CHINA: Administrative House-Keeping Campaign on Dormant Enterprises

By Xiaoyun Xie (Ellen)

Lead Consultant of Hui Xiao 

Lawyer Admitted in China and US (California)

June 30 deadline for filing annual report to company registration authorities in China is approaching.  If your company has not yet filed the annual report, you'd better hurry up.  For those whose companies have not filed annual report for two consecutive years, you will find this legal newsletter particularly relevant and important to your business.

I.  Regulatory Background

On 27 May 2016, the China State Administration for Industry and Commerce (“SAIC”) and the China State Administration of Tax (“SAT”) jointly issued a Circular on Relevant Issues Associated with Cleaning Up Dormant Enterprises (Document No: Gong Shang Qi Jian Zi [2016] No.97) (“Circular 97”) signals an official launch of a national wide house-keeping administrative campaign on dormant enterprises and echoes the central government's call on forcing "zombie enterprises" out of the market place.

Message delivered by Circular 97 has been well received by local counterparts of the SAIC and SAT across China.  On 6 February 2017, Beijing Municipal Administration for Industry and Commerce, Beijing Municipal State Tax Bureau and Beijing Municipal Local Tax Bureau jointly issued a Notice Concerning the Work of Cleaning Up Dormant Enterprises (Document No: Jing Gong Shang Fa [2017] No.3) (“Beijing Notice”) that expands the target of this administrative house-keeping campaign to include dormant sole proprietorships registered in Beijing, among others.  It is well observed that in Shanghai, certain enterprises that may have been dormant for years have also proactively complied with statutory formalities including filing annual reports and tax reporting, etc.

II.  Dormant Enterprises under Circular 97 and Beijing Notice

Enterprises that fail to file annual report and complete tax reporting for two consecutive years (“Dormant Enterprises”) fall within the scope of the administrative house-keeping campaign under Circular 97.  Circular 97 urges local counterparts of the SAIC and SAT to cooperate with each other to identify and take necessary actions against the Dormant Enterprises.

In addition to the Dormant Enterprises, Beijing Notice expands the scope of the targeted entities to include the following additional entities registered in Beijing area:

(a)  Enterprises and sole proprietorships that fail to rectify and complete tax registration within the deadline set by the local tax authority, or fail to register tax information for one tax year; or

(b)  Sole proprietorships that fail to file annual report and tax reporting for at least two consecutive years, could not be reached/contacted and have been determined by the local tax authority as abnormal de-registration.

III.  Possible Government Actions

Actions taken by the government against the Dormant Enterprises may include the following:

(a)  For a Dormant Enterprise that could be reached/contacted at its registered domicile or place of business during official on-site visit, it will be required to promptly perform its statutory obligations including filing annual report etc;  

(b)  For a Dormant Enterprise that has been dormant for a long period of time and could not be reached/contacted at its registered domicile or place of business during official on-site visit, its business license will be revoked; or

(c)  For a Dormant Enterprise that has filed for liquidation or has entered into a bankruptcy process, no action will be taken against it. 

In determining whether an enterprise is a Dormant Enterprise and thus is subjected to a penalty of the revocation of business license, local counterparts of the SAIC are legally permitted to take into consideration evidence with red-flag behaviors of a "dormant" enterprise such as:

(i)  it fails to file annual report for two consecutive years;

(ii) it could not be reached/contacted during official on-site visit;

(iii) it fails to file tax reporting for two consecutive years;

(iv) it fails to replace its business license with a new business license version as required by the government;

(v)  it fails to register a liaison contact specifically designated for the Administration for Industry and Commerce;

(vi)  it fails to provide/contribute social insurance as legally required; and

(vii) its basic bank account has no money flow for six months.

IV.  Our Suggestions and Comments

This house-keeping administrative campaign shows China government's commitment in undertaking its corporate registration reform.  Based on our observation, this campaign is not a simple one-off government effort but a long-term administrative measure adopted by the government.

To avoid implicating adverse legal restriction or consequence on you (especially if you are legal representative or person-in-charge) and your other business, our suggestions to the owner or legal representative of the Dormant Enterprises are:

(a)  Be cautious when selecting a registered address service provider for your company;

(b)  Designate a permanent contact person to act as your company's contact person for the local Administration for Industry and Commerce, and keep the said authority updated on any change or replacement of such contact person;

(c)  File annual report before June 30 deadline each year;

(d)  Complete necessary tax registration formalities and file tax reporting on monthly basis as legally required;

(e)  Cooperate with local counterparts of the SAIC and SAT in accordance with law; and

(f)   Engage a good company secretarial service company which may help you and your company reduce administrative burden and save cost.

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Note: This document (including information contained herein) is for general information only and is not legal advice or opinion for any purpose. 

All rights reserved. No part of this document may be copied, reproduced, circulated or otherwise transmitted without prior permission in writing of Shanghai Hui Xiao Law Consulting Group and its author Xiaoyun Xie (Ellen).

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About The Author: Ms. Xiaoyun XIE (Ellen), lead consultant and lawyer admitted in China and the United States (California), has more than 14 years' experience in serving multinational companies.  Ms. Xie’s practice area is broad with a focus on mergers, acquisitions & restructurings, foreign direct investment, corporate governance and compliance, labor and employment, dispute resolution as well as private wealth management matters.

The author would like to extend her gratitude and appreciation to Ms. Rebecca Xiao (Intern of Hui Xiao) for assisting with this Article's Chinese translation.