Chinese entertainment stocks are taking a knock this week after news of a tax probe

Key Points
  • Stocks of entertainment companies in China have declined this week.
  • The moves lower in the week came after China's State Administration of Taxation said it was looking into tax evasion in the film industry.

Stocks of entertainment companies and production houses in China are having a sorry week after authorities in China announced they were launching an investigation in the sector following allegations of tax evasion.

China's State Administration of Taxation said in a statement earlier this month that it had instructed tax authorities in Jiangsu to carry out investigations following news concerning the use of so-called "yinyang contracts" and related tax issues among those involved in the film and television industry.

The use of "yinyang" contracts raised by mainland authorities involves the practice of drawing up more than one contract for an agreement.

In such a situation, a contract stipulating real agreement terms will be drawn up alongside another contract that reflects a smaller earnings figure, with the latter document subsequently declared to the authorities to allow for lower tax payment, according to a Reuters report.

The department added in its notice that those found violating tax regulations would be dealt with according to the law.

Shares of production companies fell sharply on Monday, with many names still on the back foot by the end of the week.

Shares of Zhejiang Talent Television and Film were down 2.85 percent Friday afternoon, lagging the Shenzhen composite, which traded lower by 1.22 percent. The benchmark was down 1.37 percent. Zhejiang Talent was down around 13 percent in the week.

Meanwhile, Wuhan DDMC Culture, which is involved in both sports and television productions, hovered around the flat line, but its stock was still down roughly 10 percent this week.

Huayi Brothers, a film and television production company, advanced 0.71 percent during Asian afternoon trade, but those gains were not enough to erase steep losses at the beginning of the week. Huayi Brothers stock was down more than 13 percent for the week.

South Korean films may get a break in China
South Korean films may get a break in China

The saga arose at the end of May, when Cui Yongyuan, a Chinese television personality, released several documents on his Weibo page that were purportedly part of a contract for 10 million yuan ($1.6 million). He later said there was another contract for a larger sum of 50 million yuan. Although Cui did not mention any names, popular Chinese actress Fan Bingbing's name is seen in the document.

Fan is China's top-earning actress, with Forbes estimating the star's earnings last year totaled 300 million yuan ($46.8 million).

Fan's studio refuted the allegations in a statement released online.

The additional scrutiny of the sector comes amid growth in the industry, with China's box office takings surpassing that of the U.S. in the first quarter of the year, according to Variety. A total of 20.2 billion yuan (around $3.17 billion) was collected during that period.