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Dormant status for Chinese enterprises

Find here the Daxue Talks episode 56. Our guest, Nicolas Coster, explains the dormant status for Chinese companies and discusses the different advantages of such a status.

Full transcript below:

I am Nicolas Coster, I’m a French business lawyer. I’ve been in China for 16 years and specialized in foreign direct investment. So, basically, I set up companies in China.

When it is necessary to terminate a company you can also choose to make it dormant, what is a dormant company?

A dormant company is a company without business operations. So, like – two years ago, the ministry of market supervision issue a special notice to say that they will chase the dormant status for Chinese enterprises who are not fulfilling their legal obligations. So that means, if they found that there is a company who is not declaring, who is not doing the annual return in China or which is not filing account or tax in China, then this company will be canceled by the administration. So, China is trying to fight dormant companies. So, if you want to keep a dormant company in China, you need to have an accounting firm to declare the tax even if its zero. Every year you need to pass the annual return.

What are the advantages of making your company dormant instead of closing it?

I think the advantage is the cost, it’s cheaper to make the company dormant at the beginning. Of course, if you keep it for plenty of years it’s cheaper to liquidate the company now, so it’s a matter of cost, and good things to keep the company is you will not trigger the tax liquidation. So that means if you have a tax issue, accounting issue and you don’t want to involve the tax office, then it’s better to make it dormant because the longer the company is sleeping, the day you decide to liquidate it, the tax office will not be able to find the past issues.

How can you make a company dormant? Is it purely the accounting firm which is going to declare no tax?

Basically, what we do, it depends if they have registered address with an agent, without an office – if they have an office. If they have an office, we need to cancel the office and to find an address that is cheap, to register the company, and to minimize the lease or costs every year. If this is a registered address like in the free trade zone, where you don’t have an office, then it’s very simple. We just terminate all the employees’ contract and we just ask the accounting firm to file zero for the tax.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.