulations;
  • Depreciation/amortization clearance: Those accounts should be stopped, depreciated and amortized;
  • Inventory clearance: The inventory should be sold out or disposed of according to accounting rules and regulations;
  • Payroll payable clearance: payroll for employees should be paid before liquidation;
  • The clearance of short-term/long-term loans.

2. Prepare all related documents

  • The accounting books for the past 3 years;
  • The historical tax declaration records for the past 3 years;
  • General ledger, sub-ledger, financial reports for the past 3 years;
  • The liquidating company should conduct a self-inspection first before submitting the related documents to the tax bureau. If you find any taxes that were missed to pay, this gives you a chance to pay them before submitting the liquidation application, avoiding possible penalty payments.

3. Submit the liquidation application to the tax bureau

  • The liquidating company should declare all tax types related for the liquidation period, e.g. VAT, IIT, CIT, Stamp duty…;
  • Prepare the liquidation income/loss report according to related tax regulations;

4. Submitting all documents to the tax bureau, according to the tax officer’s

Usually this will include the tax declaration records and accounting books for the past 3 years

  • In orderto clarify questions regarding the business operations, historical tax calculation and declaration, and other ad hoc questions from the tax officer, itis necessary for the company to discuss with the tax officer who is in charge of its case.
  • The tax officer will typically focus on the historical tax calculation and declaration in this step.

5. Tax declaration for non-paid tax inspected by tax bureau, if any

6. After tax liquidation: Clearance tax report may be needed in the overseas remittance in Bank

7. The retained earnings over the registered capital would be deemed as dividend, which need to withhold tax before the overseas remittance

 

Issues and solutions:

Company A: Small-mid-size WFOE manufacturing company

It is important to know that the overall tax liquidation process has to be conducted on two levels: on the local and the national levels. While the local tax bureau focuses on stamp duty, VAT surcharges and the individual income tax, the national tax bureau concentrates more on VAT and EIT. It also has to be noted that there is usually a one-year gap between the liquidation on the local and national levels. This is because the client usually needs some time to clear the AP/AR account.

In the case of Company A, the tax bureau required our client to complete the liquidation process within six months due to the time gap which was considered as too long.

  • Ecovis Beijing helped the client to check and analyze the financial and tax record
  • Ecovis acted as an accounting agency for our client and therefore provided services in financial and tax matters.
  • We accelerated the clearance procedure. We were able to reduce the time gap between the local and national liquidation processes by providing proper suggestions and solutions to the client.
  • In addition, on behalf of the client, we negotiated with the responsible tax officer and managed to extend the deadline for the client.

Company B: WFOE for consulting services

The company had to provide accounting books and tax declaration records of the previous three years for inspection. Furthermore, the local tax bureau refused to hand out a liquidation note with the argument that the national tax bureau had to accept the application first. Also, our client required the whole process to be conducted quickly.

  • We provided professional accounting services and helped our client to communicate with the responsible tax officer. We also helped to clear all related accounts for fixed assets and AR/AP accounts.
  • The local tax bureau refused to hand out the liquidation note to our client until the national tax bureau accepted the application. We therefore negotiated with the national tax bureau to speed up the annual tax declaration. This was needed in the liquidation process. The entire process took one year, from submitting the application to the local tax bureau to the completion of the liquidation process on local and national levels.

Company C: Representative office of a foreign company

The company had a complicated tax declaration history. This was especially IIT related and had to be compliant with the related regulations.

  • Ecovis Beijing helped to review the historical tax declaration report and ensured that everything was compliant with the related regulations.

As seen above, the tax liquidation process is considered as one of the most complicated business procedures. There are several key points that have to be considered, which can differ depending on what branch and legal form the company embodies. Therefore, our tax team keeps close contact with our clients to ensure that emerging problems get solved quickly. If you have any questions regarding this issue, please contact our manager of the tax or accounting department.

 

                                           Amanda Liu

Amanda has more than ten years of experience working in professional services for China’s accounting, tax, finance, internal control and business sectors. Prior to joining ECOVIS she worked in a Hong Kong-based financial and tax consulting firm. She has provided internal control advisory, audit, accounting, tax and financial compliance advisory as well as financial due diligence services for both mainland and MNC enterprises. Clients she served include companies from real estate, manufactoring, IT, media, consulting, culture and other sectors. Amanda holds a Master’s degree in Finance Management from China Renmin University. She is also a non-executive member of the Beijing Institute of Certified Public Accountants (CPA).

please contact:  amanda.liu@ecovis-beijing.com

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax, audit and legal, give us a call: +86 10-65616609 (Dw 811/806) or contact us directly via service@ecovis-beijing.com