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A Quick Guide to Closing Down a Foreign Subsidiary

When a multinational company sets up a subsidiary or branch office in a foreign country, they are expanding to meet business goals, but might not anticipate the steps required if they need to close the branch. Not every foreign venture succeeds, therefore closing a subsidiary abroad should be considered as one possible outcome in researching the new market location.

Reasons for closing a foreign entity could include:

  • Lack of revenue and/or high expenses
  • Concerns about permanent establishment and taxation
  • Security issues due to political changes
  • Changes in markets and customer base
  • Economic slowdowns
  • Increasing reliance on home country operations
  • Immigration and employment compliance issues

The process will differ depending on the location and the degree of commitment to the country. Closing down a fully incorporated entity with many staff will be more complex than shutting a small branch office, and an entity located in a country with adjacent borders will be logistically easier to close than one overseas. However, there are country specific elements that may pose the most daunting challenges, and we will review the steps in a few of the world’s most attractive business destinations.

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Universal Steps Involved in Closing Down a Foreign Entity

If you must shut down a foreign subsidiary in any country, you will probably have to take at least a few of these common steps:

  • Repatriating employees to the home country
  • Terminating office and facility leases
  • Moving or selling office equipment and supplies
  • Transfer of documents, electronic data and files to the home office
  • Closing bank accounts and arranging for transfer of funds
  • Payment to local suppliers and vendors for products and services
  • Liquidating capital investments, and obtaining funds
  • Final payroll and tax steps, including required notices and fees

Depending on the country, there may be delays or expenses associated with these steps that were not anticipated.  For example, some countries have restrictions on liquidating investments and transferring funds out of the country.  In other cases, there may be notice periods for terminating leases and contracts, as well as early termination penalties.  The best approach is to examine the specific country where a subsidiary is planned, and review the potential challenges and costs in the event of closing.

Country Specific Examples of Closing a Foreign Entity

There are several key areas to evaluate the steps required for closing a foreign subsidiary: the length of time it takes, associated costs, local compliance rules and potential penalties and liabilities.

China

If a multinational company wishes to close a WFOE (Wholly Foreign Owned Enterprise) in China, there are numerous steps to be completed in order to comply with Chinese de-registration rules.  The documentation required spans ten different categories with submissions to several national agencies.  A few examples of the requirements include:

  • Cancelling tax registration
  • Application of de-registration to the Foreign Trade Bureau
  • Cancellation of Alien Employment Permits
  • Closing bank accounts and transferring funds

The length of time will depend on how long it takes to submit the documents and receive approval, and the cost will depend on how long the WFOE was in business.

USA

Most of the steps for closing a foreign subsidiary in the US will occur at the state level, since business registrations are made in the state of incorporation. The Employer Identification Number issued to any foreign business for federal tax withholding and payment is permanent, and does not need to be cancelled. It can be re-used in the future if necessary, although the IRS can be notified if you are closing the business.

Formally incorporated entitles must formally file for dissolution or they will continue to be liable for all tax and filing requirements annually. Other required steps in most states include:

  • Cancellation of all licenses and permits
  • Cancelling the business trade name with the state agency
  • Obtain state and tax clearance certificates that all taxes are paid
  • Give notice to employees, in some states as much as 60 days
  • Payment to employees for unused leave
  • Maintain all records in case of any legal problems after closure

UAE

Closing a foreign subsidiary in UAE is a fairly involved process due to the many notifications required, and failure to comply with all necessary steps could result in civil or criminal liability. Therefore, it is essential to fully understand the extent of de-registration steps, which include:

  • Application to the Ministry of Economy
  • Termination of National Agency Agreements
  • Notice to creditors and employees of the pending closure
  • Payments to employees, third party contractors and lease arrangements
  • Cancellation of commercial licenses with Department of Economic Development

There is a 30 day notice period during which creditors could contest the closure and deregistration, and only after that period will the Ministry Of Economy approve release of bank guarantees. Failure to follow this procedure or to pay outstanding debts could result in forfeiting the bank guarantee, and being prohibited from leaving the country.

These steps are required to prevent companies or investors from abandoning failed businesses, and to protect employees and creditors.  In total the process should take about two months to complete de-registration.

Canada

The process of closing a foreign subsidiary company in Canada is similar to the process required for domestic companies.  A few of the required steps for a fully incorporated entity will include:

  • Notice to the Canada Revenue Agency
  • Filing a final tax return
  • Closure of payroll accounts
  • Formal dissolution of the corporation, and obtain certificate of dissolution, which requires approval of the directors and notice to creditors

An incorporated entity can only be dissolved if there are no liabilities and it owns no property.  The notification forms are very specific on rules of dissolution, and payment of liabilities.  After all the steps have been taken, the Canadian business number will be relinquished and the company will be closed.

Belgium

The closing of a foreign branch in Belgium has several specific requirements besides the typical de-registration steps.  A liquidator must be appointed to handle any property disposition, and if there are unpaid debts the branch must go through insolvency prior to formal closure.

At that point the form for termination of the branch can be submitted within 14 days, and must be completed by the individual who is the named resident agent.

Closing a Foreign Subsidiary When Using A GEO Employer of Record

When entering a new foreign market, some companies elect to avoid the time and expense of local incorporation, and instead utilize a GEO local employer of record.  One of the benefits of using a GEO solution for setting up a foreign branch is the simplification of the closure process if that becomes necessary. 

Because Shield GEO acts as employer of record, there are fewer deregistration steps to comply with, and most of the tasks of closure will be logistical for the client.  Shield GEO will handle final payroll, tax payments, visa issues and other local compliance requirements.  The company may still need to handle the steps of liquidation, payment of creditors and transferring funds and bank accounts.

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