Rules on the disposal of the balance of the “three funds” of foreign-invested enterprises has been released
The “Law on Sino-foreign Equity Joint Ventures” and its implementing regulations, which were abolished on January 1, 2020, stipulated that foreign-invested enterprises should withdraw reserve funds, staff incentive and welfare funds, and enterprise development funds in accordance with the law (hereinafter referred to as the “three funds”). On January 1, 2020, the “Foreign Investment Law” came into effect, stipulating that foreign-invested enterprises are also subject to the “Company Law”, but a five-year transition period was granted to foreign-invested enterprises established in accordance with the original laws (i.e., until December 31, 2024). According to the “Company Law”, foreign-invested enterprises are not required to withdraw the “three funds”, but there have been no clear rules on how to handle the balance of the “three funds” that have already been withdrawn.
On June 9, 2025, the Ministry of Finance issued the “Notice on Financial Treatments following the Effectiveness of the Company Law and the Foreign Investment Law ” (Cai Zi〔2025〕No. 101), which stipulates issues such as the use of public reserve funds to make up for losses, the valuation of non-monetary property as capital contributions, and the disposal of the balance of the “three funds”. The key points regarding the disposal of the balance of the “three funds” are as follows:
- The balance of the reserve fund shall be converted into statutory public reserve funds for management and use, and the balance of the enterprise development fund shall be converted into discretionary public reserve funds for management and use.
- The staff incentive and welfare fund shall be used in accordance with the purposes, usage conditions, and procedures determined at the time of withdrawal. During liquidation, except for those that should be managed as liabilities in accordance with the provisions of the “Notice of the Ministry of Finance on Issues Concerning Enterprise Financial Handling after the Implementation of the Company Law” (Cai Qi〔2006〕No. 67), the staff incentive and welfare fund shall be handled in accordance with the “Notice on Relevant Provisions of Financial and Fiscal Management during the Liquidation Period of Foreign-invested Enterprises” (Cai Gong Zi [1995] No. 222).
According to the above provisions, there are no mandatory rules on the use of staff incentive and welfare funds by foreign-invested enterprises in normal operation. Therefore, if the purposes, usage conditions, and procedures of the staff incentive and welfare fund at the time of withdrawal are unclear, it is recommended to formulate such rules as soon as possible. For foreign-invested enterprises in the liquidation stage, the staff incentive and welfare fund will not be part of the liquidation property. However, if the foreign party withdraws, it shall be merged into the public welfare fund of the surviving company; if the company is dissolved, it shall be owned by the enterprise where the Chinese staffs work; if the company is terminated, it shall be handed over to the receiving unit, which is understood here to refer to the shareholders.
In addition, it is worth noting that Cai Zi〔2025〕No. 101 clearly stipulates that the reserve fund, enterprise development fund, and staff incentive and welfare fund shall no longer be accrued from January 1, 2025. Moreover, any accruals made after January 1, 2025 shall be reversed.