China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Companies involved in the cannabis industry will sometimes hear about China being a first-to-file jurisdiction and ask if they should file a trademark application in China for their cannabis products. The short answer is no. Cannabis is illegal in China and those who violate the relevant laws are subject to harsh criminal penalties, including the death penalty.

However, it is possible to use the same workaround as in the U.S., where cannabis is also illegal under federal law: register the mark on products that also have legal uses.

China copyright lawsCurrently, the number one film in China is the smash hit Hello Mr. Billionaire (US$306M and counting). It’s a comedy about a hapless soccer player who stands to inherit 30 billion RMB, but only if he can spend 1 billion RMB in a month (albeit with a number of complicated conditions, like no gambling, donating the money, or purchasing illegal substances).

If the story sounds like déjà vu all over again, that’s because it’s the same plot as a 1985 Universal movie starring Richard Pryor called Brewster’s Millions. The idea for Hello Mr. Billionaire originated with Universal, which was seeking to exploit their back catalog by remaking movies for a Chinese audience. It’s a brilliant strategy when it works, except that it didn’t actually work for Universal: they decided not to finance the remake and merely allowed the filmmakers to use some of the plot points from the 1985 film.

The track record of Chinese remakes is decidedly mixed. In 2017, Disney remained highly involved in The Dreaming Man (a remake of the 1995 Sandra Bullock film While You Were Sleeping) but it barely registered at the box office. Before that, the 2004 film Cellular was remade in 2008 and bombed; the Coen Brothers’ 1984 film Blood Simple was remade in 2009 by Zhang Yimou and enjoyed modest success; and the 2000 film What Women Want was remade in 2011 and basically broke even. It only takes one success to start a trend, though, and the outsize profits of Hello Mr. Billionaire will surely lead to similar remakes being fast-tracked.

But Hello Mr. Billionaire is not just any remake. It’s based on the 1902 novel Brewster’s Millions by George Barr McCutcheon, which has been adapted into a film at least 12 times and in multiple countries. Sure, the story is fun, but I suspect the real reason it’s been remade so often is that the IP is free – the book’s copyright has expired and the story has been in the public domain for years. Thus, when Universal decided not to fund Hello Mr. Billionaire, the only chain of title issues the filmmakers faced were with respect to plot points or characters that solely appeared in the 1985 film. (The filmmakers may have had other contractual obligations to Universal, but that’s a separate matter.)

Let’s thicken the plot even further. China and the US are both signatories to the Berne Convention, but they don’t have the same rule when it comes to the expiration of copyright. The basic rule in China is that a published work enters the public domain after the life of the author plus 50 years (i.e., the minimum protection under the Convention); the basic rule in the U.S. is the life of the author plus 70 years. Both countries have numerous exceptions to the rule, which in the U.S. are even more advantageous to copyright holders.

It remains unclear whether China would apply its own rule or the U.S. rule for a work created in America — say, a book or play or other source material for a movie. It may seem like a moot point because most movies are created for an international audience, but the Chinese film audience is so big now that a Chinese movie only needs to succeed in China. As of December 31, 2018, the works of any author who died in 1968 will arguably be in the public domain in China. That’s a lot of potential material coming on the market, including the oeuvres of John Steinbeck, Edna Ferber, and Upton Sinclair. And that doesn’t even consider anyone who died before 1968! The larger question is whether Hollywood will view this as a threat, an opportunity, or both.

China trademarkAs a result of reshuffling announced during the 2018 National People’s Congress back in March, the Chinese Trademark Office will now become part of the State Intellectual Property Office (SIPO), which had previously only handled patents. SIPO is also taking over responsibility for geographical indications (e.g., Basmati rice, Parmagiano Reggiano cheese, Cognac brandy), but copyrights will remain under the purview of the Copyright Protection Centre of China. Which may seem odd at first – why consolidate IP registrations in one agency but leave out one form of IP? – but that’s how the US does it with the USPTO and the U.S. Copyright Office.

Although early reports are that SIPO is having some growing pains, the integration has progressed enough so that when SIPO released the mid-year statistics on July 10, 2018, it included statistics for patents, trademarks, and geographical indications.

Faithful readers of the blog will remember that we have expressed a combination of incredulity and bemusement at the massive numbers of trademark applications being filed in China over the past few years. See, for instance, Does China Have Too Many Trademarks? and China Still Has Too Many Trademarks. Well, the hits just keep on coming.

During the first six months of 2018, 3,586,000 applications for trademark registration were filed in China. As of June 30, 2018, 31.5 million total trademark applications had been filed, 19.4 million trademarks had been registered, and 16.8 million trademarks remained as valid registrations. To provide some context, slightly more than 5.7 million trademark applications were filed in all of 2017; if the numbers for the second half of 2018 stay at the same level (which seems overly conservative) then the number of applications in 2018 will have increased by nearly 25% from the previous year.

Meanwhile, the CTMO is making a decent showing on its pledge to reduce the time spent examining trademarks. According to its statistics, the average examination time is now about 7 months. I don’t have access to all of the data, but anecdotally that number seems generous (although I will concede that the tempo has picked up). But the quality of the decisions isn’t any better, which raises a bit of a conundrum. If you’re going to get a ridiculous decision, do you want it made quickly or slowly?

One of these days we’ll hit peak trademark – we have to – but we sure aren’t there yet. In the meantime, what with all the trademarks that are being filed  in China, it’s more important than ever that you secure the trademarks that matter to you before anyone else does. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

In the meantime, stay tuned for updates on China’s trademark statistics.

China movie lawAs everyone who follows the Chinese film industry already knows, the would-be blockbuster Asura had one of the strangest and most ignominious openings in film history last weekend. With an estimated budget of US $113 million, it ranked as the most expensive domestic production of all time, and featured a high-profile international cast and crew including Chinese teen heartthrob Lei Wu, Hong Kong legends Tony Leung Ka-Fai and Carina Lau, the costume designer from the Lord of the Rings movies and the visual effects supervisor from Deadpool. But after an anemic opening weekend of $7.1 million and a huge decline in box office even from Friday to Sunday, the film was yanked from theaters on Sunday evening like a vaudeville act getting the cane.

The producers announced their decision to pull the movie via the film’s official Weibo account (in Chinese). Some stories have emphasized that the producers (and not the theaters) pulled the movie. This is true, but elides the fact that Chinese theaters adjust the number of theaters every day for every film, especially on a film’s opening weekend. By Sunday evening Asura was already circling the drain, caught in a vicious cycle of low admissions, terrible reviews, and dwindling screens, and the producers faced a Hobson’s choice of pulling the movie themselves or having it effectively pulled for them.

No one quite believes the producers’ announced plan for Asura, which is that they will modify the film and re-release it. Numerous films have been successfully retooled after preview screenings, but after a wide release with a huge marketing push? It reminds me of the long and troubled history of the Broadway show Spider-Man: Turn Off the Dark, which at the time was the most expensive Broadway show in history, had the most number of “previews” in history, and was revamped several times but still ended up losing more than $60 million.

But if the producers really are going to re-release Asura, their plan to pull the movie early may have been a stroke of genius: by pulling the movie early, they may have given up a million or so in revenue, but they’re getting that back and more with the free publicity surrounding the mystery of what’s next. And the producers are just adding fuel to the fire by alleging they were sabotaged by a deluge of (ostensibly fake) negative reviews. I can’t decide which P.T. Barnum quote is more apt: “There’s a sucker born every minute” or “I don’t care what the newspapers say about me as long as they spell my name right.”

The coverage has bordered on the gleeful, with pundits from across the spectrum weighing in on what went wrong. Everyone agrees that the movie was a disaster, with particular attention to the effects (uninspiring), the story (a strange fusion of Tibetan mythology and action-adventure tropes), the actors (poorly cast), and the marketing (off-putting with its emphasis on the movie’s cost). Indeed, in retrospect it’s hard to identify anything that went right with this movie.

Asura wasn’t some strange labor of love backed by a mysterious billionaire. It was a studio film, produced by powerful and experienced Chinese companies like Zhenjian Film Studio, Ningxia Film Group and Alibaba Pictures. Numerous executives must have weighed in on every aspect of development and production, yet nobody with the power to stop it ever did. I can honestly say that this movie looked horrible and I would have predicted that it would fail, but I would have said the same thing about Warcraft and Resident Evil: The Final Chapter and those movies went gangbusters in China despite being largely ignored in the rest of the world.

As a general rule, I root for Chinese films to succeed. But if this film was as bad as it seems, it’s good that it failed, because Chinese audiences deserve better. Maybe the failure of Asura will even prove a corrective to Chinese studios trotting out 17 Monkey King movies every year. But I doubt it.

The real lesson from Asura, and the reason I think its implosion will ultimately prove to be a good thing, is that it shows the Chinese film industry is maturing. It can fail, and fail spectacularly, in the same way that Hollywood has done for years (see, for instance, Cleopatra, Heaven’s Gate, Ishtar, Cutthroat Island, The Adventures of Pluto Nash, and John Carter). And just like Hollywood, the Chinese film industry will shrug off this failure, because the Chinese film industry is doing just fine – the two movies that dominated the box office last week, Dying to Survive and Hidden Man, are home-grown successes attracting audiences and critical acclaim in equal measure.

It bears noting that Renny Harlin, director of Cutthroat Island, has moved to China and restarted his once-faltering career, with numerous big-budget films lined up including one for Alibaba Pictures. What could possibly go wrong?

China film lawyerLast Tuesday, U.S. Trade Representative (and Trump appointee) Robert Lighthizer released a statement explaining that his office would seek to impose a second round of tariffs on Chinese imports, this time 10% tariffs on an additional $200B in imports. The first round of tariffs, which went into effect on Friday, July 6, imposed tariffs on $34B in imports, and was quickly matched by China’s imposition of tariffs on $34B in US exports to China.

The USTR is justifying its actions on the basis of the 200-page Section 301 report which detailed a wide range of allegedly unfair trading practices by the Chinese government, including forced technology transfer, theft of IP and technology, improper government subsidization, and lack of reciprocity.

It is difficult to find anyone outside China who disagrees with the substance of the Section 301 report, but it is difficult to find anyone outside the Trump administration who understands – let alone agrees with – the country’s blithe entry into a trade war. Ramesh Ponnuru, a senior editor at National Review (hardly a bastion of liberal thought), wrote a cheeky opinion piece in Bloomberg laying out what he saw as Trump’s Four Rules for Conducting a Trade War:

  1. Assume that you will win it effortlessly.
  2. Make sure your tariffs are designed to inflict maximum damage on your own country’s companies.
  3. Take on as many countries simultaneously as you can.
  4. Don’t feel that you have to make your negotiating demands clear.

The USTR has released a tentative list of 6,031 product categories that, in aggregate, allegedly represent $200B worth of Chinese imports. Included on this list, to the chagrin of almost everyone in the entertainment industry, is the following category: “Motion-picture film of a width of 35 mm or more, exposed and developed, whether or not incorporating sound track.” The list also includes motion picture films of a width less than 35mm, but it is silent as to whether this would extend to movies on digital media, which is how the vast majority of films are distributed these days. See Rule (4) above.

Industry observers have been trying to figure out what, if anything, this means to the Chinese film industry, the US film industry, and the interaction between the two. From an economic standpoint, putting tariffs on motion picture imports from China is solely a symbolic gesture. China would love to be exporting films in such quantities that these tariffs would hurt, but as we wrote in What Does the Chinese Film Industry Get From Hollywood?, Chinese films simply don’t do business in the U.S. In the past 10 years, the highest-grossing Chinese films in the U.S. have been The Grandmaster (2013, $6.6M), The Mermaid (2016, $3.2M), and Wolf Warrior 2 (2017, $2.7M).

Meanwhile, multiple U.S. films each year gross more than $100M in China.

Putting all this together, it seems possible (if not likely) that the Trump administration is simply baiting the Chinese government to retaliate against the liberal redoubt of Hollywood. See Rule (2) above. China would love to see Chinese films dominate the Chinese box office, and they certainly don’t care about protecting American business interests. But they also don’t want to do Trump’s dirty work for him.

At this point, all options are open to the Chinese government, and they have even more political cover to take whatever action they like. My guess is that the Chinese won’t do anything except use the threat of tariffs as an excuse to postpone the already-interminable negotiations over the revised film quota and profit-sharing arrangements. I’d do the same thing in their place. How could they possibly reach an agreement on film imports with the threat of retaliatory action hanging over the entire process? This way, the Chinese can have their cake and eat it too.

Of course, it’s also possible the Trump administration didn’t think about any of this too deeply and everyone is reading in complexity where there is none. Being There, anyone?

China trademark subclasses.
China trademark subclasses. It’s complicated.

Our China trademark lawyers are often asked about the difference between the Nice Classification system for trademarks and China’s trademark subclass system. They are related, but quite different.

The Nice Classification system is an international classification of goods and services that separates all possible goods and services into 45 classes: 34 classes for goods and 11 classes for services. The classification was first established in 1957 by the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks, and is administered by the World Intellectual Property Organization (WIPO). A large number of Western and industrialized countries use this system, including the US, Mexico, the EU, the post-Soviet Republics, China, Japan, Korea, Australia, and New Zealand. (But not Canada!) In theory, and mostly in practice, the common classification system makes it much easier to file the same trademark in multiple countries, either through the Paris Convention or Madrid System. The Nice Classification also underpins the trademark fee structure; in most countries, the cost of a trademark application is determined in large part by the number of classes.

China’s subclass system is an overlay of the Nice Classification system. As we wrote in China Trademark Classes and Orange Crush(ed),

One of the more distinctive aspects of China’s trademark system is its unique interpretation of the Nice Classification system. China divides each Nice class into subclasses, and treats each subclass as a discrete unit. A trademark registration gives the owner rights in the covered subclasses, but virtually no rights in any other subclasses. (For further discussion of this feature, see China Trademarks. Register Them in China not Madrid.)

The Nice Classification system includes a list of specific goods and service for each of the 45 classes. Each one of those goods and services has a six-digit “Basic Number” which begins with the two-digit Class number. For instance, Class 15 covers musical instruments, and the list of goods in Class 15 includes accordions (Basic Number 150001), pianos (Basic Number 150008), and tuning forks (Basic Number 150033).

China took the Basic Numbers and produced its own list, identifying for each Class the subclasses and the Basic Numbers in each subclass. For instance, Class 15 has 2 subclasses: subclass 1501 includes musical instruments, and subclass 1502 includes accessories and parts for musical instruments. As you might imagine, pianos and accordions are in subclass 1501, and tuning forks are in subclass 1502.

But Class 15 is a fairly straightforward example. Class 09 is a bear. The summary description from WIPO is “Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking (supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs; compact discs, DVDs and other digital recording media; mechanisms for coin-operated apparatus; cash registers, calculating machines, data processing equipment, computers; computer software; fire-extinguishing apparatus.”

China has divided Class 09 into 24 subclasses, as follows:

0901   Computers and external devices

0902   Recording and counting machines

0903   Other office machines not considered printers or copiers

0904   Weighing machines

0905   Measuring instruments

0906   Signaling instruments

0907   Electrommunication and navigational instruments

0908   Audio equipment

0909   Machines and instruments for photography and films

0910   Measuring instruments, lab instruments, electronic measuring instruments, scientific instruments

0911   Optical instruments

0912   Material used for the transmission of electricity

0913   Crystal, electric and carbon materials, electronics and electronic components

0914   Electrical appliances and controlling devices

0915   Electroplating apparatus

0916   Extinguishers

0917   Electric arc cutting and welding devices

0918   Industrial X-ray machines and devices

0919   Safety/rescue instruments

0920   Alarm devices, electronic bells

0921   Glasses and accessories

0922   Batteries and chargers

0923   Cinematographic film and exposed material

0924   Other items not included in the above sub-classes

Yeah, it’s complicated. Most of the classes fall somewhere in between the simplicity of Class 15 and the complexity of Class 09. But the main point to understand is that Basic Numbers refer to specific goods or services, whereas subclasses refer to a subset of goods or services in each Class that is (in theory) a discrete subset of goods or services that is defined by the Basic Numbers for the goods/services in that subclass.

China IP lawyerHow do you know when a copyright has been infringed? For years, this wasn’t even a question people asked in China because it was so obvious. The guys on the corner with carts full of bootleg CDs and DVDs, the illegal BitTorrents and download sites – all of them were wantonly and flagrantly engaging in copyright infringement. Indeed, infringement was their business model. If they weren’t offering copies of copyrighted works, nobody would be interested.

Slowly but surely, though, China’s enforcement of copyright infringement has improved – in large part because large Chinese companies like Baidu and Alibaba and Tencent now control the rights to a great deal of content and their business models are based on people not getting such content for free somewhere else. The BAT companies have turned to Chinese agencies and courts to enforce their rights, evidenced by a concomitant surge in copyright-related litigation. We wrote about this last year in Copyright Protection in China– It’s Real, and It’s Spectacular:

The point is not that Chinese courts are establishing new rights, but that they are enforcing the rights that already exist for copyright owners – and doing so in a meaningful way. Both Chinese and foreign copyright owners are turning to Chinese courts to enforce their rights, and are prevailing. At least with the easy cases.

China still has work to do on the easy cases before it gets to the level of the US or the EU, but the concept (and value) of copyright has taken hold in China. Bring on the not-so-easy cases! Like the ongoing “Blurred Lines” case in the US, in which Marvin Gaye’s estate sued Robin Thicke and Pharrell Williams for allegedly copying the musical style of “Got to Give It Up.”

Where is the line between plagiarism and inspiration? American courts have grappled with this question for years; lawsuits are filed every day by songwriters and screenwriters who hear a hit song or see a hit movie or tv show and think that the creators stole their work. Many of these cases are spurious and easily dismissed on summary judgment, but not always.

Robin Thicke and Pharrell Williams lost at trial and on appeal, but still deny that they copied Marvin Gaye. Led Zeppelin prevailed in a lawsuit over “Stairway to Heaven,” but the plaintiff (the songwriter for 70s band Spirit) has appealed. Sam Smith quietly settled with Tom Petty before a lawsuit was even filed – perhaps because he feared he would lose the battle of forensic musicologists.

It’s more common to see a music-related case alleging infringement go to trial than a film or tv-related case – probably because musicology offers at least a semblance of objectivity when comparing the original and the allegedly infringing work. But that doesn’t stop online fans from crying foul when they see uncanny echoes of their favorite works in a new program. That’s what happened last week when the Chinese tv show Legend of Fu Yao was taken to task for allegedly ripping off numerous plot points from J.K. Rowling’s Harry Potter and the Goblet of Fire (book four in the seven-book Harry Potter cycle).

This is hardly the first time the Potterverse has been ill-used in the Middle Kingdom. Back when new Harry Potter books were still coming out, Chinese publishers did a brisk business in fake Harry Potter books. Who can forget “Harry Potter and the Hiking Dragon,” “Harry Potter and the Chinese Empire,” or “Harry Potter and the Big Funnel”? Laugh if you want, but these books sold millions of copies. You can understand why loyalists would be unhappy about the latest affront to the Hogwarts canon. The difference is, these days J.K. Rowling can do something about it.

I haven’t seen Legend of Fu Yao and can’t comment on the extent and depth of the alleged similarities. But if the producers of that  show really did steal from J. K. Rowling she could sue in China under the Copyright Law and the Law Against Unfair Competition. That was Disney’s successful strategy against the Chinese filmmakers who made The Autobots, a film whose anthropomorphic cars looked almost the same as Lightning McQueen et al. from Cars.

Suing over Legend of Fu Yao would likely be tougher sledding, but figuring out whether you have a case is what lawyers do for a living. If I were J.K. Rowling, I’d ask my lawyer to engage a China IP lawyer, stat.

China film quotasSince 1994, China has had a quota on the number of foreign films that could be shown in Chinese theaters on a revenue sharing basis (i.e., with the Chinese distributor remitting some percentage of the revenues to the foreign film’s producer). The quota started at 10 per year in 1994, was increased to 20 films per year in 2002, and then was increased again to 34 films per year in 2012 with the proviso that at least 14 of the films be in either 3D or IMAX format.

The exact revenue sharing model has varied, but the current rule, as outlined in the 2012 US and China Memorandum of Understanding (which was a settlement after the US had prevailed in a WTO complaint), allows the foreign film producer to keep 25% of all domestic revenues, without any withholdings or deduction. That percentage has been more aspirational than actualized; money from China is often both too little and too late.

Hollywood has been negotiating a new deal with China for more than a year (the 2012 memorandum expired in 2017), in hopes of raising the quota, increasing the percentage on revenue shares, and gaining more control (or at least transparency) with respect to distribution logistics such as release schedules and blackout dates. But the on-again, off-again US-China trade war has thrown those negotiations for a loop and effectively given China the ability to take whatever position it likes, from slapping a huge tariff on all US films to conceding on all of Hollywood’s deal points. But China is in no hurry to agree to anything. Why should it be? They’re fine with the status quo.

Meanwhile, an alternative to the quota import system has emerged that may render the whole discussion moot. For years, in parallel with the quota-based foreign films, China has also allowed the importation of “buyout” foreign films: films bought for a flat amount, with no required profit sharing. But in recent years, as the Chinese box office has become ever more profitable, the competition for buyout films has gotten increasingly fierce, with many distributors offering better terms, i.e., profit sharing. The most famous example of profit sharing on a buyout film came in January 2017 with Resident Evil: The Final Chapter, which became a smash hit in China to the surprise of all parties involved. Once the film passed RMB 500 million in domestic revenue (which happened on opening weekend), the film producer started getting a piece of the revenue.

As Resident Evil goes, so goes the world. Indeed, strict buyout films are now more the exception than the rule, and the revenue-sharing provisions are getting better and better. The US negotiators must be wondering why they are spending so much time negotiating an agreement for terms that are not appreciably better than what foreign filmmakers are already getting on the open market.

Except it’s not really an open market; China’s theatrical distribution system is dominated by two huge players, China Film Co. and Huaxia, both of which are state-owned. Even the buyout films have to go through those distributors to play in theaters, because foreign companies are legally prohibited from distributing films in China. If there is a convergence between the revenue-sharing terms of buyout films and quota films, it’s only because the Chinese authorities want that to happen (or at least are allowing it to happen).

It’s anyone’s guess how long buyout films will be allowed in on similar terms as the quota films or what the Chinese authorities really think about buyout films. Maybe they’re letting all of this play out to see what happens. Maybe they’re just roiling the waters between the MPAA (which represents the Hollywood studios, who provide most all of the quota films) and the IFTA (which represents non-studio producers, who provide many of the non-quota films). Either way, if you’re an independent producer, it’s a good time to be selling to China.

China movie contracts
Photo by George Baird

Over the past couple weeks, the Chinese Internet has been abuzz with chatter about how Chinese movie stars allegedly underreport income via a dual-contract system in which only one contract is disclosed to the tax authorities.

The ruckus started when television personality Cui Yongyuan uploaded a redacted actor employment contract apparently for Chinese A-list actress Fan Bingbing’s work on the upcoming Bruce Willis film Unbreakable Spirit. (Initial reports stated, incorrectly, that the contract was for Fan’s work on the upcoming Feng Xiaogang film Cell Phone 2.)

Cui complained that Fan was massively overpaid – nearly $1.6M for only four days’ work – and her contract was bad for the Chinese film industry. The contract also detailed some of Fan’s allegedly egocentric contractual demands: screenplay rewrites, her own hairstylist and voice artist, luxury car service, a $200+ daily food allowance, and a requirement that the studio also hire her personal makeup artist at more than $12,000/month. Here in the United States, The Smoking Gun and other websites have posted so many celebrity contracts that we are inured to such terms, but Chinese netizens went berserk. Some penned impassioned defenses of Fan; others bemoaned the country’s skewed priorities.

Cui was just getting started. The next day he published a second redacted contract, this one for $7.8M, and intimated that the two contracts were so-called “yin-yang contracts” for Fan Bingbing: a form of tax evasion under which the smaller contract is reported to the tax authorities as income, and the other is unreported and therefore tax-free income.

At this point the Chinese tax authorities got involved and announced they would be investigating various Chinese film companies and also Fan Bingbing’s own production company. Shares in most of China’s major film companies promptly took a dive, presumably on the assumption that accounting flim-flam was rampant.

Meanwhile, the supposed evidence of Fan’s financial misdeeds unraveled nearly from the beginning. Cui conceded that the second contract had no connection to Fan Bingbing and in fact he had no evidence of any tax evasion on her part. Fan has vehemently denied the allegations of a second contract, and has threatened to sue Cui for damage to her reputation. It’s enough to make your head spin.

Actor compensation is an increasingly touchy subject in China, as the government more control over the film industry while also wanting to exert “soft power” through its cultural exports. With the possible exception of Olympic champions, movie stars probably represent China’s most bankable and least controversial form of soft power. But if the stars shine too brightly (or get paid too much), then the optics start to look bad, especially internally. For this reason, last fall the China Alliance of Radio Film and Television passed guidelines (almost certainly at the behest of the Chinese government) seeking to limit actors’ pay in two ways: capping acting fees at 40% of a project’s budget, and capping any one actor’s fee at 70% of the casting budget.

At this point the only thing that seems (relatively) clear is that Fan Bingbing received $1.6M for four days’ work on Unbreakable Spirit. But let’s imagine for a moment that Fan did receive a separate, larger payment via a second contract. There’s no proof this occurred, but even if it did there’s nothing illegal about it, unless the recipient never reported it. Indeed, all of the criticisms leveled against Fan thus far are similarly uncompelling. Consider:

  1. Fan is being paid too much for her acting services. It’s not difficult to muster a convincing argument that as a policy matter celebrities should not be paid more than, say, teachers or scientists. But the producers of Unbreakable Spirit are the ones who have to pay Fan, not the public, and they have obviously made the calculation that Fan is worth it. She is one of the most popular actresses in China, and they’re not running a charity. Why shouldn’t Fan get as much money as possible for her role? Fame (and the attendant paychecks) can be fleeting, and it’s hard to begrudge anyone who demands to be paid what the market says they’re worth. Especially a female actor, in this age of #metoo. If Unbreakable Spirit were an American film no one would think twice about Fan’s compensation.
  2. The contract is with Fan’s company, not her personally. The vast majority of actors in Hollywood are hired through their own companies, usually LLCs called loanout companies. The main reasons for this are to limit liability and to gain preferential tax treatment. The situation in China is similar. Nothing illegal about it.
  3. Fan (might have) signed two contracts for the same film. Fan has her own production company and it’s quite common for big stars to work as actual or de facto producers on a film. That is: they use their fame, connections, and/or money to help get the film financed, made, and distributed. If someone not  an actor did that, they’d be paid as a producer. Nothing illegal or even unusual about having a second contract for different services.
  4. If she signed two contracts, Fan was paid much more for producing than for acting. Actors take lower fees all the time for various reasons. Maybe they love the movie and take less just to get the movie made. Maybe they believe in the movie and will take less upfront for a piece of the profits (or even revenues, as pioneered by Jack Nicholson in 1989’s Batman). Maybe they’re also directing and producing the film and effectively want to invest their sweat equity in the film. It’s also possible Chinese filmmakers may also be trying to avoid the 2017 rule limiting actor compensation. Such a workaround is arguably a gray area but seems difficult to police, especially with talent that legitimately provides more than just acting services. Who should decide the actual value of their acting services?
  5. Fan’s contract requests are outrageous. By Hollywood standards, Fan’s requests for Unbreakable Spirit are neither outrageous nor particularly diva-like; I’ve received bigger, less rational asks from actors who are much less famous. It’s almost expected for an actor (or their agent) to push the envelope and see how much they can get, not least because it establishes a benchmark for the actor’s next picture. And sometimes a seemingly outrageous request has a legitimate purpose, as most famously embodied by Van Halen’s prohibition of brown M&Ms.

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

But if Chinese celebrities are committing tax evasion through two contracts, it’s because they’re not reporting income, not because there’s anything wrong with the two-contract model.

China WFOE Rules

What is it about registered capital that makes it so consistently confounding? We hear so many half-truths and misconceptions about registered capital that it’s hard to keep track of them all, let alone dispel them. Not for lack of trying, though: see China Company Law Myths: Registered Capital and Personal Liability, How To Start A Business In China. The Minimum Capital Requirements For A WFOE, Part II — The Goldilocks Rule, and Registered Capital For Chinese Companies. Overrated. Without further ado, following please find 7 rules (both formal and informal) about the registered capital requirement for WFOEs.

  • China has no statutory minimum registered capital amount for WFOEs. This statement has been widely promulgated but is only mostly true. China used to have a statutory minimum applicable to all WFOEs, but when the Company Law and associated regulations were revised as of March 1, 2014, the statutory minimum was waived for almost all types of WFOEs. Certain high-profile business scopes still have statutory minimum registered capital amounts for WFOEs. For instance, a financing and lease company must have at least US$10M in registered capital, and an international forwarding company must have at least US$1M in registered capital.
  • China still has a de facto minimum registered capital amount for all WFOEs. When the Implementing Rules on WFOE Law were amended in 2014, the new rules eliminated the following requirement: “the amount of registered capital of an FIE shall match the company’s operational scale.” Observers hailed this change as allowing foreign investors much greater latitude in determining the proper amount of registered capital for their Chinese subsidiaries, because the Administration of Industry and Commerce could no longer claim statutory authority. The acclaim was short-lived, because the AIC still approves all WFOE applications and the formal requirement has simply been replaced with an informal one.
  • You don’t have to deposit the full amount of registered capital right away. Before the Company Law was amended, the default rule was that foreign investors needed to deposit 15-20% of the full amount of registered capital within 90 days of the business license being issued, and the remainder within 2 years of the business license being issued. And to confirm that the registered capital was in fact paid, the deposit needed to be verified by an accountant and the government. The new default is that the registered capital simply needs to be paid within 30 years of the business license being issued.
  • You do have to deposit the full amount of registered capital at some point. 30 years seems like a long time, and it is, but it’s not forever. And if you ever seek to wind down your WFOE – for any reason – you need to have deposited the full amount of registered capital first. So don’t think you can set the amount of registered capital artificially high just so you can have tax-free operating funds.
  • You don’t have to keep the full amount of registered capital as a reserve. We have covered this extensively in previous posts. The basic rule of thumb is that your registered capital should cover the first year or two of your WFOE’s projected expenses. And not only do you not need to keep the registered capital amount in a bank account, you are expected to spend it. On your WFOE’s expenses for the first year or two.
  • You will have to keep a reserve fund of 50% of the registered capital amount. The corollary to the above rule is that though you are expected to spend your entire registered capital amount on the China WFOE’s expenses, you are simultaneously required by statute to build up a reserve fund equal to 50% of the registered capital amount. This is straight out of Article 166 of China’s Company Law: “When companies distribute their after-tax profits for a given year, they shall allocate 10% of profits to their statutory common reserve. Companies shall no longer be required to make allocations to their statutory common reserve once the aggregate amount of such reserve exceeds 50% of their registered capital.” Note the use of the imperative “shall”: paying 10% of your WFOE’s profits into this fund is not discretionary.
  • The minimum allowable registered capital amount may not be the minimum necessary. Just because the AIC approves a certain registered capital amount for your WFOE does not mean the amount is appropriate. The most common error here is for foreign investors to set their registered capital amount too low in light of what they plan to do with their WFOE. Maybe they want to start with a two-person office, but in two years they expect to open a second office, hire 30 more people and bring several people over from their “home office.” Unfortunately, if a WFOE’s registered capital amount is too low, the WFOE may have limitations on everything from hukous to foreign work permits to its ability to open branch offices. It is possible to increase the amount of registered capital after a WFOE has been formed, but it takes time, and that is often the most precious commodity of all.