China’s Talent-Owned Companies Under Scrutiny as New Tax Crackdown Looms

Chinese authorities have issued warnings of a new crackdown on entertainment industry financial practices and astronomical star salaries in wake of another high-profile celebrity tax scandal. The latest furor, involving actor Zheng Shuang, is the biggest since the 2018 downfall of Fan Bingbing and has echoes of the earlier scandal, albeit without a mysterious disappearance by the leading lady.

Last week, allegations emerged online that the immensely sought-after TV actor Zheng was paid $24.6 million for her work on a single web series. The figure massively exceeds the $7.7 million (RMB50 million) maximum that Chinese industry bodies say individuals can be paid for a single production.

Additionally, Zheng was accused of using dual “yin-yang” contracts — one that reported a much lower salary within the limits to the tax authorities, and a second one that directs the bulk of her payment to be invested in a firm owned by her mother.

The revelations have sparked renewed scrutiny of celebrity-owned and talent-affiliated companies, long seen as channels which stars use for legal tax avoidance and illegal tax evasion.

The Shanghai tax bureau has launched an investigation into the case, and Beijing’s media regulatory body said it would start a broader inquiry into the production costs and salaries of projects. “The entertainment industry may very well usher in a major tax rectification in the near future,” the China Business Daily said.

In her first public social media post to Weibo since the scandal erupted, Zheng wrote last Thursday: “The tax bureau is already verifying my contracts, personal taxes, and all of the related economic contracts. I am willing to accept and cooperate with all investigations.”

Now, the National Film Bureau has sounded an even more ominous alarm.

“The majority of film industry workers should take this as a warning, and conscientiously boycott ‘yin-yang contracts,’ illegal actions such as receiving sky-high pay, tax fraud and tax evasion so as to establish a good societal image and reward viewers with quality film works.”

The TV Professional Ethics Committee of the China TV Association said that paying proper taxes is the “basic and moral obligation of every patriotic, law-abiding citizen,” stating: “Society will never provide artists without artistic morals an opportunity to speak out or be seen.”

After the Shenzhen-listed Chinese media index dropped 1.36% in the immediate wake of the announcement of a broader industry tax probe, one Weibo user joked: “Zheng Shuang — the most influential person of 2021.”

Dirty Laundry?

After the initial social media outcry, public attention has now turned to the issue of which other celebrities may be scurrying to hide their dirty laundry for fear that they may be next in the firing line.
As industry limits on acting fees have become increasingly stringent, most high-powered stars have found work-arounds. Many have significant chunks of their salary funneled to them under the table via relatives or agents given nominal roles in companies or productions, allowing them to make it seem on paper that their remuneration is much lower than it actually is — just as Zheng has been accused of doing.

The recent closure of hundreds of such “artist representative-affiliated companies” has made viral headlines in wake of the Zheng scandal. It became the number one trending item on China’s Weibo social media platform with a hashtag garnering almost a billion views.

The public assumption has been that mass company shutdowns potentially signal that stars have been cooking the books. It also may imply that sky-high salaries continue to be “routine,” even after the strictures put in place after the Fan Bingbing incident, China Business News wrote.

Whether or not the firms are a front for wrongdoing, it’s worth understanding the enormous ecosystem of China’s network of actor-related companies, which undergirds the rest of the entertainment industry.

‘Legal Tax Avoidance’?

A list of 75 A-list entertainers have registered 647 companies over the years, but they since dissolved 209 of them, according to a viral Shandong Business Daily analysis of public company data, the first report to arouse mass criticism on the topic.

It found Huang Xiaoming to be the artist with the most registered companies (43), as well as dissolved companies (13). Zhang Ziyi has the second largest number of firms (29), but only five that have been dissolved.

Other actors with the most registered companies were, in decreasing order: actor Aloys Chen Kun (“The Yinyang Master”), who has 25; Fan Bingbing’s ex-fiance Li Chen, with 20; influential TV host He Jiong (19); Chen He (“iPartment”) with 18; TV star Jin Dong, with 18.

Half of those 209 firms were sole proprietorship companies, which are exempt from corporate income tax — making them a top choice for celebrities. Most of them had short lifespans: nearly 70% of the dissolved companies (135) existed for three years or less, and 13 were dissolved in less than a year.

This may not be the entire story, however. A scandal-free explanation comes from the way that many artists had been able to legally reduce their tax burden by registering companies in cities with tax incentives.

There are currently more than 700 companies in China registered as artists’ personal “studios,” according to the Tianyancha database. Around 85% of them are located in Zhejiang province, with many others in Xinjiang. More than 99% are structured as sole proprietorships.

As those loopholes have been steadily closed by authorities, in reaction to the Fan Bingbing meltdown, so have those companies.

“Celebrities previously registered large numbers of companies for legal tax avoidance purposes, and are now dissolving a large portion of them due to tax system reforms. I don’t see a direct connection” between the phenomenon and the Zheng scandal, the Entertainment Capital outlet cited a head of one such a company as saying.

Churn amongst the broader category of “artist representative-related” firms is typical. Official statistics show that 147 new “artist representative-related” companies were registered in the first quarter of 2021, a 41% increase year-on-year. From Jan. 1 to April 29 of this year, 570 have been dissolved. Last year, 1,138 were registered (a 55% decrease year-on-year) and 1,306 dissolved.

 

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