Laws of the People's Republic of China

The Ministry of Finance

Circular of the Ministry of Finance on How to Deal with the Financial Issues about the Assessed Increase and Decrease of the Overseas Investment Assets of Foreign-funded Enterprises

CaiQi[2003] No.181

July 4, 2003

The departments (bureaus) of finance of provinces, autonomous regions, municipalities directly under the Central Government and municipalities separately listed on the State plan:

In order to meet the requirements of WTO, to promote the further development of the foreign invested enterprises, protect the long-term interests of all Chinese and foreign parties, the relevant matters on how to deal with the financial issues about the assessed increase and decrease overseas investment assets of foreign-funded enterprises are hereby notified as follows:

1.

Where a foreign-funded enterprise makes overseas investments in kind or with intangible assets, the excess between the book value of the invested assets plus pertinent taxes payable (namely the initial investment costs, the same below) and the shares of rights and interests that the owner of the investing entity is entitled to enjoy shall be dealt with as the margin of stock right investment, which shall be counted into profit and loss through amortization in accordance with the relevant provisions. The margin between the initial investment costs and the shares of rights and interests that the owner of the investing entity is entitled to enjoy shall be dealt with as accumulation fund. The pertinent provisions in the Circular on Distributing the Supplementary Provision on the Foreign-funded Enterprises¡¯ Implementation of the New Enterprise Financial System [CaiGongZi(93)No.474] issued by this Ministry in 1993 shall not be implemented any longer.

2.

As to a foreign-funded enterprise that counts the assessed increase and decrease of overseas investments in kind or intangible assets into profit or loss in accordance with Document CaiGongZi(93)No.474 issued by the Ministry of Finance, because the assessed increase and decrease of the assets will not cause flow of cash, the enterprise shall take this factor into full account when it allocates profits. For an enterprise that treats it as profit in light of the previous financial system, but fails to allocate it yet, it may use it as future annual makeup for loss or converse it into capital increase.