Ministry of Finance

CHAPTER I GENERAL PROVISIONS

Article 1. This set of regulations is formulated in compliance with the laws and regulations of the State concerning foreign-funded enterprises with a view to controlling and supervising the financial affairs of foreign-funded enterprises and protecting the interests of the State, enterprises and investors.

Article 2. The regulations apply to all foreign-funded enterprises established within the territory of China according to Chinese laws. They include Sino-foreign equity joint ventures (hereinafter referred to as "joint ventures"), Sino-foreign cooperative enterprises (hereinafter referred to as "cooperative enterprises") and foreign enterprises.

Foreign-funded enterprises shall abide by the relevant laws and regulations and this set of regulations of China in its financial affairs and accept the examination and supervision by Chinese financial organs.

Article 3. The general financial affairs of foreign-funded enterprises in China shall be put under the unified administration of China's Ministry of Finance.

The financial departments (bureaus) of various provinces, autonomous regions, municipalities under the direct administration of the central government and cities whose plans are directly controlled by the central government (hereinafter referred to as "financial organs in charge") shall administer the financial affairs of foreign-funded enterprises within their jurisdiction.

Central administration of enterprises shall provide guidance, aid and supervision to financial affairs of foreign-funded enterprises jointly run by their affiliated enterprises.

Article 4. A foreign-funded enterprise shall submit to the financial departments in charge the copies of the document of approval, business license, contract and articles of association within 30 days after registering with the administration for industry and commerce.

A foreign-funded enterprise, which makes additional investment, transfers the rights and interests of investment or alters terms of cooperation during the period of production and operation, shall submit to the financial departments in charge the copies of documents on alteration within 30 days after the procedures for alteration is completed.

CHAPTER II ACCOUNTING ORGANIZATION, PERSONNEL AND RULES

Article 5. A foreign-funded enterprise shall set up an accounting organization at place where it locates in China. If it has difficulties in setting up an accounting organization due to too small a scale of operation, it may not set up such organization but should report to the financial departments in charge or the central administration of enterprises.

A foreign-funded enterprise shall have qualified accounting personnel to handle accounting affairs according to law. When accounting personnel leave their posts due to good reasons, their work shall be handed over properly and in no circumstances shall the accounting work be interrupted.

The setup of the accounting organization of an enterprise shall be determined by the board of directors (or joint management organ, the same applies below) according to the principle of being sound and efficient.

A foreign-funded enterprise shall, according to actual needs, designate a chief accountant to assist the CEOs of the enterprise in financial and accounting affairs control.

Article 6. A foreign enterprise shall, in compliance with the Chinese laws, regulations and this set of regulations, work out its own financial rules, including financial receipt and payment, property management, cost and spending management, spending standards and examination and approval procedure, management of funds in foreign currencies, internal control and auditing in light of its own circumstance.

The financial rules of an enterprise shall be submitted to the financial department in charge or the central administration of enterprises for the record before the enterprise should go into operation or open business.

For an enterprise which needs at least one year of preparation to start official operation, it shall first of all work out financial rules suited to the period of preparation and submit them to the financial department in charge or the central administration of enterprises for the record within three months after the business license is obtained.

Article 7. A foreign-funded enterprise shall submit regularly to the financial department in charge or the central administration of enterprises and local tax authorities an accounting statement and a financial position statement according to the forms, contents and time limits prescribed by the Ministry of Finance. The annual statement and settlement statement should be attached with an auditing report by an accountant registered in China. In case that the accounting report and the auditing report attached do not conform to those required by the Ministry of Finance, they shall be returned for revision.

CHAPTER III MANAGEMENT OF CAPITAL

Article 8. A foreign-funded enterprise should advise its investors to pay up the prescribed amount of investment, fulfill other cooperative conditions and do well the appraisal and acceptance of assets in accordance with the State laws and the provisions of the contract and articles of association to ensure the needed operation funds shall be available in time. An investor who violates the provisions of the contract with regard to investment shall bear the legal responsibility.

An investor shall pay the due investment or provide the cooperative conditions in cash, in kind or in intangible assets. Foreign exchange should be paid by a foreign investor in cash for his (her) investment or cooperative conditions; but profits in Renminbi derived by a foreign investor from an enterprise he (she) has funded within the territory of China can also be used as investment or cooperative conditions to be put in another enterprise in China.

When an investor makes investment or fulfill cooperative conditions in kind or intangible assets, the certificates for ownership and disposable right of the assets and other effective certificates should be presented according to law. Assets got from leasing or having used as collateral cannot be used as share of investment.

When necessary, investment or cooperative conditions should be priced in value terms according to law. Intangible assets shall not be accounted for more than 20 percent of the actual registered capital.

Once set according to the exchange rate quoted by the State when the contract is signed or when the investment is first received, the ratio of the investment by various sides shall not change upon the changes of exchange rates.

Article 9. A foreign-funded enterprise shall employ an accountant registered in China to verify the investment and cooperative conditions it receives and submits report of the verification. The verification shall be completed within 60 days after the investment or cooperative conditions are presented.

The report of the verification shall be submitted to the financial department in charge or the central administration of enterprises within ten days after the verification is completed. In the case that the verification does not tally with the facts, re-examination of the investment shall be carried out.

Article 10. An investor of a joint venture or a foreign enterprise shall not withdraw its registered capital under any pretext or in any form within the period of its operation. In a cooperative venture contract that appropriates the whole fixed assets to the Chinese side upon the expiration of the term of cooperation, it can also let foreign side to recover its investment during the term of cooperation but under the obligation of paying the debts owed by the venture according to relevant laws and the contract. A contract that provides the foreign side the right to recover its investment before paying the income taxes must be approved by the financial and tax departments concerned.

Article 11. The accumulation fund of an enterprise includes: the part of the investment exceeding the registered capital; the differences obtained through conversion in the standard currency for bookkeeping due to the differences in the exchange rates adopted in the relevant asset accounts and the paid-up capital accounts; and donations.

The accumulation fund shall be used: to offset special losses that cannot be offset by the undistributed profits and reserve funds and enterprise development funds of the preceding year according to the decision of the board of directors; and as additional investment upon the decision of the board of directors.

CHAPTER IV MANAGEMENT OF ASSETS

Article 12. The current assets of a foreign-funded enterprise include cash, bank deposits, short-term negotiable securities, funds receivables and funds paid in advance and goods in stock.

Cash of an enterprise shall be kept by a specially designated person and it is not allowed to draw cash from income as expenses. Bank deposits should be put into the bank with which an account has been opened in the name of the enterprise. Funds paid in advance and receivable should be handled and recovered according to the provisions of the contract or agreement.

The relevant rules and regulations of the State Foreign Exchange Control should be observed in receipt, payment and deposit of funds in foreign currencies. Foreign currencies should be converted into the standard currency for bookkeeping according to the relevant regulations promulgated by the Ministry of Finance.

Article 13. Inventory of a foreign-funded enterprise refers to goods in stock, in processing and on the way of transport, raw material, fuels, packing material, low value consumables, finished and semi-finished products and products in manufacture. Goods in stock should be correctly classified, rationally priced, properly kept, regularly received, drawn and stock taking.

Goods in stock of an enterprise should be priced according to the real cost.

The real cost of the goods in stock bought in should include purchase price plus transportation charges, loading and unloading fees and insurance premiums, rational losses in transportation, processing fees before putting in stock and taxes. The commodities bought in by commercial and service enterprises should take the purchase prices plus taxes as the real cost.

The goods in stock made, manufactured or mined by the enterprises itself should take the various actual expenditures in the process of manufacturing, production or mining as the real cost.

The real cost of the goods in stock processed by other units on commissioned basis should include the raw materials actually used or the cost of semi-finished products plus processing fees, charges of transportation, loading and unloading, insurance premiums and taxes. The real cost of goods of commercial and service enterprises processed by other units should include the original prices before processing, processing fees and taxes.

The goods in stock received as donations should be priced according to the amount listed in the invoice plus the transportation charges, insurance premiums and tax payment borne by the enterprises. In the absence of invoices, it should be calculated by consulting the market prices of similar product.

If an enterprise exercise the accounting of planned cost, it should indicate differences between the planned cost and the real cost of the goods in stock.

Article 14. In delivering or using the goods, semi-finished products made by the enterprise itself, raw materials, finished products as well as low value and easily consumed products and packing materials, the real cost should be calculated or amortized by the accounting method prescribed by the Ministry of Finance.

Whenever an adjustment has to be made to the book value of the goods in stock as the value has a too disparity from the net realizable value, the adjustment can only be made upon an approval by the financial department in charge or central administration of enterprises. Article 15. When investing to another venture in kind or intangible assets, a revaluation should be made to the assets to be invested. Differences between the revaluated and book values may be regarded as current loss or gain for a short term project and as deferred investment loss or gain which shall be written off in installments annually within the term of the project for a long term one.

When investing in bonds, the investment should be calculated according to the amount actually paid.

When investing in stock shares, the investment should be calculated according to the amount actually paid or according to the revaluated amount of the investment in kind and intangible assets plus the commission for brokers and other relevant expenses.

The differences between the income from dividends or interests actually realized and the amount actually received in recovering the investment or assigning and selling the shares in the process of operation and the book cost and the receivable dividends or payable interests shall be regarded as gains or losses on investment.

The assets appropriated by a foreign-funded enterprise to its affiliated enterprise which practices independent accounting but does not pay taxes separately should be priced according to the amount appropriated or according to the book value of the assets in kind.

Article 16. The fixed assets of a foreign-funded enterprise should include houses, building structures, machines, machinery equipment, means of transport and other equipment, devices, instruments and tools associated with production and business operations for more than one year. Articles which are not major equipment in production and business operation, but whose per unit value exceeds RMB 2,000 and the period of use exceeds two years, should also be regarded as fixed assets.

Article 17. The fixed assets of a foreign-funded enterprise should be priced according to the original prices. The original prices of fixed assets which appear in the current regulations refer to:

For fixed assets used as investment or conditions for cooperation, the original prices should be the rational prices agreed upon in the contracts or agreements or the prices evaluated according to the market prices, plus the relevant expenses before they are used. If an investor uses equipment as his (her) share of investment, the original invoices of the manufacturers should be provided in determining the original prices.

For fixed assets bought in, the original prices should be the purchase prices plus the charges of transportation, loading, unloading and installation and insurance premiums and the amount of taxes paid.

For fixed assets made or constructed by an enterprise itself, the original prices should be the actual spendings in the processes of manufacture or construction.

For fixed assets leased in through accommodation, the original prices should be the prices prescribed in the contracts plus the charges of transportation, loading, unloading and installation, insurance premiums and taxes paid which are all due to the enterprise.

For fixed assets received as donations, the original prices should be the amounts specified in the invoices or the receipts plus the charges of transportation, loading, unloading and installation, insurance premiums and taxes paid which are all due to the enterprise. If the fixed assets are second-hand, the accumulative depreciation allowances should be estimated according to the actual state of the assets.

The inventory profits of fixed assets are the complete value of replacement and the accumulative depreciation allowances should be calculated according to the actual state.

For fixed assets with values added as the result of technical innovation and technical transformation, the original prices should include the relevant spendings incurred.

Article 18. The depreciation of fixed assets of a foreign-funded enterprise usually follows the straight-line method or the unit-of-production method, calculated month by month from the time when the fixed assets are used. For fixed assets which are no longer used, the calculation of depreciation should be stopped from the month following the month when the use of the fixed assets is stopped. If an enterprise wants to adopt other methods or change the current depreciation method, it has to go through the application and approval procedure according to law.

Article 19. The accrued amount of depreciation allowances of the fixed assets of a foreign-funded enterprise is usually calculated according to the original prices and the group depreciation rate.

The depreciation rates of fixed assets shall be determined by the original values, the estimated residue values and the periods of depreciation. The estimated residue values shall not be lower than 10 percent of the original values. If the estimated residue values need to be lower than 10 percent, the necessary application and approval procedure should be observed according to law.

The depreciation of fixed assets of an enterprise should be calculated according to the following classification and period:
1. No less than 20 years for houses and other building structures;
2. No less than ten years for trains, machines, machinery equipment and other production equipment;
3. No less than five years for electronic equipment and means of transport other than trains and ships and devices, tools and furniture associated with production and business operations.

If the term of operation of an enterprise, the residual usable term or the used fixed assets it acquired is shorter than the prescribed depreciation period, the depreciation period may be determined according to the term of operation of the enterprise of the usable term of the fixed assets it acquired upon approval. Article 20. For fixed assets of a foreign-funded enterprise whose prices have been updated with values added due to expansion, renewal, renewal, renovation and technical transformation, the depreciation should be calculated according to the adjusted prices and estimated residue value, the sum already depreciated and the service age.

For fixed assets acquired by an enterprise through capital lease and the fixed assets lent out through operational lease, depreciation should be calculated. But depreciation will not be made on long-term idle fixed assets other than houses and buildings.

No more depreciation shall be continued after the whole depreciation period even if the fixed assets can still be used. If the fixed assets are reported dead in advance, depreciation shall not be made in retrogress.

Article 21. A foreign-funded enterprise should made a careful budget before purchasing or starting a project, buy the equipment and materials that are really needed, correctly calculate the cost, do its best to reduce expenditure and timely make the final account upon completion of the project.

The cost of a project undertaken by the enterprise itself should include materials, wages and mechanical engineering fees directly involved in the project and the project management fees.

The cost of a project contracted out should include the payment for the contracting and the share of the project management fees of the enterprise.

For equipment installation projects, the original prices of the equipment being installed, the installation fees, spendings on trial operation and the project management fees shared by the enterprise should be calculated as cost.

Article 22. The intangible assets of a foreign-funded enterprise include industrial property rights, technical knowhow, royalty of sites (territorial waters), franchise rights and copyrights etc.

For intangible assets which the investor uses as capital or conditions for cooperation, the price agreed upon in the contract and agreement or in the enterprise application plus the relevant costs borne by the enterprise should be made the original price.

For intangible assets bought in, the original price should be the sum actually paid out.

For intangible assets developed by the enterprise itself, the actual expenditures incurred in the course of development should be made the original price.

Intangible assets received as donations should be priced according to the bill attached or by consulting the prices for similar intangible assets on the market.

In pricing the intangible assets, detailed information which includes copies of certificates of title and the basis and standards for pricing should be well-prepared. The pricing of technical knowhow, franchise rights and goodwill should be assessed and confirmed by organizations with the power of authentication or accountants registered in China.

Article 23. The intangible assets of a foreign-funded enterprise should be amortized by even installments according to the time limit prescribed in the contract, agreement or enterprise application starting from the profit-making of the enterprise. If no time limit is specified, they should be amortized evenly according to the predicted time of profit-making. If the time of profit-making cannot be ascertained, they should be amortized in installments over a period of no less than 10 years.

Article 24. Other assets of a foreign-funded enterprise, such as the initial outlay and the overall loss during the period of preparations, should be amortized in even installments starting from the date of the project project going into production or operation and the amortization should be spread over a period of no less than five years.

In development and operation of large tracts of land, the payment for land-use should be amortized by even installments according to the time limit for the lease of the land-use rights approved by the local governments. If an enterprise needs to shorten the period of amortization because the operational period is shorter than the period of lease, the case should be approved by the financial department in charge.

Other deferred payment incurred on an enterprise should be amortized by even installments according to the estimated period of profit-making. In case that it is impossible to determine the period of profit-making, it should be amortized by even installments over a period of no shorter than 10 years.

CHAPTER V MANAGEMENT OF COSTS AND EXPENSES

Article 25. Costs and expenses of an enterprise refer to all kinds of expenditure incurred in the course of production and operation.

Costs and expenses of an enterprise covers materials directly used in production, direct wages, manufacturing charges, sales charges, management fees and financial charges for manufacturing enterprises.

Costs and expenses for commercial enterprises should include the original prices of the goods bought, purchase expenses, sales expenses, management expenses and financial charges.

Costs and expenses for service enterprises should include operational spending, management expenses and financial charges.

The following expenditures or losses incurred in an enterprise cannot be listed as costs and expenses:
1. Capital outlay for acquiring fixed assets, intangible assets and other assets;
2. Interests on capital;
3. Interests which are higher than general loan interests;
4. Royalties paid to the head office;
5. Overseas social insurance premiums for staff members who work inside China;
6. Investment to other units and management fees paid to associated enterprises;
7. Reserves for bad debts and entertainment expenses which exceed the standards set in Article 30 and Article 32 of these regulations;
8. Losses from confiscated property and indemnities, default fines, delay charges, penalty interests and fines;
9. Expenditures which should be appropriated from the reserve funds, enterprise development funds, rewards and welfare funds;
10. Fees collected outside the coverage of the State laws and regulations; and
11. Other expenditures having nothing to do with production or operational activities.

Article 26. The sales expenses, management fees and financial charges incurred for the purpose of obtaining operational income shall not be calculated in costs of production (operation) but be calculated separately as periodic charges to be directly deducted from the sales (operational) profits.

Sales expenses include charges of transportation, loading and unloading, packaging, insurance, travel, commission, advertising, wages for special sales organization and other charges that occur in the process of sales or providing labor service.

Management fees should include corporate expenses (wages of staff members and other expenses), trades union fees, spendings of the board of directors, entertainment charges, taxes (including urban real estate tax and license fees for the use of vehicles and boats), workers' training fees, research and development expenses, royalties for use of sites (territorial seas), technology transfer fees, amortization of intangible and other assets and expenses incurred in the process of upkeeping and storing the commodities.

Financial expenses include interest payment (subtracting interest income) which occur in the process of production and operations, conversion loss (subtracting conversion gains), commissions collected by financial organizations and other expenses on raising funds.

Article 27. Wages to the staff that calculated into cost and expenses shall be determined by the board of directors in accordance with the provisions of the State on labor management of foreign-funded enterprises and in line with the financial position and the principle of "to each according to his work" and "equal pay for equal work done".

Article 28. The following expenditure of a foreign-funded enterprise shall be included in cost and expenses:

1. The insurance and welfare funds for workers of the Chinese partner according to the standards set for State-owned enterprises;

2. Pensions, old age benefits and unemployment insurance funds for workers of the Chinese partner according to the standards set by the local governments;

3. Housing and price subsidies drawn for Chinese workers according to the standards ratified by the financial departments in charge and labor departments.

The insurance and welfare funds shall be retained in the enterprise for use to cover medical care, insurance and other relevant welfare expenses.

The pensions and old-age allowances and unemployment insurance funds shall be kept by the organization in charge of the pension and unemployment insurance of Chinese workers to pay as labor insurance to Chinese workers in the enterprises but are not allowed to be used for other purposes.

Housing subsidies should be retained in the enterprises as housing subsidy fund of Chinese workers for repairing and purchasing of housing for Chinese workers. Price and other subsidies shall be handled over to the local financial departments.

Article 29. Interest payment of a foreign-funded enterprise should be calculated according to the normal interest rates on similar businesses.

1. The interest payment in terms of fixed assets and intangible assets shall be calculated as costs of assets before the assets are put into use or before the completion of the project and the compiling of final account;

2. The interest payment during the period of preparations shall be calculated as to start-up expenses;

3. The interest payment during the period of production and operation shall be calculated as financial charges.

When calculated as interest payment or income, the following differences occurred during the period of production and operation shall be treated as the follows:
1. For discounts to receivable bills, the ensuing difference between the actual amount gain from and the face value of the bill shall be counted as periodic expenses;

2. For discounts to payable bills, the difference between the actual amount gain from and the face value of the bill shall be counted as relevant cost when the bill is due;

3. In issuing bonds, the difference between the actual amount received from and the face value of the bonds shall be amortized by even installments before the bonds are due; and

4. In using bonds as investment, the difference between the amount actually paid out and the face value of the bonds shall be amortized by even installments before the bonds are due.

Article 30. Foreign-funded enterprises engaging in credit, leasing and same kind of businesses shall draw three percent of reserves for had debts at the end of the year according to the receivable accounts, receivable bills and other receivable items or the year-end balanced amount of loans lent out (not including inter-bank loans) upon approval.

If the actual loss due to bad debts exceeds the reserves for bad debts in the preceding year, the exceeded amount shall be counted as management expenses of the period; If the loss is less than the reserves for bad debts of the preceding year, that part exceeded shall be deducted from the management expenses of the period; if the confirmed bad debts are recovered, they shall be written off from the management expenses of the period.

The loss due to bad debts mentioned in the preceding paragraph refers to the loss due to uncollectable debts as the result of bankruptcy of the debtor even after liquidation or as the result of the death of the debtor whose legacy is not enough to pay up the debt and who has no other obligators or due to the fact that the debtor fails to perform his obligations of paying the debts two years after the debts are overdue.

Article 31. The expenditure on fixed assets incurred in the process of servicing and repair shall be included in the periodic cost expense. If such expenditures are very large, they shall be made as deferred expense to be amortized in installments.

An enterprise shall pay royalties for using sites according to standards set by the local governments, and the amount paid shall be included in the periodic expense. For using territorial water surface, an enterprise shall pay territorial water use fees to the financial organ in charge or departments they have commissioned and the fees paid shall be amortized.

The value of sites or of territorial waters used by Chinese investors as their shares of investment or conditions for cooperation shall be amortized against cost expense according to the provisions of Article 23 of these regulations.

Article 32. Production and operation related entertainment expenses listed in the cost expense of a foreign-funded enterprise shall not be higher than the following standards:

1. Not exceeding five per thousand of the net sales (of goods) for manufacturing, plant culture, breeding and commercial enterprises whose annual net sales (of goods) value is less than RMB 15 million; not exceeding three per thousand of the part of the annual sales volume which tops RMB 15 million.

2. Not exceeding ten per thousand of the total annual turnover for enterprises in the domains of tourism, catering, transportation, construction, installation, designing, consultation, finance, leasing andother service enterprises whose annual business income is less than RMB 5 million. If the annual business income exceeds RMB 5 million, five per thousand shall be drawn from the part above the mark.

The real entertainment fees for trans-industrial enterprises shall be calculated according to the net sales value or business turnover. If it is difficult to distinguish income, the entertainment fees shall be determined by consulting the standards of the industries with the same major businesses.

Article 33. The standards and method of control for travel expenses, meal allowances, the expenses for the board of directors shall be set rationally by the board of directors and submit them to the financial department in charge or the central relevant administration for the enterprise for the record.

A foreign-funded enterprise shall appropriate trade union expenses at a rate of about two percent of the actual total payroll of the workers of the enterprise and shall be listed as cost expense. The trade union expenses shall be managed and used by the trade union organization of the enterprise according to the relevant regulations promulgated by the All-China Trade Union Council.

The rebates (commission) received by the enterprise in its business activities according to contract or agreement shall be used to increase its business turnover or reduce the cost expenses; the rebates (commission) paid out by the enterprise according to contract or agreement shall be used to increase its cost expenses.

Article 34. If inventory gain, inventory loss, scrapping and damage of assets occur in a foreign-funded enterprise, they shall be handled according to the following rules:

1. Inventory gain or damage of the stock shall be counted as relevant expenses after deducting the indemnities paid by the person or persons responsible or insurance companies and the residue value. The net abnormal loss shall be listed as non-operating expenses. Inventory gain shall be used to reduce relevant expenses according to the real cost of similar inventories.

2. The net inventory loss or damage of fixed assets after deducting accumulative depreciation allowances according to the original cost and the indemnities paid by person or persons responsible or by insurance companies shall be listed as non-operating expenses. The net inventory gain of fixed assets after deducting accumulative depreciation allowances according to the original cost shall be charged to non-operating income.
3. Inventory gain or loss of fixed assets incurred in the construction of a project by an enterprise and the net gain or loss after clearance of fixed assets shall be counted as project cost.

4. The net loss from scraps and damages incurred in projects in construction shall be counted as costs of the remaining part of the project after deducting the residue value and the indemnities paid by person or personal responsible or by insurance companies. The net loss from abnormal scraps and damages shall be counted as initial expenses during the period of preparations and as non-operating expenses after the project is put into operation.

CHAPTER VI MANAGEMENT OF INCOME, PROFIT AND PROFIT DISTRIBUTION

Article 35. The operational income of a foreign-funded enterprise shall usually be realized through the delivery of products and commodities sold, handing-over of projects contracted, provision of services or labor committed, receipt of the money due or acquirement of the rights to receive the money.

Realizations of the following operational incomes by an enterprise can be affirmed as:

1. In installment sales of products or commodities, realization of income shall be affirmed at the date when the products or commodities are delivered or invoices are issued or the date of payment by purchasers prescribed in the contract.

2. In construction, installation and provision of labor service and manufacturing and processing of large machinery equipment and ships for other units for a continuing time of at least one year, the realization of income may be affirmed through work schedule or the amount of work done.

In cases of cooperative enterprises in which products are shared by partners, realization of income shall be affirmed at the time when the products are distributed and the amount of income shall be calculated according to the prices sold to a third party or according to current market prices.

The sales prices of products (commodities) produced for export by an enterprise shall be determined by such method as cost plus rational fees and profits if the products are not directly sold by the enterprise except otherwise provided in the contract and articles of association.

Article 36. The profit of a foreign-funded enterprise includes business profit and other net non-business incomes.

The business profit is basic operating profit minus sales (goods) expenses, management fees and financial charges and plus the other net operating profits.

The non-business incomes include gains on investment, gains from disposing of fixed assets, and inventory gains of fixed assets. Non-business expenses include losses on investment, losses from disposal of fixed assets, inventory losses of fixed assets and abnormal losses.

Profits of an enterprise should be calculated on monthly basis. If it cannot be calculated monthly, it may be calculated quarterly or annually after getting the approval of the financial department in charge or central administration of enterprises.

Article 37. A foreign-funded enterprise shall pay income tax on its profits.

After-tax profits shall be distributed in the following order:
1. To pay various indemnities, default fines, relay payments, penalty interest, and fines;
2. To offset the losses incurred in the previous year;
3. To draw reserve funds, enterprise development funds and workers reward and welfare funds; and
4. To distribute among investors.

The percentage of reserve funds, enterprise development funds and workers reward and welfare funds shall be determined by the board of directors. Foreign-funded enterprises may not draw enterprise development funds, but its reserve funds shall not be less than ten percent of the after-tax profit, and when the amount of reserve funds has reached 50 percent of the registered capital, the drawing of reserve funds shall be terminated.

The reserve funds of foreign-funded enterprises shall mainly be used to pre-offset the losses of the enterprises. Enterprise development funds shall mainly be used to expand production or operations. With the approval of the original organizations of examination and approval, it may be used as additional investment by the investors. Workers reward and welfare funds shall be used to reward workers on non-regular basis and subsidize purchase or repairing of housing and other collective welfare undertakings.

Article 38. The remaining part of the after-tax profit of foreign-funded enterprises after being distributed according to the provisions of 1, 2 and 3 of Article 37 of these regulations is distributable profit and shall be distributed to investors according to the following principles:

For joint equity ventures, it shall be distributed according to the actual shares of investment by investors;

For cooperative ventures, it shall be distributed according to the provisions of contracts; and

For foreign enterprises, it shall be distributed according to the provisions of their articles of association.

Investors, who have violated the agreement in regard to making of investment or provision of conditions for cooperation, but have not made due correction and accepted the responsibilities according to the regulations on the management of investment promulgated by the State, are not allowed to participate in the distribution of profits.

The undistributed profit of an enterprise at the end of the preceding year may be carried over to the distributable profit of the year.

Usually, an enterprise shall not pre-distribute profits. But in cases when the economic results are good and there is no mature debts and there are still a handsome profit after pre-paying income tax according to regulations, it may distribute part of the profit after getting the approval of financial department in charge.

Article 39. Cash distributed by a foreign-funded enterprise as profits should, in principle, be the currency gained during the operation of the enterprise except otherwise provided for in the contract or articles of association. If an investor needs to convert the profit he (she) got in Renminbi to other currency, he (she) should bear the losses incurred in the conversion.

A foreign investor may remit its profits according to law or use it as re-investment in China. The profits due to Chinese investors shall be handled according to the relevant regulations of the State.

CHAPTER VII MANAGEMENT DURING PERIOD OF LIQUIDATION

Article 40. When a foreign-funded enterprise terminates its operations due to the expiry of the term of operation or other reasons, the board of directors should work out the liquidation procedure, principle and set up a liquidation committee. The liquidation committee should carry out overall clearance of all the property, credits and debts, compile statement of assets and liabilities and a catalogue of property put forward the basis for pricing the property and calculation, formulate liquidation plans and submit them to the board of directors for adoption before implementation and to the financial department in charge or central administration of enterprises for the record.

Article 41. The pricing of liquidated property is usually based on the net book value or based on re-evaluation or cash realizable value.

Before the completion of liquidation, it is not allowed to dispose the property in any way except paying the necessary expenses.

The surplus of the workers reward and welfare funds, the housing subsidy funds for Chinese workers and the property, facilities purchased with such funds shall not be liquidated as property of the enterprise.

Article 42. The order for clearing debts of a foreign-funded enterprise shall be:
1. Wages and insurance and welfare expenses payable to workers;
2. Taxes and other payments payable to the State;
3. Guaranteed debts still outstanding;
4. Other outstanding debts.

If there is not enough to clear all the items in the same order, liquidation shall be made proportionately.

Article 43. Inventory gain or loss, gains or losses in the re-evaluation of the property, the cash realizable gain or loss and the insolvable debts or unrecoverable credit incurred during the process of liquidation of an enterprise and the gains and losses of continued operation during the period of liquidation should be regarded as gains or losses of liquidation.

After the liquidation is over, the part of the net value of assets or the value of the remaining property exceeds the total of capital received and the reserve funds, enterprise development funds, additional paid-in capital and undistributed profits shall be regarded as profits, and income tax shall be paid on it. The remaining property after paying the income tax may be distributed according to the principle laid down in Article 38.

After the liquidation is over, the liquidation plans, files and relevant financial accounting data of the enterprise shall be kept by the original Chinese investor or the administration of the original enterprise and a list of the documents shall be copied and sent to the original financial department in charge.

CHAPTER VIII LEGAL LIABILITIES

Article 44. Financial departments in charge and central administration of enterprises have the right to examine the implementation of the provisions of these regulations by foreign-funded enterprises. If violations are found, they may give a written warning or issue a circular making them known to other enterprises apart from ordering corrections within a prescribed period of time.

In performing their duty of examination, the examiners shall produce certificates issued by the Ministry of Finance and undertake to keep secret the data provided by the enterprises examined.

Article 45. If a foreign-funded enterprise fails to pay the site (territorial water)-use fees within the prescribed period of time or fails to pay the price and other subsidies to Chinese workers, it has to pay delay fines of two per thousand of the amount of the deferred payment on a daily basis from the first day when payment becomes overdue apart from making good the payment within the prescribed period of time.

Fines of less than RMB 5,000 shall be imposed on an enterprise in addition to ordering correction within a prescribed period of time if it commits one of the following acts:

1. Failing to submit the document of approval, business license, contract, articles of association and other documents and copies of documents on alteration of registered capital according to regulations;

2. Failing to go through the capital examination formalities according to regulations;

3. Failing to submit financial accounting rules of the enterprise, financial statements and statements on the financial position of the enterprise according to regulations;

4. Amortizing and drawing cost expenses at will in violation of the coverage of expenditure of cost expenses and resorting to deception;

5. Failing to pay the fees for using sites (territorial waters) and pay for State price subsidies;

6. Distributing profits in advance without the approval of the financial department in charge; and

7. Acts that violate the provisions of these regulations under serious cases.

Article 46. If a foreign-funded enterprise refuses to accept the punishment, it may appeal for review by the financial department above or central administration of enterprises within 15 days starting from the day when the notice of punishment is received. If it refuses to accept the review, it may appeal to the people's court within 15 days from the day when the review decision is received. The party concerned may also bring the case directly before the people's court within 15 days starting from the day when the notice of punishment is received. Should the party concerned fail to apply for review or bring the case before the court within the prescribed time limit and yet refuse to observe the penalty decision, the departments which have made the decision may apply with the people's court for compulsory enforcement.

CHAPTER IX SUPPLEMENTARY ARTICLES

Article 47. The Ministry of Finance of the People's Republic of China is responsible for the interpretation of this set set of regulations.

Financial departments of various provinces, autonomous regions and municipalities under the direct administration of the central government and the central administration of enterprises shall formulate specific measures for implementing this set of regulations and submit them to the Ministry of Finance for the record.

Article 48. The regulations shall be implemented starting from the date of promulgation and the "Regulations of the People's Republic of China on the Financial Management of Sino-Foreign Joint Venture Enterprises" will cease to be effective on the same date.