Issued by: The Office of the Ministry of Finance
Issue No.: Caibanzi (2024) No.19
Release Date: October 29, 2024
Links: https://zcgls.mof.gov.cn/zhengcefabu/202411/t20241101_3946784.htm

The Draft is designed to facilitate the seamless integration of enterprise financial systems with the legal frameworks regarding methods of capital contribution, profit distribution and other relevant aspects, as outlined in the newly revised PRC Company Law and the Foreign Investment Law. The key points of the Draft are as follows:
1. Regarding using capital reserve fund to offset losses
    a. The scope of capital reserve funds that can be used to offset losses is limited to those formed by shareholder contributions, with a definite amount, collectively owned by all shareholders, and not for any specific use.
    b. To prevent enterprises from adjusting profits by using capital reserve funds to offset losses mid-year, it is clarified that the use of capital reserve funds to offset losses should be based on the company’s annual financial accounting report. This process should be conducted at the conclusion of each fiscal year, following the completion of annual operations.
    c. The procedure for using capital reserve funds to offset losses has been clarified, that is the board of directors shall formulate a plan, which must then be submitted to the shareholders' meeting for review and approval.
2. Regarding contributions of non-monetary assets
    a. It is explicitly required that when accepting contributions from shareholders in the form of non-monetary assets such as equity or right of credit, an asset valuation must be conducted.
    b. If there is a potential defect in the realization of the equity or right of credit that a shareholder intends to contribute, the company should obtain professional legal advice.
3. Regarding the treatment of balances in the reserve fund, enterprise development fund, and employee reward and welfare fund
    a. For foreign-invested enterprises, if the originally accrued reserve fund and enterprise development fund have a surplus, they shall be converted into statutory surplus reserve funds; if there is a deficit, it shall sequentially offset the capital reserve fund and retained earnings from previous years. If there remains a deficit after such offsets, it shall be transferred to retained earnings.
    b. For foreign-invested enterprises, the surplus of the originally accrued employee reward and welfare fund should continue to be treated as liabilities.