Fan Bingbing’s fall from grace turns the spotlight on the far-reaching yin-yang economy in China

Mimi Zou says separate contracts for official use and for execution by private parties are common in the construction industry and property transactions, and are even legitimised by the courts

PUBLISHED : Tuesday, 09 October, 2018, 10:04am
UPDATED : Tuesday, 09 October, 2018, 10:37pm

When Fan Bingbing “disappeared” in July, there was much speculation about what had happened to China’s highest-paid actress. She returned to the spotlight last Wednesday when Chinese authorities announced that she has been ordered to pay nearly 884 million yuan (US$129 million) in unpaid taxes, fines, and penalties for tax-related offences. Fan is the most high-profile personality to date to be subject to the Chinese government’s crackdowns on celebrities’ earnings and tax evasion practices.

Central to the authorities’ investigation is Fan’s use of “yin-yang contracts” to conceal her real earnings. The actor entered into two contracts for the same work: a “yang” (“in the light”) contract showing lower earnings for the tax authorities and a separate “yin” (“in the dark”) contract with a larger figure that is unreported. Such contracts have become quite prevalent in the Chinese entertainment industry to circumvent tax laws and, more recently, a policy capping television and film stars’ earnings to discourage “money worship” and “distortion of social values”.

The Fan Bingbing scandal unfolded in June, when a television presenter leaked on social media documents of two yin-yang contracts that were purportedly linked to Fan’s work in the film Air Strike. One contract was for 10 million yuan, another for 50 million yuan. At the time, Fan’s studio denied any wrongdoing by the actress. The TV presenter later withdrew the allegations and apologised to Fan, but the tax authorities had already launched their probe.

According to the State Administration of Taxation, Fan had earned 30 million yuan for her work on the film Air Strike but had only declared 10 million to the authorities, thus evading 6.18 million yuan in personal income tax. Fan and her company also owed 255 million yuan in unpaid taxes.

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Beyond the entertainment industry, yin-yang contracts are found across a variety of sectors and transactions in China. For example, in construction projects, the yang contract is signed by the construction unit and the bid-winning contractor in accordance with Chinese Bidding Law and official bidding documents.

This contract is registered with the administrative department of the construction unit. Meanwhile, a yin contract is concluded between the parties in private, usually to avoid administrative supervision and management by the relevant government authorities. The yin contract spells out the actual execution of the project.

Such contracts are also common in property transactions. The yin contract indicates the real transaction price, while a yang contract stating a lower price is produced for the transfer of title registration to enable the parties to pay less capital gains and other taxes.

Another type of yang contract is one with a higher price that is submitted to the bank to apply for a bigger mortgage. The parties may also attempt to split the full transaction price into two contracts: one sales contract – which states a low sale price for the property – and a separate contract for refurbishments and furniture.

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While the use of such contracts for tax evasion or other unlawful purposes attracts administrative and possibly criminal sanctions, are yin-yang contracts unenforceable per se if a dispute arises between the contracting parties? There is no easy answer.

Chinese courts have adopted a case-by-case approach to determining the validity of yin-yang contracts

Under Chinese contract law, a contract established according to law becomes effective at the time of its establishment. If relevant laws and administrative regulations require the approval or registration of a contract before it comes into effect, then those provisions apply. As a general principle, a valid agreement between the parties is the genuine expression of their intention. Thus, while the yang contract may be the registered official contract, the yin contract reflects the parties’ true intention.

Furthermore, the main Chinese contract law legislation lists several grounds on which a contract can be deemed void: contracts that appear legitimate on the surface but conceal an illegal purpose; contracts that violate mandatory provisions of laws and administrative regulations; and, contracts that harm social and public interests. On these grounds, Fan’s use of yin-yang contracts for tax evasion renders both contracts void.

In judicial practice, Chinese courts have adopted a case-by-case approach to determining the validity of yin-yang contracts. For example, if the difference in the value of the two contracts is small, courts tend to recognise the validity of either. Sometimes, courts may determine the price clause to be invalid while upholding the validity of the remaining contract.

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Fan’s fall from grace and the recent government crackdown on celebrities’ tax-dodging schemes have redirected our attention towards the ongoing problems of China’s yin-yang economy. In 2010, the Post called for the stamping out of rampant yin-yang contracts in property transactions, since these practices distort property prices and the market.

However, yin-yang contracts, which have become ubiquitous in many parts of the economy, will not disappear after the latest crackdown. One can only hope that the long-standing tacit tolerance of such practices by government authorities and courts will begin to change.

Mimi Zou is the inaugural Fangda Fellow in Chinese Commercial Law at Oxford University. She is the author of An Introduction to Chinese Contract Law