A foreign-invested company may decide to suspend its Chinese business activities for many reasons. These can include the challenges of establishing a strong presence in China, the need to focus on the home or other markets in preparation for liquidating the company in the future, or simply putting the company plans in China on hold for the time being and picking them back up in the future.

If a company decides to continue operations and not liquidate, it will still be required to satisfy the ongoing compliance requirements. To mitigate costs, there are two options: decreasing activities and costs to the lowest level possible while continuing to satisfy all normal requirements or using the new business suspension policy (company dormancy) that was introduced nationwide in 2022 (The Law Firm Network / MHP Law Firm).

In this article, we discuss the implications of both of these options in depth so that companies can make a well-informed decision about which best fits their current situation.

Dormant Company Definition in China

A dormant company can be defined as one that ceases trading and operations and does not receive any income for a period of time. A dormant company is not closed or obsolete but placed on hold as it remains officially registered. As such, the company may be exempt from making specific tax payments and other contributions.

Ongoing Compliance Requirements

There are several ongoing compliance requirements that companies in China need to satisfy. In the table below, we summarize key monthly, quarterly, and annual compliance requirements:

Monthly VAT filings
Quarterly CIT filings
Annual statutory audit
Annual CIT filing
Annual publication report

In the table below, we summarize key monthly, quarterly, and annual compliance requirements:

Category	Requirements	Deadline
Accounting	Maintain a reliable record of accounts and submission of Balance Sheet and Income Statement	Monthly filing (15th of the next subsequent month)
CIT	Provisional filing for Small- and Medium-sized Enterprises	Quarterly provisional filing (15th of the next subsequent month following the quarter)
	Provisional filing for Large enterprises	Monthly provisional filing (15th of the next subsequent month)
	Annual CIT Filing	Before May 31st of the subsequent fiscal year
VAT & Surtaxes	Small-scale Taxpayers	Quarterly filing (15th of the next subsequent month following the quarter)
	General VAT Taxpayers	Monthly filing (15th of the next subsequent month)
IIT	All companies employing individuals act as withholding agent	Monthly filing (15th of the next subsequent month)
Social Security & Housing Fund	All companies employing (Chinese) individuals	Monthly filing (10th of the next subsequent month)
Audit	All foreign-invested enterprises	Annually, before annual CIT filing deadline
Publication Report	All foreign-invested enterprises	Before June 30th of the subsequent fiscal year

Please refer to our Compliance in China for Foreign Companies article to learn more about these requirements.

In addition to the requirements highlighted above, another key compliance requirement is that the authorities must be able to contact a company and its representatives. This includes having a general and financial contact person registered with the authorities and a registered company address where the authorities could visit the company if required.

Maintaining an address and satisfying compliance requirements can incur significant costs for your company. Below, we discuss the options available to mitigate these costs.

Unofficial Dormancy

Before the introduction of an official dormancy process (as explained below), companies could not change their status to dormant. As such, companies were left with the choice of liquidating the entity or lowering costs as much as possible while continuing to satisfy the minimum compliance requirements.

If a company stops its operations and neglects its compliance requirements for more than 6 months, the authorities could revoke the business license. In such a case, various problems may arise, such as a company losing its brand and company name in China or the company being blacklisted. As such, your company must ensure that it continues to satisfy compliance requirements to avoid adverse consequences. Below, we summarize key items to consider when deciding on an “unofficial dormancy”.

Registered Address

According to regulations, a company must have a registered office in the district in which the company is registered. However, companies may rent a relatively expensive office that serves as a registered address. If your company becomes dormant, there will no longer be the need for office space, which would be an opportunity to save costs. There are two key factors to consider in this case:

Type of Address

When finding an alternative address, the company will naturally look for the most cost-effective solution. In most cities in China, there are providers offering so-called “virtual addresses.” These are not actual physical locations and, as such, are a much cheaper alternative to an actual office.

However, using virtual addresses is not compliant with regulations, as the authorities should be able to contact the company at its business premises. Additionally, when changing the registered address, the bank must visit the company address to take pictures, as required by PBOC (People’s Bank of China) regulations. As such, we advise clients to find a small office that can satisfy these requirements while providing a relatively cost-effective solution.

We have to note that certain localities may accept virtual addresses or even facilitate their use. We always advise companies only to use solutions provided by or specifically licensed or approved by the authorities to avoid any negative impact or unforeseen circumstances arising in the future.

Change of Registered Address

If a company decides to change its registered address, it will need to update its company records with different authorities to complete the process. The company will need to update its articles of association and update the company record with the AMR, MOFCOM, Tax Bureau, the company’s bank, and the customs bureau or other authorities with which the company is registered, if applicable.

It is important to note that if the company moves to another district within a city, it will need to file for tax deregistration in the current district before making a new application in the new district. From our experience, tax deregistration can be a challenging and time-consuming process. As such, finding an address within the same district is generally advised.

Compliance Requirements

If a company is not officially dormant, it must still satisfy all the compliance requirements mentioned above. Even if the company has no operations, it will still be required to complete a so-called “zero filing” concerning VAT and IIT. Moreover, as the company will likely retain small expenses such as the rent, it will continue to have limited transactions, so a CIT declaration will still be required.

The company will still be required to complete all annual requirements, such as the annual statutory audit, the annual CIT filing, and the annual publication report. Even though these items will be simpler for a company with limited to no activity, they will still need to be completed, which may generate costs for the company.

If a company intends to continue business in China in the future, it is essential to satisfy all the compliance requirements. Therefore, it is advised to engage a third-party service provider that can ensure all these requirements are met.

Official Dormancy in China

After a successful trial period in Shenzhen, the authorities have implemented an official “dormancy” process for companies active in China. According to the “Regulations of the People’s Republic of China on the Administration of Registration of Market Entities” and the “Implementation Rules for the Regulations of the People’s Republic of China on the Administration of Registration of Market Entities”, companies can make use of this concept starting from 1 March 2022.

Conditions to Apply and Applicable Period

Companies experiencing difficulties operating due to natural disasters, accident disasters, public health incidents, social security incidents, etc., are eligible to apply for dormancy (D’Andrea & Partners Legal Counsel).

The regulation applies to the following company types:

Companies, non-company enterprise legal persons, and their branches;
Sole proprietorship enterprises, partnership enterprises, and their branches;
Farmers’ professional cooperatives (associations) and their branches;
Individual industrial and commercial households;
Branches of foreign companies;
Other market players as prescribed by laws and administrative regulations.

Companies can retain the dormant status for a period of up to 3 years. After the 3-year period, the company will automatically resume operation unless a decision to liquidate the company has been made (Pamir Law Group).

According to the implementation rules, it may be possible to extend the period after 3 years, but it is currently unclear what the requirements are for such an extension. If a company would like to extend the dormancy period, an application must be filed within 30 days before the expiration of the 3-year period.

Alternatively, if the company resumes business activities during the closing period, it must announce the termination of the dormancy in the National Enterprise Credit Information Publicity System (NECIPS) within 30 days. Failure to announce business resumption may result in fines from the Administration for Market Regulation (AMR) (Adaltys Avocats).

Dormancy Application Process

If a company decides to suspend business operations through dormancy temporarily, it must apply with the AMR. Subsequently, the AMR will report the period of business closure and address the delivery of legal documents in the NECIPS.

Legal Implications

A filing for dormancy will have the following legal implications:

Company Address

During periods when companies are dormant, an email address may be used instead of a physical registered address to serve legal documents, which may result in a significant reduction in costs. In certain cities, including Beijing, Shanghai, and Shenzhen, the local authorities also allow the use of an email address to receive legal documents.

Suppose the company uses an address to service legal documents instead of a registered one. In that case, it is required to submit a confirmation letter of the address for service of legal documents. If the legal documents service address is in a different district, the registration jurisdiction of the company will not be changed. After business is resumed, the company will need to arrange a new address in their original or a different district. As mentioned above, changing procedures to a different district may be more complex.

Staff Considerations

According to the regulations, companies shall negotiate with employees on labor relations and other relevant matters before the temporary business closure. Entering into dormancy will not be considered a legal reason for termination, so the company will have to follow normal termination procedures when firing staff.

Theoretically, a company could maintain labor relationships over the dormancy period. However, the company will still be required to contribute to social security and the housing fund, which will be challenging while the company is in a dormant state. The Beijing authorities have announced that companies could apply for a reduced payment ratio or delay payment. However, it is advised to avoid maintaining employees if possible, to avoid difficulties with such payments.

Tax and Reporting Requirements

According to the implementation guidelines, dormant companies are still required to publish their annual reports on time.

The national regulations do not specify the implications for dormant companies concerning tax and other reporting requirements. However, the Beijing authorities have issued local implementation guidelines regarding reporting. In Beijing, dormant companies are not required to report to the Tax Bureau and other departments, as the relevant departments can obtain relevant business closure information through data sharing.

Company Legal Status

If a company becomes dormant, it will maintain the business license. The business license will not be revoked after 6 months of no activities. Additionally, the dormancy period does not affect companies’ qualifications, nor does it affect the companies’ claim to creditor’s rights and performance of debts, administrative penalties, administrative reconsideration decisions, judgments, arbitration documents, and other statutory or agreed obligations.

Dormant Company Example

Company X is a trading company operating in Zhejiang Province, China, since 2016. Due to the resurgence of COVID-19 and the lockdowns experienced in various parts of China, Company X has decided to put its China operation on hold for some time while it considers what to do next.

Company X then files an application with the AMR for official dormancy, which is subsequently approved. For the following 11 months, they do not conduct any operational activities, downsize their labor force, and ensure their taxation and reporting obligations have been fulfilled. They decide to liquidate the company and start the company liquidation process.

A dormant company in China must continue filing annual reports, paying minimum administrative fees, and maintaining basic compliance even when inactive—failing to do so risks penalties, loss of credits, or forced deregistration. Many companies overlook dormancy rules and accidentally accumulate tax arrears. MSA Asia helps you properly structure, maintain, or wind down dormant entities to avoid hidden liabilities. Get in touch about company liquidation options.