Obtaining Dormant Company Business Status in China During Trade Difficulties: What You Need to Know

We provide technical support and practical guidance to companies in China that want to apply for dormant company status. For more questions about China’s business suspension policy, compliance requirements, and procedures, please contact Chenchen Liu, Assistant Manager, Business Advisory Services (BAS) (Shanghai Office) and Sophie You, Senior Associate (BAS Shanghai).

Since the outbreak of the COVID-19 pandemic, some small-scale enterprises have been impacted heavily and unable to bear the daily operation costs, such as rent and employee salary disbursals. However, compared with closing the company permanently, some companies are more willing to put their business on hold and get their second wind after surviving difficult times.

To minimize the impact of the pandemic and improve conditions in the business environment, China’s authorities have launched a “business suspension policy”, also commonly known as “dormant company policy” in other jurisdictions. Business suspension or company dormancy allows enterprises to take a temporary break and return to the market when they are financially and operationally stable. The policy is expected to stimulate the vitality of the market and consumption potential.

In this article, we first provide a comparative study of the relevant rules in other jurisdictions, before introducing the applicability, eligibility conditions, and legal consequences of dormant company status in China.

What is dormancy and why do companies choose to be dormant: A comparative study

The business suspension policy originates from the concept of ‘dormant company’, which has been implemented in several overseas countries or regions, such as the United Kingdom, Singapore, and Hong Kong.

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Basically, a dormant company refers to a company that does not engage in business activities during a given period of time.

In most situations, the company applies for the dormant status due to benefits of reduced administrative requirements, though different countries have different rules that apply.

In China, beyond reducing administrative costs, the dormant status may also bring the following benefits to the company:

• Reserve the company name;
• Reserve the special license or pre-approval, which is hard to apply for again in a special industry;
• Protect the company’s branding or other intangible assets;
• Hold a particular type of physical asset, such as property;
• Take a break temporarily, which may be caused by difficulty in operation, business restructure, etc.; and
• Save the time and cost of winding down the company and opening a new entity in the future.

Below we look into the dormant company policy in other jurisdictions.

UK

Under the UK law, the Companies House, the authority in charge of company registration, defines a dormant company as one that has “no significant accounting transactions” during the accounting period. Here, significant accounting transactions mean transactions that should be entered in the company’s accounting records. The transactions, such as payment of a civil penalty and administrative fee for late filing of accounts, will not affect the dormant status.

To be noted, the company applying for dormancy must be officially registered with the Companies House – it can then be dormant from the date of its incorporation or after the commencement of active trading.

On the other hand, Her Majesty’s Revenue and Customs (“HMRC”), the tax authority of the UK, defines a dormant company as the one that is “not active, not liable for Corporation Tax, or not within the charge to Corporation Tax”. The company is usually deemed dormant for Corporation Tax if it has stopped trading and has no other income.

Under the HMRC’s definition, a dormant company may not carry out trading or receive any kind of income. However, there are certain transactions and activities that are disregarded and can be carried out by a dormant company in the UK, including payment of shares, fees, charges, and penalties to the Company House.

Generally, there are no laws or restrictions for dormant companies in the UK regarding the maximum period of dormancy. It is up to the company itself to decide how long it wants to stay dormant.

Singapore

In Singapore, the Accounting and Corporate Regulatory Authority (“ACRA”) and the Inland Revenue Authority of Singapore (“IRAS”) have different definitions on dormant company.

Under the ACRA’s definition, a company will be considered dormant during a period in which no accounting transactions occur. An accounting transaction is one that affects the financial statements of a company, such as selling goods to customers and purchasing assets from suppliers.

For IRAS, a company is considered to be dormant if it has not generated income during a period of 12 months.

The companies deemed dormant by the authorities can be exempted from certain administrative procedures, such as filing annual financials. However, the dormant company will still need to meet several filing requirements from the ACRA and the IRAS, such as filing corporate income tax returns. The company can only seek exemption from this compliance or apply for a waiver by meeting certain requirements.

Hong Kong

The Hong Kong Companies Ordinance (the “Ordinance”) defines the dormant company as a Hong Kong limited company that conducts “no significant accounting transactions” during a financial year. Basically, an accounting transaction refers to a transaction that is required to be entered into the company’s accounting records subject to the Ordinance.

The Ordinance allows a company to be declared dormant while retaining the same status with a minimum maintenance cost, as long as it does not have any accounting transactions. The dormant company can be exempted from:

• Filing annual returns;
• Holding annual general meetings;
• Appointing auditors; and
• Preparing audited financial statements.

However, a dormant company in Hong Kong still has some obligations to fulfill. For example, the company will need to maintain at least one director, one shareholder, as well as its registered office and the company secretary. Also, the company is required to report any changes that may occur regarding its agents or office to the Registrar.

Dormant company rules in China: Conditions, applicability, and legal consequences

China has also adopted the concept of dormant company status, and piloted its business suspension policy in Shenzhen from March 1, 2021 as stipulated in the Rules of Shenzhen Special Economic Zone on Commercial Registration.

On March 1, 2022, the Administrative Regulation of the People’s Republic of China on the Registration of Market Entities ( the “Regulation”) and its Implementing Rules took effect, which officially expanded the implementation of the business suspension policy nationwide.

According to the new law, if the company has encountered operational difficulty due to special situations (such as the COVID-19 pandemic, flood situation, etc.), the company can apply for business suspension. Upon finishing the business suspension filing, the company’s status will turn to “business suspension”, which means the company can retain its existence in a low-cost model within a period of up to three years and return to the market when it is ready.

Applicable situations and qualified applicants

Business suspension is applicable to those situations when the company’s normal operation is challenged by factors like natural disaster, accident, public health incident, or public security incident. The company can decide to suspend its business for a certain period of time by its own assessment, but the suspension period cannot be more than three years.

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For the company to become dormant, the law in China currently does not impose many restrictions on applicant eligibility. Generally speaking, to be eligible for filing for dormant status in China, the company should not be included in the blacklist of abnormal operations or serious illegal and dishonest acts and the business suspension filing should not endanger national security, public interests, the rights and interests of trading counterparties, etc.

Also, local governments can make and implement their own policy based on their respective situations. For example, the Shenzhen government stipulates that the company applying for business suspension should have been set up for at least for one year and the proposed end date of the business suspension should be within the business term as indicated on the business license.

Legal consequences

Exempted from retaining physical premises

Normally, a company shall maintain its registered address or contactable address during its business term. If the authority cannot contact the company through its registered address, the company could be blacklisted and labelled as entities with “abnormal operation”.

However, during the business suspension period, the requirement of being reachable through its registered address is relaxed. When filing business suspension, the company is required to provide an address for the service of legal documents, which can be different from its registered address to receive legal notifications and documents. In some regions like Shenzhen and Shanghai, the government also allows the company to provide an email address to receive legal notifications and documents.

This means that it is not a requirement for a market entity to keep renting physical premises during the suspension period as it can use an alternate address to receive the legal documents. In this way, the struggling market entity can save some rental cost.

Suspend the business legally

Previously, if a market entity stopped its business operation for more than six months, the company would be closely supervised and its business license could be revoked by the registration authority. Now, upon the business suspension filing, the company can suspend their business operation legally, without revoking their business license.

Legal standing reserved

The company’s legal standing can be reserved during the business suspension period. That is to say, the company can reserve its existence unless the situation has not improved till the end of the business suspension period. By that time, the company may decide to close its business permanently.

To be noted, like Hong Kong and Singapore, China’s Regulation and its Implementing Rules forbid active transactions during the dormancy period. However, it remains unclear whether exemption exists, such as whether the dormant company will be allowed to pay for penalties or perform other obligations as required by the administrative decisions or court judgements or not, and thus further clarification from the authorities is awaited.

Terminating staff

The Regulation and its Implementing Rules do not provide that business suspension can be used as a lawful reason for termination. Rather, it only states that the company’s market entity qualification will be reserved during the dormancy period and the company should handle the labor relationship and other relevant matters in accordance with laws and regulations before filing.

In this case, the company can only use the business suspension situation as a strategic condition in the termination negotiation, rather than as a ground to unilaterally terminate its employees.

Tax obligations

The Regulation and its Implementing Rules do not provide clear rules on how the dormant company should deal with its tax obligations, such as whether the company is still required to complete monthly/quarterly/annually tax filing or not. The corresponding tax responsibility during the suspension period still needs to be clarified by the competent tax authority.

Conclusion

Based on the above introduction, the implementation of dormant company policy in China is still at an initial stage.

A series of supporting regulations are needed to promote the implementation of the business suspension policy in collaboration with other authorities, such as the tax bureau, the labor bureau, and the social insurance bureau.

Entities in China that plan to suspend their business are suggested to pay attention to the regulatory updates, keep close contact with relevant authorities, and seek professional assistance for business suspension filings.

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