- Order of priority for profit distribution
Enterprises should pay income tax on the profits they earn in accordance with the law. After-tax profits should be distributed in the following order of priority:
(i) Paying all kinds of fines such as breach-of-contract fines, late charges, later interest charges and other penalties;
(ii) Making up for previous years' losses;
(iii)Contribution to reserve funds, enterprise development funds, staff incentives and welfare funds;
(iv)Profit distribution to investors.
- Principles of profit distribution to investors
Equity JVs should distribute profits according to the actual proportion of capital contribution by the respective investors; cooperative JVs should follow the terms as stated in their contracts; whereas foreign enterprises should do so according to their articles of association.
Investors failing to honour their contractual obligations in terms of capital contribution as stipulated in state regulations or other provisions in the contract will not be eligible for profit distribution.
- Conversion of profit in renminbi and profit repatriation
Unless otherwise stated in the contract or articles of association, profit to be distributed in cash is on principle in the currency of the income from the enterprise's operation. Investors may convert their profit in renminbi into foreign currencies but haveto be responsible for the possible losses in currency exchange.
Foreign investors may remit their profit overseas, or they may reinvest it in China.
(a) Reserve Fund, Enterprise Development Fund, Staff Incentive and Welfare Fund
The ratios of contribution to reserve funds, enterprise development funds, staff incentives and welfare funds are determined by the board of directors. Among these, reserve funds must account for at least 10% of an enterprise's after-tax profits. When the reserve funds reach 50% of the enterprise's registered capital, further contribution is not required. It is not mandatory for an enterprise to set aside an enterprise development fund.
Reserve funds are intended primarily to make up for an enterprise's operating losses. Development funds are usually used for expanding the enterprise's scale of production or operation; and upon approval by the original approval authority, such funds may also be used to increase investment. Staff incentives and welfare funds are earmarked for ad hoc incentive programmes and collective benefits such as subsidies for the purchase, construction, maintenance and repair of staff housing.
