Liquidating a company in China – two scenarios


published 15 June 2022 | reading time approx. 3 minutes

Company liquidation is commonly seen in practice when a strategic change  or an adjustment of the group structure is required. The legal and tax requirements for a company liquidation may differ depending on the form of adjustment of the corporate structure. We have summarized this as follows:


* The gains derived from the restructuring normally should be subject to CIT based on the market value at the time of the restructuring. When the conditions of neutral tax treatment are met, taxation of the restructuring gains may be deferred until the relevant merged assets are actually disposed of at a later date.

First Scenario

In the first scenario, when the shareholder resolution on discontinued operation is passed, a number of issues need to be resolved prior to the legal and tax associated with the liquidation. Such work may consume significant time and efforts for the company, which can slow down the liquidation process. We recommend to get prepared early for such work, including but not limited to:

  • Plant selling or termination of plant leasing contract
  • Disposal of fixed assets
  • Handling of remaining inventory
  • Cleaning-up remaining invoices
  • Termination of employees’ labor contract, compensation negotiation and conclusion  of agreements
  • Termination of other leasing agreements
  • Termination of commercial contracts


The complexity of the above work may vary from company to company, but all of them should be paid highly attention in terms of legal and tax compliance. When the liquidation process begins, the declaration of the liquidation CIT as well as distribution of retained earnings require accurate tax calculation and correct tax filing.

If the company disposes plant or other immovable assets they used to possesses, the selling of such assets may trigger significant land value added tax (“Land VAT”). Under such circumstance, equity selling may become an approach to reduce the tax burden, with the pre-condition that the local tax authority recognizes the business substance of the relevant transaction.

Second Scenario

In the second scenario, in view that the assets and liabilities of the merged enterprise will be undertaken by the merging enterprise, there is no liquidation requirement from legal perspective, enterprise shall pay more attention to the important tax treatments, including but not limited to:

  • Evaluation and application of the possibility in the transfer of VAT credits of the merged enterprise to the merging enterprise
  • Evaluation and application of neutral tax treatment
  • Consideration about the fair market values of the assets and the calculation of liquidation CIT in general tax treatment
  • Treatment of the retained earnings in the merged enterprise
  • Limitation of tax loss of the merged enterprise to be inherited by the merging enterprise

Besides, according to the prevailing tax regulations, enterprise merger refers to the merger of two or more enterprises whereby one or more enterprise transfers all the assets and liabilities to another existing or newly-established enterprise with the shareholders of the merged enterprise receiving equity or non-equity consideration of the merging enterprise. Therefore, the above process may turn out to be the combination of several steps such as merger, share transfer, investment withdrawal etc. from legal perspective based on different transaction arrangements. The selection and order of the legal steps may result in different overall tax burden. We recommend enterprises should make internal analysis and seek for professional comprehensive advices from legal and tax perspectives in the course of restructuring planning and execution, in addition to considering the commercial factors, in order to realize tax compliance and optimization.

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