CHINA: ‘Yin and yang’ contracts identified as tax evasion

China’s top judicial authorities have identified so-called “yin and yang” contracts as a type of tax evasion in a newly released legal document.

The designation has been highlighted in a judicial interpretation about the handling of tax-related offenses that was issued by the Supreme People’s Court and the Supreme People’s Procuratorate on Monday.

It was the first time that judicial authorities clearly declared such contracts as a method of tax evasion, aiming to help prosecutors and judges solve tax-related cases more effectively and apply the laws more accurately.

Yin and yang contracts, or dual contracts, refer to two documents being produced for the same agreement. One expresses the parties’ true intentions, while the other, in which a lower sum is included to minimize taxation, is presented to tax agencies.

Teng Wei, chief judge of the SPC’s No 4 Criminal Adjudication Tribunal, told a news conference that the judicial interpretation sets out a strong legal basis for tackling relevant cases. She said dual contracts are especially common in the entertainment industry.

In response to the rapid growth of fraud related to export tax refunds in recent years, the judge added that the interpretation also lists eight circumstances in which documents can be defined as scams.

For example, fraudulently using export businesses to declare export tax rebates or falsely reporting the functions and uses of export products are considered to be export tax refund fraud, in line with the interpretation.

Chinese actress Zheng Shuang was found guilty of tax evasion due to a yin and yang contract she had in 2021. According to a statement issued by the Shanghai Municipal Tax Service that year, Zheng was fined 299 million yuan ($41.5 million) as punishment.

In recent years, China has stepped up efforts to combat tax-related violations and crimes, making every effort to safeguard national tax security.

Data provided by the SPC showed on Monday that Chinese courts concluded 30,765 tax-related criminal cases in the past five years, with 48,299 people sentenced.

Chinese police solved more than 16,000 cases involving taxation last year, helping the country recover 3.7 billion yuan in economic losses, according to the Ministry of Public Security.

Prosecutors nationwide have also attached great importance to the taxes, accusing 54,176 people of tax-related crimes from January 2019 to December 2023, said Yu Shuangbiao, an official from the SPP. He added that tax regulations are facing challenges in new areas, including e-commerce and livestreaming.

To solve the problems, Chinese taxation departments have increased their supervision, Fu Liping, an official from the State Taxation Administration, said on Monday.

In 2023, for instance, tax agencies investigated and punished 135,000 entities suspected of evading taxes, and recovered 181 billion yuan in losses, she said.

Meanwhile, 8,228 suspects were arrested under the cooperation of the tax departments and public security bureaus, she added.