(Source: "Economic Daily", China Economic Net2025-07-01）
Recently, the Ministry of Finance issued the "Notice on Financial Handling Issues after the Implementation of the Company Law and Foreign Investment Law" (hereinafter referred to as the "Notice"), which further clarifies the relevant regulations on financial handling on issues such as the use of capital reserve funds to make up for losses, non-monetary property valuation, foreign-invested enterprise reserve funds, enterprise development funds, and employee incentive and welfare funds.
The relevant person in charge of the Asset Management Department of the Ministry of Finance introduced that the new Company Law that will be implemented from July 1, 2024 stipulates that to make up for the company's losses with the provident fund, the discretionary reserve fund and the statutory provident fund should be used first; if it still cannot be made up, the capital reserve fund can be used in accordance with the regulations. Non-monetary property used as capital contribution shall be evaluated and valued. The specific financial management requirements of the above provisions need to be further clarified. The Foreign Investment Law, which came into effect on January 1, 2020, stipulates that the organizational form, organizational structure and activity guidelines of foreign-invested enterprises shall be governed by the provisions of the Company Law, Partnership Enterprise Law and other laws. After the expiration of the five-year transition period on January 1, 2025, there is an urgent need for further clarification on how to conduct the financial treatment of the "reserve funds, employee incentive and welfare funds, and enterprise development funds" drawn by foreign-invested enterprises in accordance with the previous laws and regulations such as the Sino-Foreign Equity Joint Venture Law.
In order to implement the above legal requirements and standardize corporate financial behavior, the "Notice" has made a series of clear provisions. On the basis that the Company Law allows the use of capital reserve funds to make up for losses, financial regulations should be made on the scope, time, basis, and procedures of making up. Clarify the scope of the capital reserve fund that can be used to make up for losses, and limit the capital reserve funds that can make up for losses to the following two categories: "Accepting capital contributions in the form of currency, or non-monetary property such as physical objects, intellectual property rights, land use rights, equity, debt rights, etc. that can be valued in currency and transferable in accordance with the law"; and "Accepting capital investment in the form of debt repayment, debt exemption, or donation of currency, physical objects, intellectual property rights, land use rights." In order to protect the rights and interests of shareholders and respect the autonomy of shareholders, it is clear that making up for losses must "form a resolution of the board of directors and submit it to the shareholders' meeting for review. Shareholders will question and vote in accordance with the law. If the shareholders' meeting fails to pass the review, the company shall not use the provident fund to make up for the losses."
On the basis of the Company Law clarifying the legality of equity and creditor's rights investment, it emphasizes that enterprises should play the role of asset evaluation and internal governance when accepting non-monetary property for investment. It is clear that "if an enterprise accepts investment from shareholders in the form of physical objects, intellectual property rights, land use rights, equity, creditor's rights and other non-monetary property that can be valued in currency and can be transferred in accordance with the law, it shall conduct asset evaluation in accordance with relevant regulations and perform internal decision-making procedures in accordance with relevant regulations on establishment, capital increase, merger, division and other matters." At the same time, companies are reminded to make prudent decisions and clarify that "for non-monetary assets invested by shareholders, companies should take into account the characteristics of the assets, pay full attention to various factors that may affect the realization of asset rights, and obtain legal opinions when necessary."
Zhu Jigao, researcher at the National Institute for Opening-up at the w88 casino and professor at the International Business w88 casino, believes that the "Notice" has established a financial governance framework that places equal emphasis on "relaxation" and "standardization". It is necessary to fully stimulate the capital vitality of enterprises and provide new relief paths for operating entities in financial difficulties; on the other hand, through measures such as strictly limiting the scope of use of capital reserve funds and strengthening non-monetary investment evaluation procedures, we can effectively prevent financial manipulation risks and effectively protect the legitimate rights and interests of creditors and small and medium-sized shareholders.
“This system design of ‘combination of decentralization and regulation’ not only accurately responds to the actual needs of enterprises, but also adheres to the compliance bottom line of the capital market, creating a stable and healthy institutional environment for high-quality economic development.” Zhu Jigao said.
On the basis that the Foreign Investment Law clarifies that the organizational form, organizational structure and activity criteria of foreign-invested enterprises shall be governed by the Company Law and other legal provisions, the "Notice" clarified the financial processing requirements for the three funds. Foreign-invested enterprises will switch from drawing reserve funds and enterprise development funds to drawing statutory provident funds and discretionary provident funds. At the same time, it is clarified that the reserve fund balance will be transferred to statutory provident fund management, and the enterprise development fund balance will be transferred to discretionary provident fund management. In order to safeguard the rights and interests of employees, it is clarified that the employee rewards and welfare funds of foreign-invested enterprises shall be used in accordance with the purposes, conditions and procedures determined at the time of withdrawal. Considering that the five-year transition period proposed by the Foreign Investment Law on January 1, 2025 has expired, it is clear that "foreign-invested enterprises will no longer accrue reserve funds, enterprise development funds, employee incentives and welfare funds from January 1, 2025."
“The abolition of the three fund provisions has significantly reduced the financial pressure on foreign-invested enterprises. Enterprises can use these funds for R&D investment, dividends or debt repayments, etc., which helps to enhance the company’s capital liquidity and operational vitality. The abolition of the three fund systems breaks the difference in the profit distribution system between foreign-invested enterprises and domestic-funded enterprises, helps optimize the business environment, and stimulates the innovation vitality and development motivation of foreign-invested enterprises.” Zhu Jigao said.
Chen Yunsen, a professor at the Central University of Finance and Economics, believes that in the face of the implementation of new regulations, companies should not just regard it as a simple accounting adjustment, but should regard it as a comprehensive test of corporate governance, internal control management and risk awareness. Policy tools must be used prudently to prevent abuse and "loophole taking"; improve the quality of information disclosure, build a "moat" of trust with transparency; consolidate the foundation of compliance and strengthen internal control.
"The "Notice" is an important measure to implement the requirements of the Company Law and the Foreign Investment Law, standardize and strengthen issues related to corporate financial management. In the next step, we will do a good job in publicity, interpretation and organizational implementation, continue to track the implementation of the "Notice", keep abreast of the opinions and suggestions of stakeholders and the public, solidly promote system evaluation and research, and continuously improve the effect of system implementation." said the relevant person in charge of the Asset Management Department of the Ministry of Finance.
Attached original text link:
http://ipaper.ce.cn/pc/layout/202507/01/node_07.html
