Detailed Rules for the Implementation of the Law of People's Republic of China (PRC) on Foreign-funded Enterprises:
Article 58 The profits of a foreign-capital enterprise after paying income tax in accordance with the provisions of the China tax law shall be drawn from reserve funds and employee incentive and welfare funds. The withdrawal ratio of the reserve fund shall not be less than 10% of the after-tax profit. When the accumulated withdrawal amount reaches 50% of the registered capital, it shall not be withdrawn. The proportion of employee incentive and welfare funds shall be determined by the foreign-funded enterprises themselves. A foreign-capital enterprise may not distribute profits until its losses in the previous fiscal year have been made up; Undistributed profits in previous fiscal years can be distributed together with distributable profits in this fiscal year.
The implementation of the new Company Law in 2006 cancelled the above requirements. The unification of domestic and foreign capital only requires statutory provident fund and arbitrary provident fund.
Company law:
Article 167 When distributing the after-tax profits of the current year, the company shall allocate 10% of the profits to the company's statutory reserve fund. If the accumulated amount of the statutory common reserve fund of the company is more than 50% of the registered capital of the company, it may not be withdrawn. If the statutory reserve fund of the company is insufficient to make up for the losses of the previous year, the profits of the current year shall be used to make up for the losses before the statutory reserve fund is withdrawn in accordance with the provisions of the preceding paragraph. After the company withdraws the statutory reserve fund from the after-tax profits, it may also withdraw the reserve fund from the after-tax profits upon the resolution of the shareholders' meeting or general meeting.
With regard to the specific use of employee bonus and welfare funds, Article 57 of the Accounting System for Foreign-invested Enterprises in People's Republic of China (PRC) stipulates that employee bonus and welfare funds shall be used for the non-recurring bonuses or various collective benefits of employees of the enterprise, and the assets such as houses and facilities formed therein shall not be used as the property of the enterprise. The specific purpose of employee bonus and welfare funds should be relatively clear, that is, non-recurring bonuses for employees, such as major awards. And collective welfare for employees, such as building and maintaining employee housing.
However, the use of the reserve fund is not without documents. The purpose of withdrawing the reserve fund is to improve the enterprise's ability to resist risks. After all, the foundation of foreign companies is not at home. Therefore, reserve funds are generally reserved to make up for the losses of enterprises.