Laws of the People's Republic of China

The Ministry of Finance

Provisions of the People's Republic of China on the Financial Control of Chinese-foreign Equity Joint Ventures

the Ministry of Finance

August 5, 1986

Article 1

These Provisions are formulated in accordance with the Law of the People's of China on Chinese-foreign Equity Joint Ventures and other relevant laws and statutory regulations, in order to improve the financial control and supervision of Chinese-foreign Equity Joint Ventures and to protect the legitimate rights and interests of investors.

Article 2

All financial and accounting activities of a Chinese-foreign Equity Joint Ventures (hereinafter referred to as a joint enterprise) which is established in China with the approval of the ministry of Foreign Economic Relations and Trade of the People's Republic of China or one of its authorised organs shall comply with the provisions of the relevant Chinese laws and statutory regulations, and shall be subject to examination and supervision from the relevant finance and taxation departments. A joint enterprise shall provide the examining party with related information and the examining party shall be liable for maintaining the confidentiality of such information.

Article 3

A joint enterprise shall establish a complete financial and accounting body which shall be based within China. Financial and accounting matters shall be handled by the enterprise itself.

Article 4

A joint enterprise shall, in accordance with the rules and financial and accounting procedures for Chinese-foreign Equity Joint Ventures issued by the Ministry of Finance of the People's Republic of China and in conjunction with its own specific conditions, formulate is own financial and accounting procedures and shall file these procedures with the department in charge of the enterprise, and equivalent level finance organ and the local taxation organ. If any one of these units considers that the financial and accounting procedures of the said joint enterprise contravene a Chinese law or statutory regulation it shall require the enterprise to make the appropriate amendments.

Article 5

A joint enterprise shall tighten control of its invested capital, invested property and invested goods and materials, in order to ensure that enterprise property remains safe and intact. A joint enterprise shall improve cost control and endeavour to reduce costs so as to enhance its competitiveness. A joint enterprise shall strengthen control of its creditors and debtors, special funds and foreign exchange funds and increase the efficient use of these funds.

Article 6

A joint enterprise shall, in accordance with provisions, submit monthly, quarterly and annual accounting statements to the various parties to the joint enterprise, the department in charge of the joint enterprise, an equivalent level finance organ and the local taxation organ. A copy of the annual accounting statement shall be submitted to the original examining and approving organ. A copy of the annual accounting statement for key joint enterprises designated by the Ministry of Finance shall, at the same time, be submitted to the Ministry of Finance.

Article 7

The various parties to a joint enterprise shall pay their respective investment contributions in full in accordance with the time limits prescribed in the contract. Interest on late payments or compensation for losses shall be paid in accordance with the provisions of the contract for that part of the investment payment overdue. After the various parties to a joint enterprise have paid their investment contributions, a certified public accountant approved by the Chinese Government shall be engaged to verify the amount and to issue a verification report. The joint enterprise, in accordance with this report, shall enterprise. Investment verification work shall be completed within 60 days of payment of investment.

Article 8

A joint enterprise shall strengthen finance control during its establishment period. Wages of personnel involved in preparatory activities, travelling expenses, staff training costs and other expenses incurred during the establishment period, which is the period from the signing of the contract to the start-up of production and business operations, may be classified as establishment costs and shall be amortised by instalments after the start-up of production and business operations. Annual amortisation shall not exceed 20%. The purchase or construction of fixed assets by a joint equity enterprise, its expenditure on intangible assets, or its interest expenses during construction which shall be apportioned to project costs shall not be counted as establishment costs.

Article 9

Classification criteria for fixed assets and the period of depreciation for a joint enterprise shall be determined and implemented in accordance with the provisions of the Rules for the Implementation of the Income Tax Law on Chinese-foreign Equity Joint Ventures.

Article 10

During the period of the joint enterprise the parties to the joint enterprise shall not withdraw their registered capital in any form or by any means.

Article 11

A joint enterprise shall pay site use fees for the right to use a site. The scale of rates for site use fees and the method of payment shall be implemented in accordance with the local provisions of the people's government of the province, autonomous region and municipality directly under the Central Government. Site use fees may be counted as costs. If the site use right is subscribed by the Chinese party as investment, a joint enterprise shall not, in addition, pay site use fees.

Article 12

A joint enterprise, in accordance with the scale of fees checked and ratified by the finance department and the labour department of the local province, autonomous region or municipality directly under the Central Government, shall pay, on behalf of its Chinese employees, labour insurance funds, medical and welfare fees and various State subsidies, such as employee housing rent and commodity price subsidies. Such expenses shall be counted as costs. Labour insurance funds for the Chinese employees of the enterprise shall be paid by the joint enterprise to the department in charge of labour insurance. Medical and welfare fees shall be kept by the enterprise itself for use in payment of medical and welfare expenses for Chinese employees. The various subsidies, such as housing rent and commodity price subsides, shall be paid by the enterprise to the local finance organ.

Article 13

A joint enterprise shall set aside 2% of the total monthly employee actual wage bill as trade union funds, to be paid out of enterprise cost outlays. Trade union funds shall be managed and used by the trade union of the enterprise in accordance with the relevant provisions of the All-China Federation of Trade Unions.

Article 14

A joint enterprise shall pay the various taxes in accordance with the provisions of the relevant tax laws of the People's Republic of China. After-tax profits shall be allocated first to the reserve fund, the employee bonus and welfare fund and the enterprise development fund. The proportion of the amount allocated to these funds shall be determined in accordance with contract provisions or by the Board of Directors. In addition to being used as a temporary advance payment to cover the losses of a joint enterprise, the reserve fund may also be used to increase the enterprise's capital and to expand its production, provided this is approved by the joint enterprise's examining and approving organ. The enterprise development fund may be used to purchase fixed assets, increase the amount of working capital available and expand the enterprise's production operations. The employee bonus and welfare fund shall be used in part for extraordinary employee bonuses, such as an exemplary worker bonus, an invention bonus and an end-of-year bonus, and in part shall be given to the trade union of the enterprise for use in collective welfare activities, such as construction or renovation of employee housing.

Article 15

After the "three funds" have been set aside in accordance with Article 14 of the Provisions, a joint enterprise shall distribute the remaining distributable profit in accordance with the proportion of investment contributed by the various parties to the enterprise. Profit that has not been distributed from previous years may be added to the current year's profit for distribution. A foreign party to a joint enterprise may legally remit abroad its dividends paid in accordance with its investment proportion, or the dividends may be reinvested in China. Dividends paid to the Chinese party to a joint enterprise in accordance with its investment proportion shall be handled pursuant to the measures of the Ministry of Finance of the People's Republic of China on the allocation and control of profit received by a Chinese Party to a Chinese-foreign equity joint enterprise.

Article 16

When the liquidation of a joint enterprise is declared at the expiry or premature termination of its contract, appropriate financial and liquidation work shall be conducted in accordance with the Law of the People's Republic of china on Chinese-foreign Equity Joint Ventures and the provisions of its Implementing Rules concerning liquidation of Chinese-foreign Equity Joint Ventures.

After a joint enterprise is dissolved, the various account books and documents shall be retained by the Chinese party to the enterprise.

Article 17

The right to interpret these Provisions resides with the Ministry of Finance of the People's Republic of China.

Article 18

These Provisions shall enter into force as of the date of promulgation.