Regarding the financial treatment pertaining to the Company Law (effective July 1, 2024) and the Foreign Investment Law (effective January 1, 2020), the following notice is issued:

• On the premise that the Company Law permits the use of capital reserve to offset losses, financial rules are established for the scope, timing, basis, and procedures of such offset, as follows:

1. Scope: Capital reserves eligible for loss offsetting are limited to the following two categories:
   1. Capital contributions made in cash or in the form of non-monetary assets that could be monetary valued and legally transferred, including physical assets, intellectual property, land use rights, equity interests, and creditor’s rights;
   2. Capital injections through debt assumption or debt exemption, or through donations made in cash, physical assets, intellectual property rights, or land-use rights.

However, capital reserves that are exclusively designated for specific shareholders or restricted to particular purposes require prior consent from the rights holder(s). Capital reserves subject to contingent conditions that may alter their value may only be utilized for loss offsetting after the amount is finalized.

2. Timing and basis: When utilizing capital reserves to offset losses, the company must rely on its audited financial statements for the preceding fiscal year (no earlier than 2024), and the offset shall be capped at bringing the ending balance of retained earnings from a negative amount to zero.
3. Procedures: A board resolution shall be formulated and submitted to the shareholders' meeting for approval. No offsetting is permitted if the shareholders’ meeting rejects the proposal. Upon approval, the company must notify the creditors or issue a public announcement within 30 days after the shareholders' resolution; the amount of capital reserve used for loss offsetting shall be separately disclosed under retained earnings in the financial statements. Listed companies may disclose such information in the latest financial statements (interim or annual reports).

• Financial requirements for capital contributions in the form of non-monetary assets:

1. It is clarified that "for accepting shareholders’ capital contributions in the form of non-monetary assets such as physical assets, intellectual property rights, land-use rights, equity interests, and creditors’ rights that can be monetary valued and legally transferred, asset valuation shall be conducted in accordance with the relevant provisions of Caiqi [2009] No. 46. Furthermore, the relevant internal decision-making procedures must be followed as prescribed for establishment, capital increase, merger, division, or similar transactions.
2. It is clarified that "for non-monetary assets invested by shareholders, the company shall, in light of the assets’ characteristics, fully consider various factors that may affect the realization of the rights in such assets, and obtain legal opinions when necessary".

• Treatment of the remaining balances of the reserve fund, enterprise development fund, and employee bonus and welfare fund previously appropriated by the foreign-invested enterprise:

1. Foreign-invested enterprises shall switch from accruing reserve funds and enterprise development funds to accruing statutory reserves and discretionary reserves; the balance of the previous reserve funds shall be converted into statutory reserves, and the balance of the enterprise development funds shall be converted into discretionary reserves.
2. The staff bonus and welfare funds accrued by foreign-invested enterprises shall be used in accordance with the purposes, conditions, and procedures determined at the time of accrual; the balance at the time of liquidation shall be merged into reserves, among which the  accrued balance of insurance and welfare for Chinese employees shall be merged into employee welfare expense payables.

It is clarified that, effective from January 1, 2025, foreign-invested enterprises shall cease to accrue reserve funds, enterprise development funds, or staff bonus and welfare funds. Those accrued on or after January 1, 2025 shall be reversed.