When a foreign company in China has to close or downsize, its management will need to see to a range of matters such as compensation of laid-off staff, taxes, inventory and so on. One of the more commercially critical issues that needs to be dealt with is determining what to do with the company property.
Currently in Shanghai many firms are still enjoying double-digit growth rates, but in the last 12 months we have also noticed a mild uptick in the number of businesses liquidating their operations. If your company is among those exiting the market, then you might find useful the following list of property-related issues that ofen need to be addressed when a firm closes or downsizes its operations.
1) Leased Properties:Negotiating a reduced early termination penalty
If the penalty for early termination is not clearly specified in yourlease contract – which is often the case in China – then you cannegotiate it with your landlord. Addressing this issue early andwith the right strategy can save your firm considerable amounts ofmoney. Start negotiations on the right foot by first identifying yourlandlord’s needs and interests, and indicating that you are willing tocooperate. You may wish to engage a trusted third-party to brokeran agreement for you.
Potential concerns of your landlord include: the possibility that yourfirm owes money to government authorities or suppliers who willone day show up at the building looking for you; ensuring that thespace is fully clean and cleared before you go, which may requireremoval of renovations and fixtures; financial compensation (i.e. theearly termination penalty); and, importantly, getting your companyto deregister from the unit as quickly as possible so that it can beleased or sold to another company.
Note that finding replacements tenants is neither common practicein China nor necessarily appreciated by a landlord.
2) Owned Properties: Issues relating to property sales
If your company owns property in China then chances arethat its value has appreciated considerably since its purchase.In order to determine the likely time needed to dispose ofthe facilities and how well its sale is supported by currentmarket conditions, you may wish to carry out a marketbasedproperty appraisal. You will also want to investigateand ensure you are fully aware of: all legal aspects of thesale, such as transferability of your premises; tax aspects,such as expected appreciation tax; and potential hurdlesregarding capital repatriation. Since 2011 capital gains taxesare typically due to be paid in China, even if the sale is an offshoreshare deal.
3) Renting and Rezoning: What options are available to you?
Renting, subletting or rezoning owned property may beconsidered desirable options for some firms leaving China,but such real estate activities will generally only be permittedif they are listed under the business scope of your firm’sbusiness license. If not, then you are probably out of luck:it is very difficult in China to have the original scope of yourbusiness activities expanded to include real estate. Sublettingyour property when it is not part of your firm’s businessscope is risky and is likely to be challenged by authorities.
4) Move of Registration Address: Easing the corporate exit
The process of deregistering a China business licensetypically takes many months and can only be completedafter tax clearance and various other procedures have beenfinalized. Because the exact length of this period is uncertain,it presents a problem to your landlord who cannot rent thespace to another tenant until your firm has left. It is thereforegenerally wise to move the business to a smaller space andreregister it under the new address, a relatively quick andsimple process, while continuing to deregister the companybusiness license. The new space can be as small as a onedesk,closed office in a business center (but not a virtualoffice) and still adhere to Chinese property regulations.
5) Physical Move: what goes where
You will need to decide which items and documents to keep,and which to send to your headquarters, accountants andlawyers, or storage. Remember that moving things out ofyour building typically requires permission from facilitiesmanagement.
6) Sequence: Scheduling and resolutionof conflicting demands
Scheduling the transport of everything is critical as you wantto avoid sending an item away only to discover later thatyou need it to complete some essential step. Meanwhile,scheduling contradictions may arise in your arrangementswith the various parties you are dealing with. For example,your building’s facility management department maydemand that all outstanding payments are completedbefore they permit you to move your belongings out ofthe premises, while the building’s owner requests that allitems are moved out successfully before an agreement onthe successful early termination of your lease agreementis executed. Similar questions may come up with regardsto current and future electrical expenses, IT and telephoneexpenses and so on.
A preplanned strategy designed before entering into officialnegotiations, along with a written project schedule andamicable, solution-oriented dialogue with the affectedparties can help you avoid some of these difficultiesaltogether, and more easily resolve the problems thatinevitably do arise.
Heading into the new year, occupanciesremain high overall in all the major CBDs acrossShanghai, with landlords of the most soughtafter buildings able to pick and choose theirtenants based on background, industry, etc.
However, as noted in the first section ofthis newsletter, there has been a small butnoticeable uptick in the number of foreign firmsdownsizing and leaving the market in recentquarters, which have also seen the closing ofseveral companies in the P2P technology sector. These are factors relieving upward pressure onrents to some degree.
Tenant moves in the last quarter included theSwiss company Sonova renting space in GopherCenter, and a move by private bank Julius Baerto Azia Center.