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.

 


Tax system widening the income gap

China's tax system has been blamed for creating a widening income gap by allowing loopholes for big businesses to evade paying taxation, while restricting the development of small businesses through the imposition of heavy taxes.

Under the present system, many Chinese became rich by becoming adept at evading taxes. In contrast, small- and medium-sized enterprises are forced to develop slowly, as they struggle with the burden of being heavily taxed, Economic Information Daily reported on Monday following an exclusive investigation that covered Liaoning, Anhui, and Hunan provinces.

A recently exposed case of tax evasion involved a well-known company in Central China's Hunan province. According to company records, a quarter of its sales revenue is around the 200 million yuan ($29.29 million) mark, but it only declared 19 million yuan to the local tax bureau, the report said.

Moreover, the company kept a large amount of cash in reserve for its daily transactions, in order to avoid attracting the attention of the local tax bureau.

The company's use of subterfuge "caused a great loss of tax revenue", an unnamed local taxation official said in the report."Without the inspection, the company owner would have pocketed all the money.

"It is quite common to see an enterprise with more than 10 million yuan in annual returns pay only a little in taxes. Many people have become rich by evading taxes," he added.

Luo Lichong, deputy chief of a local national tax bureau in Leiyang city, Hunan province, said there are many rich coal bosses in the city. However, it is hard to supervise their businesses to ensure that they pay tax according to the regulations, because it is possible to cover up their real incomes in ingenious ways, such as cooking the books to produce false accounts or by falsifying their reported sales revenue.

"Someone divided income into several parts. For each part with less than 2,000 yuan, which was the starting point, people with a monthly income of 10,000 yuan could easily escape from paying tax," said Zhu Jiangtian, deputy chief from the local taxation bureau in Liaoning province.

In contrast, heavy taxation blocks the development of small- and medium-sized enterprises.

The current starting point at which small-scale taxpayers are required to pay value added tax (VAT) has increased from 2,000 to 5,000 yuan. However, it is still too harsh for them, according to Zhou Fangping, office director of the national tax bureau in Hunan province.

"Whether or not their businesses make profits, small-scale taxpayers are forced to pay VAT when sales revenue reaches 5,000 yuan. It imposes greater burdens on small businesses," he said.

Furthermore, business taxes in the service industries, such as catering and retailing, are simply imposed by counting the number of dining tables or employees, which is totally unfair, he added.

Zhou Tianyong, a professor with the Party School of the Central Committee of the Communist Party of China, said the current tax system not only hampers the development of small businesses, but is also responsible for enlarging the gap between the rich and the poor.

 

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