Clients often ask us whether an existing company in China can be “paused” or “suspended” due to a business disruption caused by uncertain but transitory circumstances, and resumed once the circumstances change. Not surprisingly, we have received an increased number of such queries during the COVID 19 pandemic. The answer to this question was “NO” until recent changes to the Market Entity Registration Regulation issued by the State Council (the “Regulation”) which became effective on March 1st, 2022.
What is a Dormant Company?
According to the Regulation, after registering with the Market Supervisory Administration (“MSA”), any company in China that does not plan to have any business transactions or activity can obtain the “dormant” status, and maintain it for up to three years.
What are the Benefits of Obtaining Dormant Status?
- Cost Savings: Dormant companies are not required to have a physical registered address in China.
- Corporate/Brand Identity Protection: Since the dormant company is still a registered legal entity, no other businesses can register the same name. A dormant company can also hold trademarks, patents, domain names and other forms of IP, and prosecute any violators.
- Flexibility: Traditionally, if operations were to cease, the decision to wind down the company (and related expenses) had to be made immediately. By obtaining dormant status, you are now able to delay this decision and wait for more favorable environment. If you decide to resume your business within the 3-year period, the process to remove the dormant status is considerably faster and easier than winding down a company on day 1 and registering a new company when you are ready to resume operations.
- Asset Holding: A dormant company can continue to hold assets, which can be beneficial even if the entity is ultimately dissolved. For example, if the company owned large inventories of a specific commodity which is currently trading at historically low prices, the company could become dormant, and revived or wound down if prices for the commodity recover within the 3 year period.
Can a Company Become Dormant at Any Time?
Currently, a company can only obtain dormant status if “business difficulties are caused by natural disasters, accident disasters, public health events, social security incidents, etc.” As mentioned above, registration with and approval from MSA is necessary to obtain dormant status, therefore there is a certain level of subjectivity.
How Can I Apply for Dormant Status?
Assuming that the company meets the requirement stated above, it must also:
- Settled its obligations with all employees and creditors
- Submit an application to the local MSA with the following information:
- Name of the Legal Representative
- Contact Person and phone number of the dormant company
- Correspondence address for courier and legal documents
- Period for the dormancy
- Business address (if any)
- A covenant letter to the MSA with the following commitments:
- The market entity undertakes to apply for suspension of operation during the period of business closure and not to carry out any business activities;
- The market entity undertakes to strictly abide by national laws, regulations, rules and policies during the period of closure, conduct annual reports on time, fully perform due responsibilities and obligations, and assume creditor’s rights and debts;
- The market entity undertakes to consciously accept the supervision of the government, industry organizations, the public, and news and public opinion, and actively fulfill their social responsibilities
MSA will review and process the application, once approved, the company status would be updated on the public corporate records share with the other government agencies including the tax authority.
What are the Compliance Requirements?
The following requirements must be met before a company can be registered as dormant:
- A dormant company must continue to file its annual returns.
- A dormant company shall not carry out any business activities, otherwise it shall apply to be delisted from the dormant companies registry.
- A dormant company must maintain an appointed qualified company secretary.
- A dormant company can keep its bank accounts, however it should not have any business revenues.
- A dormant company can last for three years maximum after which it would automatically become operative or the company would have to wound down.