Huayi Brothers denies its cofounders sought by police for tax evasion

Cofounders of Huayi Brothers Photo:

Huayi Brothers, a leading film production company in China, has denied rumors that its two cofounders are wanted by police for alleged tax evasion practices, amid a government crackdown on the practice of "twin contract" that big stars follow to pay less taxes.

In a statement released on Monday night, Huayi Brothers said that Wang Zhongjun and Wang Zhonglei were still working at the company as usual, adding that the rumormongers had made an apology for spreading false information.

The Huayi Brothers statement came a day after famous Chinese film director Feng Xiaogang claimed on his Sina Weibo account that he "has never signed any 'twin contract' and has never evaded taxes".

Huayi Brothers, Feng and many other entertainers are reportedly targets of a government investigation about tax evasion in the country's showbiz industry.

In July, the State Administration of Taxation urged the local authorities to strengthen tax compliance in the film and television industry. The directive came only two weeks after the Propaganda Department of the Communist Party of China Central Committee, the National Radio and Television Administration and other government agencies issued a document aimed at capping entertainers' salaries and combating tax evasions in the entertainment circle.

The government clampdown was prompted by the May revelations, in which whistleblower Cui Yongyuan, a former anchor of state broadcaster China Central Television, posted several photos of different documents on his social media account, which he said were the "twin contracts" that billionaire actress Fan Bingbing signed to evade taxes.

Fan has "disappeared" from the public sight for nearly two months, and some media reports said that she had been taken into custody due to allegations of tax evasion.

The wave of crackdown has also led to a change in tax policy imposed on film studios located in Hengdian, a film and television production base in China. The new tax policy changes the tax calculation method in order to prevent the film studios from evading taxes.

Affected by the "twin contract" allegation, Huayi Brothers has suffered a loss of 8 billion yuan in market capitalization since June, with its share price dropping by 35 percent.

In the first half of 2018, the net profit dropped 35 percent from the same period of last year to 277 million yuan, according to the financial report of Huayi Brothers.

In July, there were rumors that the cofounders of Huayi Brothers had pledged most of their shares, triggering concerns about the company's cash flow and possible tax evasion. In response, Huayi Brothers said that the pledge of shares was not a stock sale and would not affect the company's normal operations. The company also threatened lawsuits against what it calls "malicious rumormongers", which it thought "seriously impaired the legitimate rights and interests of the firm and its shareholders".

Huayi Brothers has customarily bought companies controlled by celebrities with valuation adjustment mechanism agreements targeting bigger returns, a way that it can use to deepen ties with these celebrities.

In 2015, Huayi Brothers bought a 70 percent stake in Dongyang Meila for 1 billion yuan, a media company fully owned by film director Feng. The two sides signed a valuation adjustment mechanism agreement, according to which Feng will compensate Huayi Brothers if he fails to reach the profitability goals annually.

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