A long time client came to us asking for help shutting down a long time auto parts manufacturing company in China. The factor was currently employing about 60 workers, but business had been slowing and the corporate headquarters made the decision to close that operation. Naturally the USA headquarters was hoping this could be completed quickly and minimizing costs.
A brief conference with local management exposed some major issues. Apparently the company had accumulated discrepancies regarding “Supplied Materials” imported, compared to final products exported. In China “Supplied Materials” are registered with Customs and not taxed on entry and are for exclusive use for manufacture of products to be exported.
In the situation where “Supplied Materials” exported do not match those imported; taxes will be levied on the difference. The USA headquarters is now shocked, to say the least that because of the years this had been going on, the China company now owed over $500,000 USD in unpaid taxes, and was potentially subject to a fine.
When it comes to “Supplied Materials” corporate headquarters abroad should take care to monitor volumes sent into China, and those sent out. You can be sure China Customs is keeping track. Foreign companies seeking to close down China company’s should expect this to go as quickly and as smoothly as it typically would in the USA.
In China, shutting down a company is a regulatorily intensive process. The regulators that are responsible for approving you company’s closure take their job seriously, and the company is subjected to both legal and accounting compliance reviews by authorities. Small problems that have accumulated over the years are guaranteed to surface.
If you are planning a China exit soon, first talk to your China lawyer. A good lawyer will walk you through a process of due diligence on the target WFOE beforehand. Chances are, they will find something that needs to be addressed.