SMEs and how to manage lockdown crisis in Shanghai - China

The recent epidemic outbreak in China, especially the current round and lockdown in Shanghai, has brought great challenges and impact to foreign small and medium-sized enterprises. How to quickly formulate targeted strategies is particularly important.

Before discussing specific solutions, we would like to discuss what foreign investors should consider when investing in China. After China effectively controlled the epidemic outbreak early 2020, the market recovered rapidly and the economic data maintained a stable growth. The huge market potential and the continuous improvement of the investment environment have given global investors greater investment confidence.

However, with the continuous development and maturity of the market, the competition in the Chinese market has become increasingly fierce, the changes in the market and policies have become more rapid, and the cost of operation in China has also increased significantly compared with before. On the other hand, rapid change of international situation and political tension globally recent years has caused the big impact on the investors’ mindset and their outlook on the future, at the same time, China’s special culture characteristics and economic operation practice are also important for foreign investors to consider.

Therefore, especially for small and medium-sized enterprises, when dealing with this epidemic outbreak round, we should consider the specific problems faced by our enterprises, changes in the external market, products and services, and formulate corresponding strategies and action plans.

Based on the above analysis, we divide the enterprises into the following two categories, and provide corresponding feasible schemes for your reference in combination with the actual policies and market conditions.

Investors want to continue to operate and develop the business

If your company has good business perspectives in the long run and is greatly affected by the control of the epidemic in the short term, then maintaining and developing the core business, maintaining the full liquidity of funds and the flexibility of the company are the core issues you must consider.

Recommended measures:

1.?In case of limited resources, focus on the maintenance and development of core business.

2.?Pay full attention to cash flow and maintain good liquidity of funds:

2.1?Prepare and follow up the cash flow forecast report to ensure that it meets the daily operation of the enterprise.

2.2?Negotiate with external stakeholders to shorten the payment collection period and extend the payment period as long as possible.

2.3?Apply for deferred payment of tax payment (up to three months).

3.?Solve short-term capital needs through financing. Although the Chinese government has introduced many financing schemes to help small and medium-sized enterprises solve their capital problems, in practice, foreign small and medium-sized enterprises have very low possibility of financing through banks due to their specific conditions (light assets, unsecured and difficult to trace foreign shareholders). Therefore, short-term borrowing through shareholders' personal reputation and network of contacts is a relatively feasible scheme.

4.?Cut down all costs and resource consumption unrelated to core business.

5.?Optimizing the personnel structure to reduce the personnel cost as much as possible, and using part-time employees to do some work is also an effective method.

6.?Strive for rent reduction. If the lessee is a state-owned house, the rent can be reduced for at least 3 months. If it is a non-state-owned house lease, you can try to negotiate with the owner with the force majeure clause in the lease agreement (there are reference cases jointly borne by both parties according to the court judgment).

7.?Pay attention to various subsidy policies under the government's epidemic situation (we will update the WeChat official account and LinkedIn in time to share the latest government subsidy policy, and pay close attention to it. The latest?[ETC Recap] Summary of the latest preferential policies)

8.?In response to the normalization of the epidemic situation, reassess and adjust the management model, consider the possibility of online business development and consider adopting the remote management model.

9.?Sort out the core value and business model of the enterprise. Reorganize through merger with partners or bringing new smart investors and strategic share holders.

If the core business cannot be operated in the short term, but the investor has a clear plan and goal for the follow-up development of the company, the investor should consider adjusting the company to the minimum size of the company as soon as possible, to give himself more time to think about the next step.

In this circumstance, enterprises can eliminate all unnecessary costs, focus on the research of the core business, and keep an eye on the changes of the market.

Key points:

• In China, different from international operations, even if there is no business, maintaining an enterprise still needs to file monthly, quarterly and annual tax declaration in accordance with relevant compliance requirements (the monthly report of the Commission of commerce can apply for exemption from declaration). For the relevant compliance work in this case, because it does not involve complex accounting and tax calculation, investors can find a suitable consulting company to perform on their behalf, or if possible, operate on their own.
• If the enterprise uses the actual office for the establishment of the company, and you now want to control the cost or do not need the office, the landlord will ask you to change the registered address of the company. The enterprise can find a special registered address for relocation, which can greatly reduce the cost of maintaining the company. Investors can find a suitable consulting agency to help solve the registered address and relocation issues.

Investors decide to close the business

If investors decide to leave China or the enterprise cannot survive at present because of the epidemic situation and business development, and investors are ready to close the company, it is very important to close the company as soon as possible in a reasonable way, otherwise it may cause many bad consequences.

Here's how to quickly shut down the company in compliance.

In short, the closing of foreign-funded enterprises can be roughly divided into the following steps:

1.?Industrial and commercial cancellation

2.?Tax liquidation

3.?Closure of bank accounts and cancellation of other departments (cancellation of provident fund accounts and customs registration).

*For expatriates who are ready to leave China after closing the company, they also need to conduct annual individual income tax settlement before leaving.

Before preparing to close the company, the enterprise should first make a comprehensive assessment of the company's business and financial report. If it can meet the following standards, it is recommended that the enterprise apply for simple cancellation process as far as possible, so that all cancellation processes can be completed in one month.

• The enterprise has not actually operated since its opening (no income invoice has been issued)
• The labor relationship between the enterprise and employees has been fulfilled, and there are no labor disputes and lawsuits
• The enterprise has no creditor's right and debt relationship or the creditor's right and debt relationship have been compromised, and there are no pending matters and potential litigation
• All taxes of the enterprise have been paid, and there are no outstanding matters
• All licenses of the enterprise are complete

The above standards and operation time are for reference only, and shall be subject to the actual situation of the enterprise and the practical operation of the department in charge.

If the enterprise cannot meet the simple cancellation standard, we suggest the enterprise to carry out the following operations before the normal shutdown process:

1.?Clean up all creditor's rights and debt relationships (including employees) and negotiate with relevant parties before starting the closure process as far as possible.

! Risk warning:

Although the enterprise is a limited liability company, if the creditors file a lawsuit during the closure of the company and the company is ultimately insolvent, there are the following risks for shareholders and legal persons:

• If all the registered capital of the company has been fully paid, the shareholders of the company will no longer bear the outstanding debts. However, the legal person is likely to enter the dishonest list, and its business activities in China will be affected to some extent in the future
• If the registered capital of the company is not fully paid, the shareholders of the company need to bear the liability for the unpaid part of the capital. If there are still outstanding matters after undertaking, the legal person may still be included in the list of dishonesty.

2.?Make a comprehensive assessment of the financial report and tax calculation of the enterprise in recent three years. Solve the existing tax risks as far as possible, to ensure the authenticity and rationality of business accounting treatment and tax calculation, and have relevant supporting documents.

! Risk warning:

• Tax liquidation is the most complex and critical step in the whole company closure process. If it is found in the tax review that the accounting records are chaotic and there are tax irregularities such as tax evasion and tax evasion, the company is likely to be required by the tax bureau to conduct tax liquidation audit. This will bring great tax risks to enterprises.?????

Disclaimers:

1. The above opinions and all suggestions are for reference only and do not constitute any business decision. Investors operate accordingly at their own risk.

2. The original intellectual property of the official account is owned by Sapience Pro Limited. Without any written permission, no organization or individual may copy and publish in any form, such as the reference must be specified, and the original, contrary to the original quotation, deletion and modification shall not be allowed.

Every company, every business owner, every individual is in a different challenging situation, we are here to listen to your case and provide a solution that fits your company and future perspective.

Get in touch with our China entry and exit expert for a one-on-one consultation to find a solution for your company.

Bryan Zhang

Bryan is the Founder and Managing Director at Sapience Pro based in??Shanghai. For nearly 12 years he has?been helping foreign companies enter the Chinese market and providing tailor-made business solutions to?his international clients.?

Bryan is an Entrepreneur, Mentor, Investor, Consultant and Tax expert. He has over 20 years working experience in business consulting, tax advisory, company strategies & execution, compliance &?risk management and Corporate Finance.

Before setting up the firm, Bryan was holding senior positions in finance and tax department for many multinational corporations, such as Carrefour, Inbev and Metro. Later, he joined HMY Group as Vice President.

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