Unwinding an international entity is a component of global expansion that many companies don’t anticipate. However, businesses sometimes find that they need to close overseas entities due to shifts in strategy, market conditions, restructuring, or changes in hiring needs.
The process of shutting down a business entity involves careful coordination across legal, financial, tax, and people-related functions, and mistakes can be costly.
However, it’s essential to note that closing an entity doesn’t necessarily signal the end of global growth. Companies can continue to expand internationally without maintaining local entities by partnering with an Employer of Record (EOR).
Key takeaways:
- Ceasing business activity at a foreign entity isn’t the same as dissolving it; companies retain legal and financial obligations until formal deregistration is complete.
- Employee terminations, final payroll, benefits, and taxes are among the most complex and risk-prone aspects of shutting down an overseas entity.
- Entity closures often take months — or even years — depending on the jurisdiction.
Common Reasons Companies Shutter Overseas Entities
Deciding to close an international entity is typically a strategic business decision made in response to changing circumstances, such as:
- Underperforming markets: When a local subsidiary consistently fails to meet revenue expectations or incurs higher-than-anticipated costs, maintaining it can strain financial resources. Businesses may conclude that the return on investment doesn’t justify continued operations abroad.
- Consolidation of operations: Companies with multiple international locations sometimes decide to consolidate operations to streamline costs, reduce administrative overhead, or centralize functions.
- Changes in strategy or priorities: Shifts in corporate strategy — such as focusing on core markets or responding to geopolitical and regulatory pressures — can lead companies to reconsider where they maintain a physical presence.
- Shift toward flexible hiring models: Instead of maintaining local entities, some organizations leverage EOR services or engage independent contractors as part of a strategy to stay agile while still accessing global talent.
- Compliance challenges: Compliance with local law, tax regimes, and employment requirements can become burdensome, especially when regulations tighten or evolve. In some markets, these obligations may outweigh the benefits of having a direct presence.
Closing an Entity Is Not the Same as Ceasing Operations
A company can shut its doors, stop selling products, and cease business operations, yet remain a legal entity in the jurisdiction where it was formed. Simply halting business activity doesn’t erase the company’s legal existence.
A formal dissolution or deregistration process is what actually ends a company’s existence. This requires filing the appropriate documents, settling liabilities, paying outstanding taxes, and obtaining official confirmation from the relevant authorities that the entity has been removed from the register.
If a company stops operating, but doesn’t complete this formal process, it continues to exist in the eyes of the law. That means ongoing obligations — like filing annual returns, paying taxes, or maintaining licenses — may still apply, and penalties can accumulate for noncompliance.
In other words, just like Michael Scott’s humorous (but legally ineffective) proclamation, “I declare bankruptcy!” in “The Office,” declaring that you’re done isn’t enough — there are several legal steps that must be taken to officially dissolve the entity.
Key Stakeholders to Involve Early
Successfully closing an overseas entity requires coordination across multiple internal and external stakeholders. Bringing the right parties into the conversation early ensures that you align on objectives, responsibilities, and timelines, and it helps you avoid common pitfalls in the dissolution process.
Legal Counsel
Legal advisors help you navigate jurisdiction-specific requirements for dissolution, ensure filings are accurate, and mitigate risks tied to local laws. Early legal involvement also helps manage contracts, licenses, and obligations that must be unwound before dissolution.
Payroll and HR Teams
These teams need to be engaged early to ensure that employee-related matters — final pay, employee benefits, statutory notices, and potential terminations and/or redundancies — are in line with local employment law.
Accountants and Tax Advisers
Accountants and tax experts play a crucial role in reconciling accounts, settling outstanding liabilities, and producing final financial statements. Many jurisdictions require tax clearance or audits before dissolution can proceed. Experienced advisers ensure that filings are completed in a timely and accurate manner.
Finance and Treasury Teams
Teams handling finances must address debt settlements, bank account closures, asset dispositions, and currency repatriation. They also ensure that all financial affairs are in order before submitting deregistration applications.
Local Authorities
Interacting with local regulators and government entities is mandatory for formal deregistration, which involves submitting closure notices, handling final statutory filings, and obtaining official confirmation that the entity is struck from the register.
Shareholders and Board Members
Transparent communication with shareholders and the board of directors is essential to align strategic decisions and obtain any necessary approvals for entity closure.
Clients, Suppliers, and Other External Partners
While not always directly involved in the closure decision, external partners should be notified to manage contracts, outstanding invoices, and the transfer or termination of agreements.
Employee and Contractor Considerations
Employee and contractor matters can be among the most complex and sensitive parts of the closure process, and mishandling them can lead to costly disputes, penalties, and harm to your employer brand. Here’s what to keep in mind:
Employee Termination Obligations
- Notice periods and severance: In many countries, employers are required to provide advance notice before termination, as well as severance pay, and these requirements vary by country.
- Grounds for dismissal: Unlike at-will employment in the United States, most jurisdictions require employers to meet specific legal grounds to terminate an employee.
- Collective bodies: In some markets, such as most of Europe, works councils, trade unions, or collective bargaining agreements must be consulted before layoffs can proceed.
Contractor Agreements and Misclassification Risk
- Closing out contractor relationships: When a contractor engagement ends, it’s important to follow the contract and local laws to ensure a clean and compliant exit for both parties.
- Misclassification risk: One of the biggest risks in global workforce management is misclassifying contractors as independent when, in fact, they are employees. If a contractor is determined to be an employee under a country’s laws, that worker may be entitled to employee protections, such as notice, severance, benefits, and back pay, and the company could face fines.
Misclassification claims often arise after a relationship ends, so correct classification from the start can help avoid issues.
Payroll, Benefits, and Social Contributions
Closing an overseas entity means you must settle all outstanding payroll and employee benefit obligations before you can dissolve the company.
Finalizing Payroll and Wages
When employees leave or are terminated as part of the entity’s closure, you must calculate and pay all final wages due, including outstanding salary through their last working day, contractually owed bonuses, and accrued but unused paid leave or holiday pay.
Benefits and Pension Plans
Benefits arrangements — including pension schemes, health plans, and other employee benefits — must be formally wrapped up.
Social Security and Payroll Taxes
Employers are generally required to pay social security contributions in each country where they employ workers. As you wind down operations, ensure the last periods of contributions are reported and paid, and that employee registration in the system is closed in accordance with local requirements.
Tax and Financial Obligations
This is one of the most critical and country-specific aspects of shutting down an overseas entity.
Final Corporate Tax Filings
Most countries require companies to submit a final corporate income tax return covering the period up to the date of dissolution. This may include marking the return as “final,” submitting closing financial statements, and settling any outstanding tax liabilities.
VAT, GST, and Sales Tax Deregistration
If the entity is registered for VAT, GST, or sales tax, those registrations must be formally canceled. This typically involves filing final indirect tax returns, paying outstanding amounts due, and accounting for VAT on asset disposals.
Transfer Pricing
Transfer pricing considerations should be reviewed carefully if the entity has engaged in intercompany transactions. Final settlements may be required, and supporting documentation may still be subject to audit after closure.
Settlement of Outstanding Liabilities
Before an entity can be dissolved, all known liabilities should be settled, including supplier invoices, employee-related obligations, taxes, and penalties. Some countries require companies to publicly notify creditors and allow a claims period before dissolution.
Tax Clearance Certificates
In many countries, a tax clearance certificate is required to demonstrate that the entity has no outstanding tax debts.
Other Financial Close-Out Steps
Additional steps often include closing bank accounts, repatriating remaining funds, disposing of assets, and retaining records for the statutory retention period, which can last for years.
Regulatory Filings and Deregistration Requirements
Closing an overseas entity usually involves a series of formal deregistrations, and while requirements vary by country, these are some of the common steps:
- Notify the corporate registry: Most jurisdictions require a formal filing to remove it from the register.
- Deregister with tax authorities: You may need to cancel VAT/GST and submit final returns up to the cancellation date. In many countries, an entity can’t be closed until tax obligations are finalized.
- Deregister as an employer: If the entity employed staff, you’ll often need to notify labor-related agencies and deregister employees from social security within specific timeframes.
- Cancel business licenses and permits: Operational permits — such as municipal licenses, sector-specific authorizations, and import/export registrations — need to be formally canceled.
- Close bank accounts and unwind financial infrastructure: In some jurisdictions, dissolution can freeze accounts and even create “asset vesting” issues if funds remain after dissolution. In some countries, deregistration can affect access to business bank accounts, so you may need to close accounts before final deregistration.
- Obtain any required approvals: Certain countries require explicit “no objection” or clearance documentation from tax authorities. For example, Hong Kong’s deregistration process involves a Notice of No Objection from the Inland Revenue Department.
Typical Entity Closure Timeline
Closing down an entity abroad is a multi-step process that varies significantly by country and the complexity of your company’s affairs.
General Timeframe
In simple cases where there are no outstanding liabilities, dissolution can be completed in a few months; however, this depends heavily on the jurisdiction in which your entity is based. For example, in the United Kingdom, it typically takes three to five months; however, in more complex environments, such as China, it can take more than a year.
Factors That Influence How Long the Closure Process Takes
Several variables can extend a closure timeline beyond the baseline estimates:
- Pending audits or tax requirements: Tax authorities in many countries require an intensive review of past filings or audits before granting clearance.
- Unsettled disputes: Outstanding debts, unresolved creditor claims, or legal disputes with suppliers, employees, or other stakeholders can pause a dissolution process.
- Employee matters: Complex termination obligations or collective bargaining consultations may require more time.
- Document errors: Simple mistakes on dissolution applications or missing documentation can trigger rejections or requests for additional information.
- Notification periods: Some jurisdictions impose mandatory public notice periods, and the closure cannot proceed until the notification timeline has expired.
Risks of Getting Entity Closure Wrong
Failing to close an entity abroad properly can be costly, and skipping steps or cutting corners exposes you to risks.
Ongoing Tax Exposure and Financial Penalties
Inactive entities that haven't been formally dissolved continue to accumulate taxes, and unresolved liabilities, such as corporate tax, VAT/GST, or payroll taxes, become more costly the longer they remain unaddressed.
Fines and Investigations
Tax authorities and corporate registries can investigate a company long after it has ceased operations if there are outstanding obligations or suspicions of noncompliance. In some countries, investigations can lead to fines and even personal liability for directors if they're found to have misused the dissolution process.
Personal Liability
If authorities uncover misconduct, directors may face personal liability for company debts, disqualification from acting as a director, or even criminal consequences.
Reputational Damage
Improper closure can also harm your company’s reputation. News of non-compliance, regulatory investigations, or creditor disputes can discourage future partners, investors, or clients from working with you or even block access to banking and credit in future ventures.
Complicated Market Re-Entry
A poorly executed closure can leave unresolved records in local systems, making it more difficult to re-enter the market in the future.
Administrative and Legal Burdens
When dissolution isn’t handled correctly, regulators can legally restore the entity to the register to pursue unpaid obligations, forcing costly and time-consuming remediation.
Alternatives to Full Closure
Depending on your business goals, future plans, and local requirements, there may be alternatives that allow you to reduce costs and compliance burdens without permanently exiting a market.
Placing the Entity Into Dormancy
In some countries, companies can place an entity into a dormant or inactive status if it’s no longer trading. Dormant entities have reduced compliance obligations, such as simplified annual filings. This is a good option if you plan to re-enter the market later or want to preserve licenses and registrations.
Selling or Transferring the Entity
This may be appropriate if the entity has valuable licenses, contracts, assets, or a strong market presence that another company is interested in acquiring. Selling an entity can help recover value and mitigate the costs associated with liquidation.
Transitioning Employees to an Employer of Record
For companies whose primary reason for maintaining an entity is employing local staff, transitioning employees to an EOR is a practical alternative.
Migrating Your Employees From Entity to EOR
Moving employees to an EOR removes the ongoing burden of employment from your entity, simplifying the remaining aspects of the shutdown process. Here's how the transition typically works:
Terminate Employment With the Entity
You must first legally terminate your entity’s employees in compliance with local labor laws, including notice periods, final pay, accrued leave, and any statutory severance obligations.
Rehire Through the EOR
Employees can now be rehired under the EOR with new contracts. The EOR becomes their legal Employer of Record on paper, handling payroll, tax withholding, statutory benefits, social security contributions, and compliance.
Once your people are officially on the EOR’s payroll, you can close payroll accounts associated with the entity and stop handling social security contributions and benefits administration under the entity.
How to Plan a Clean and Compliant Exit
Closing an overseas entity is a multi-phase project, so here’s practical guidance to help you execute a smooth closure:
1. Start With a Closure Plan
A robust exit plan should act like a project roadmap and typically includes:
- Timeline and milestones: Set target dates for significant steps, such as terminating employees, filing final taxes, and canceling licenses.
- Stakeholder roles: Clarify which teams are responsible for specific tasks and responsibilities.
- Legal and regulatory checklist: Document all filings required by corporate, tax, labor, and social authorities.
2. Document Decisions and Approvals
Keep organized records of key decisions throughout the closure process, including the following:
- Board resolutions authorizing the closure
- Termination and severance decisions
- Correspondence with tax authorities
- Filings, receipts, and clearance certificates
3. Communicate Clearly
Good communication is both a legal and ethical imperative, as it reduces confusion and helps prevent disputes that can delay deregistration. This means being straightforward and proactive with everyone affected, including:
- Employees: Give clear notices about termination timelines, final compensation, and benefits.
- Regulators: Notify relevant corporate registries and tax authorities where required.
- External partners: Suppliers and clients should be informed about any changes to contractual or billing arrangements.
4. Engage Local Experts
Local legal, tax, and HR advisers are invaluable in international closures because requirements vary significantly across countries, local authorities may interpret filings or deadlines differently, and labor rules can be complex and nuanced.
5. Maintain Records
Many countries require continued retention records for years after the company is dissolved. These records may be needed for tax audits, legal disputes, or proof of compliance if you re-enter the market in the future.
Skip the Hassles of Opening (and Closing) an Entity With RemoFirst
Shutting down a legal entity abroad entails significant legal, financial, tax, and operational complexities. Instead of dealing with all the red tape of establishing and then potentially dissolving an entity, partner with an EOR like RemoFirst and let us take on all the HR and administrative burdens.
RemoFirst enables companies to hire, onboard, pay, and manage international employees without setting up local entities. By partnering with an EOR, you avoid the upfront burden of entity formation, as well as the complexity of entity closure, while still expanding into new markets.
And, if you have an entity you're disbanding but want to retain your employees, you can legally employ them through RemoFirst.
Ready to simplify global hiring? Schedule a demo.
