Editor's Note: In June 2026, Yuewen Group issued an announcement disclosing that one of its subsidiaries was required to make supplementary tax payments of approximately RMB 300 million in total for corporate income tax and late payment surcharges for the years 2020 to 2022, arising from tax risks related to entities associated with Xinjiang Horgos. Using this announcement as a starting point, and drawing on a Nomura research report's finding that the supplementary payment is primarily linked to New Classics Media's tax obligations, this article traces the VIE structure and domestic equity chain formed through Yuewen Group's acquisition of New Classics Media, analyzes the underlying causes of the supplementary tax payment, reviews the policy evolution of the "substantive operations" conditions for Horgos tax incentives, and highlights tax risks in the film and entertainment industry — with the aim of providing reference for relevant market participants.

01 Yuewen Group's Announcement Discloses Supplementary Corporate Income Tax and Late Payment Surcharges of Approximately RMB 300 Million

On June 3, 2026, Yuewen Group (0772.HK), a company listed on the Hong Kong Stock Exchange, issued an announcement disclosing a significant tax supplementation matter concerning one of its subsidiaries. According to the announcement, based on a notification from the tax authority, one of the company's subsidiaries conducted a self-examination regarding tax risks related to its Xinjiang Horgos subsidiary. Following the self-examination and confirmation through communications with the competent tax authority, the subsidiary is required to pay supplementary corporate income tax and late payment surcharges totaling approximately RMB 300 million for the years 2020 to 2022. The matter does not involve any administrative penalties. As of the date of the announcement, the above-mentioned tax payments have been completed, and the relevant amounts will be recognized in Yuewen Group's profit or loss for the current period of 2026. In the announcement, Yuewen Group referred to the relevant taxable entities as "the subsidiary" and "the Xinjiang Horgos subsidiary" respectively, without specifying the actual names or disclosing the particular tax items corresponding to the supplementary payments.

Nomura subsequently published a research report stating that the supplementary tax payment is primarily related to New Classics Media's tax obligations, and that the amount payable accounts for approximately 28% of Nomura's estimated net profit for Yuewen Group's fiscal year 2026. AASTOCKS also published a summary of this report. New Classics Media is the film and television production company that Yuewen Group acquired in 2018. To clarify the identity of the entity responsible for the supplementary payment, it is necessary to first review the transaction structure of that acquisition.

New Classics Media is primarily engaged in the production and distribution of television dramas, online dramas, and films. Its core business falls within the restricted scope of the Special Administrative Measures for Foreign Investment Access (Negative List) and therefore cannot be directly held by Yuewen Group (the Cayman Islands-listed entity). To address this, Yuewen Group adopted a VIE (Variable Interest Entity) structure to complete the acquisition. Under a VIE structure, an offshore company exercises actual control over a domestic operating entity and qualifies to consolidate the entity's economic interests — without the need for direct foreign equity ownership — through a series of control agreements entered into between a wholly foreign-owned enterprise (WFOE) incorporated in China and the domestic operating entity.

Under this structure, the system of control agreements encompasses an exclusive business cooperation agreement, an exclusive option agreement, a share pledge agreement, powers of attorney, as well as confirmation letters from relevant individual shareholders and spousal commitment letters, among other documents. Together, these agreements constitute a comprehensive contractual control system, substituting contractual control for direct foreign equity ownership, and thereby achieving effective control over restricted businesses — such as film and television production and distribution — as well as the right to consolidate the economic interests therefrom, within the framework of China's foreign investment access restrictions. On August 13, 2018, Yuewen Group announced that it had entered into an acquisition agreement with New Classics Media for a total consideration of up to RMB 15.5 billion, payable through a combination of cash and newly issued shares. The acquisition was formally completed on October 31 of the same year, and New Classics Media became a wholly owned subsidiary of Yuewen Group.

The significance of clarifying the above VIE structure lies in the fact that the entities referred to in the supplementary tax announcement are all located on the domestic operating entity side, and have no connection to the WFOE level. Tax costs arising from the Horgos entities are transmitted upward through the chain of contractual control, ultimately manifesting as a reduction in Yuewen Group's consolidated profits of approximately RMB 300 million. Tracing further down the equity chain, based on publicly available equity structure information from Tianyancha, New Classics Media Group Co., Ltd. has under it New Classics Film (Zhejiang) Co., Ltd., which in turn holds 100% of Reveler Film Production Co., Ltd., and Reveler Film Production Co., Ltd. holds 100% of Horgos Zhaohua Xixi Film and Television Production Co., Ltd.

Among these, Reveler Film Production Co., Ltd. was incorporated in September 2015 with its registered address in Horgos, Xinjiang, and was deregistered in February 2025. Horgos Zhaohua Xixi Film and Television Production Co., Ltd. was incorporated in December 2020 and was likewise deregistered in December 2022. These two film and television companies registered in Horgos are representative of the pattern that was prevalent in the film industry at the time, whereby companies rushed to register in Horgos in order to benefit from the "five-year full exemption" corporate income tax incentive. The fact that the supplementary tax years of 2020 to 2022 closely coincide with the operating periods of these two Horgos entities further corroborates the link between the supplementary payments and these entities.

The question then arises: what prompted the tax authority to initiate a risk alert targeting these Horgos entities, ultimately leading to the supplementary tax payment? The following section will provide further analysis in conjunction with the applicable conditions for Horgos tax incentives and the substantive operations rules.

02 The Application of Horgos "Five-Year Exemption" Tax Incentives and the Identification of the Entity Responsible for Supplementary Tax Payment After Deregistration

In this case, the tax authority issued a risk alert, the enterprise conducted a self-examination, and the parties confirmed the outcome through communication before making the supplementary payment — without initiating a formal tax inspection. Under this type of resolution, the tax authority typically does not disclose case details through a formal tax inspection decision. It is therefore necessary to infer the entity responsible for the supplementary payment and the underlying cause based on business registration information and common tax-related practices in the industry.

(i) The Supplementary Payment Most Likely Relates to the Application of the "Five-Year Full Exemption" Corporate Income Tax Incentive

Horgos once attracted a massive influx of registrations from film, media, and entertainment companies, thanks to preferential policies such as the "five-year full exemption, five-year half reduction" for corporate income tax. At one point, the number of media companies registered in the area exceeded 1,600. As tax regulatory scrutiny over the industry intensified, this model of regional presence driven primarily by tax incentives came under pressure for deep adjustment. The reason film and television companies rushed to register in Horgos at the time was precisely to take advantage of the local "five-year full exemption" for corporate income tax. Pursuant to the Notice of the Ministry of Finance and the State Administration of Taxation on Corporate Income Tax Preferential Policies for Enterprises in the Kashgar and Horgos Special Economic Development Zones in Xinjiang (Cai Shui [2011] No. 112), enterprises newly established in the Horgos Special Economic Development Zone between January 1, 2010 and December 31, 2020 that fell within the scope of the Catalogue of Encouraged Industries for Enterprise Income Tax Preferences in Difficult Areas of Xinjiang were exempt from corporate income tax for five years starting from the tax year in which they first recognized revenue from production and business operations. Beginning in 2021, the Notice of the Ministry of Finance and the State Taxation Administration on Preferential Corporate Income Tax Policies for Newly Established Enterprises in Difficult Areas of Xinjiang and in the Kashgar and Horgos Special Economic Development Zones (Cai Shui [2021] No. 27) extended the above incentives through 2030. The operating periods of the two Horgos entities closely overlap with the supplementary tax years of 2020 to 2022. It can therefore be reasonably inferred that the supplementary payment most likely reflects a determination that the relevant entities were no longer eligible to enjoy — or should never have enjoyed — the corporate income tax exemption, resulting in a requirement to pay supplementary taxes and late payment surcharges for the corresponding years.

(ii) After Deregistration, Who Bears the Obligation to Make the Supplementary Tax Payment?

Another aspect of this case that carries significant cautionary value relates to the timing and identity of the entity making the supplementary payment.

As to the identity of the entity making the supplementary payment, the "subsidiary" referred to in the announcement is not New Classics (Tianjin) Media Technology Co., Ltd., the WFOE in the VIE structure. That entity is a shareholding platform in the chain of contractual control; it has no position in the equity chain of the two Horgos companies, does not directly undertake any film or television projects or recognize related revenues, and therefore has no basis for making supplementary tax payments in connection with this matter. The entity that actually bears the obligation to make the supplementary payment should be the surviving parent company in the domestic equity chain of the Horgos entities. According to business registration records, Reveler Film Production Co., Ltd. is wholly owned by New Classics Film (Zhejiang) Co., Ltd., which in turn is a wholly owned subsidiary of New Classics Media Group Co., Ltd. — the three entities form a continuous parent-subsidiary relationship. In practice, the recovery of historical outstanding taxes owed by a deregistered subsidiary is primarily pursued against the surviving parent company or shareholders, pursuant to rules governing the liability of liquidation obligors, the joint and several liability for shareholders' false undertakings, and the piercing of the corporate veil, as set out in the Company Law and its judicial interpretations. This case in essence involves a surviving parent company assuming the supplementary tax obligations of a deregistered subsidiary.

The timing of the tax trigger also warrants attention. Although both Horgos entities have been successively deregistered, the disclosure of the completed supplementary payment only came in June 2026. It should be noted that completing the deregistration of a company with the business registration authority requires first clearing all outstanding tax obligations (tax clearance) as a prerequisite. If a company's deregistration application were flagged with unresolved tax risks at the tax clearance stage, that stage could not be completed and the business deregistration could not proceed. Working backward from this, the fact that Reveler Film Production was able to smoothly complete its deregistration in February 2025 indicates that, at that point in time, no outstanding tax risk had yet been flagged against it — meaning the risk alert targeting it most likely arose after its deregistration. Given that the supplementary payment was completed in 2026, it can reasonably be inferred that the tax risk alert and self-examination in this case were initiated in approximately late 2025 to early 2026. This demonstrates that the tax authority possesses the ability to conduct post-event oversight and retrospective review of tax matters from historical years involving already-deregistered enterprises. Even after a company has been deregistered, the tax authority will still conduct "look-back" reviews of the legitimacy of tax incentives enjoyed during the company's operating period.

As for how the tax authority identified this particular entity, from the perspective of tax administration logic, the combination of being deregistered, having generated large revenues in historical years, and having claimed a full tax exemption on all such revenues would very likely cause the enterprise to be automatically flagged as a high-risk profile by the big data risk control system of the Golden Tax System, making it a prime target for subsequent review. The root cause of the supplementary payment is therefore most likely a determination that the revenues recognized in the relevant years failed to satisfy the "substantive operations" requirement, and that the tax exemption should therefore not have applied. The following section will provide further analysis of the "substantive operations" rules.

03 The Evolution of the Substantive Operations Standard and Its Logical Connection to the Supplementary Tax Payment in This Case

To understand the significance of the "substantive operations" determination for this case, it is first necessary to reconstruct the typical approach film and television enterprises used to exploit Horgos incentives, and then to trace the policy evolution of the relevant rules. The typical method used by film and television enterprises to take advantage of Horgos incentives was to establish a subsidiary in the area, maintaining only a registered address without any actual operations, and then, through related-party arrangements, to channel the income or profits from film and television projects to the Horgos entity, so that large revenues could be sheltered from tax under the "five-year full exemption" policy. However, the personnel, offices, business decision-making, and accounting management of these entities typically remained in cities in the interior of China, and the local company functioned in practice as nothing more than a "revenue conduit" rather than a genuine operating entity. Whether this approach was compliant ultimately depended on how the applicable conditions for the Horgos tax incentive policies were defined.

The relevant rules evolved through two stages. In the early stage, the criteria for determining eligibility for Horgos corporate income tax incentives focused primarily on qualification as a "newly established enterprise" and coverage within the "catalogue of encouraged industries," while also requiring that revenue from principal business operations account for more than 70% of the enterprise's total revenue. Although the policy documents of this stage did not provide an explicit definition of "substantive operations," enterprises were still required to satisfy basic conditions — including newly-established enterprise status, catalogue coverage, and the principal revenue proportion threshold — in order to benefit from the incentives. The year 2021 marked a pivotal turning point in policy direction. In October of that year, Cai Shui [2021] No. 42 provided, for the first time at the level of normative documents, a formal legal definition of "substantive operations": enterprises claiming corporate income tax preferential policies applicable to difficult areas of Xinjiang and the Kashgar and Horgos Special Economic Development Zones must be registered locally and conduct substantive operations — meaning that their actual management institution must be located locally, and that they must exercise substantive and comprehensive management and control over the enterprise's production and business operations, personnel, accounting, and assets. This document became effective as of January 1, 2021.

Examining the three tax years covered by this case — 2020 to 2022 — in light of the above policy evolution: 2021 and 2022 fell within the period of applicability of Cai Shui [2021] No. 42, so the substantive operations requirement had a clear legal basis for those years. While 2020 fell at the tail end of the prior round of incentive policies, the provisions then in effect similarly required enterprises to satisfy the basic conditions of newly-established enterprise qualification, catalogue coverage, and the principal revenue proportion threshold. If the tax authority determined that the relevant entities failed to meet the applicable conditions for the incentive policies, the corporate income tax that had previously been exempted for the corresponding years would need to be paid as a supplementary payment, together with late payment surcharges accruing from the date the tax was originally due. It is worth noting that whether the substantive operations standard can be applied retroactively is a matter of some debate in practice. In this case, the tax authority's handling — requiring supplementary corporate income tax and late payment surcharges for 2020 to 2022 without characterizing the conduct as tax evasion and without imposing any administrative penalties — itself reflects a cautious approach by the tax authority in making retroactive determinations.

It should also be noted that Horgos is not the only jurisdiction that imposes a substantive operations requirement. The Hainan Free Trade Port, the Guangdong-Macao In-Depth Cooperation Zone in Hengqin, the Guangzhou Nansha Pilot Launch Area, and other regions have all established similar analytical frameworks — centered on the criteria of production and business operations, personnel, accounting records, and assets being genuinely present in the preferential jurisdiction — as important prerequisites for the application of regional corporate income tax incentives. The Tibet Autonomous Region similarly issued, in May 2026, the Announcement on Issues Relating to the Substantive Operations of Enterprises Eligible for the Policy on Reduction or Exemption of the Locally Retained Portion of Corporate Income Tax in the Tibet Autonomous Region (Zang Cai Shui [2026] No. 10), which set out the latest criteria for the recognition of substantive operations and further clarified the applicable conditions for local corporate income tax incentives. For enterprises that have established entities in the above-mentioned regions, substantive operations has become a critical threshold that overlays all regional incentive policies and must not be taken lightly.

04 Analysis of Tax Risks in the Film and Entertainment Industry

What the Yuewen Group supplementary tax event reflects is not an isolated incident, but rather the systemic compliance risks that have accumulated under the widespread practice across the film and entertainment industry of establishing project companies in regions offering preferential tax treatment, concentrating revenues in those entities, and claiming corporate income tax exemptions. The reason these risks are now surfacing in a concentrated manner is attributable to two factors: first, the structural characteristics inherent to the industry itself — such as asset-light operations, project-based work arrangements, highly volatile revenues, long transaction chains, and frequent related-party dealings — create a natural gap between the form and substance of tax arrangements; and second, the profound changes in the regulatory environment, whereby big-data-driven tax audits and multi-year retrospective review mechanisms have become routine, and tax authorities now possess the ability to conduct retrospective reviews of historical tax matters involving already-deregistered enterprises. The convergence of these two factors means that the previously commonplace approach of leveraging regional tax incentives is now facing increasingly intense scrutiny after the fact. Given current policy and enforcement trends, affected enterprises face at least the following risks.

First, the risk of retrospective denial of incentive eligibility. If an enterprise is subsequently determined not to have met the applicable conditions, it will be required to make supplementary payments of the corresponding years' taxes and late payment surcharges. Tax authorities typically scrutinize whether the enterprise's business falls within the catalogue scope, whether the proportion of principal business revenue meets the threshold, whether revenues derive from genuine business activities, and whether elements such as personnel, accounting records, and assets are genuinely present in the preferential jurisdiction. In the film and television industry, the most typical triggering scenario is "formal presence, substantive absence" — that is, a project company is registered only in the preferential jurisdiction, while core activities such as script development, filming, and commercial negotiations are all conducted elsewhere, and the local company in practice only handles contract signing, payment collection, and invoice issuance. The relevant recognition rules issued by the Hainan Free Trade Port in 2025 have already made clear that an entity that has no production or business functions and merely performs financial settlement, tax filing, and invoice issuance functions constitutes a typical case of failure to satisfy the substantive operations requirement.

Second, the risk of "four-flow misalignment" among contracts, invoices, funds, and business activities. A common arrangement in practice is for contracts to be signed by the entity in the preferential jurisdiction and invoices to be issued by that same entity, while actual services are performed by a team located elsewhere; revenue is recognized at the entity in the preferential jurisdiction, while costs are primarily borne by a related company in the interior. If such arrangements cannot be shown to have a valid commercial rationale and are not supported by complete documentation, they may be characterized as artificial profit concentration or unreasonable related-party transactions. This would not only affect the application of corporate income tax incentives, but could also trigger a cascade of risks concerning VAT and invoice compliance.

Third, the risk of supplementary taxes and late payment surcharges escalating further into administrative penalties or even criminal liability. Yuewen Group's announcement made clear that the matter does not involve administrative penalties, though supplementary taxes and late payment surcharges are still required — this is already among the lighter outcomes when a regional incentive is retrospectively denied. What is worth being vigilant about is that if an enterprise engaged in subjective concealment, fabricated transactions, or fraudulent invoice issuance, the nature of the risk could escalate from supplementary payments at the tax administration level to tax evasion or fraudulent obtaining of tax incentives, potentially triggering administrative penalties or even criminal prosecution — with fundamentally different characteristics and consequences.

Fourth, the risk of historical liabilities propagating to the group level. As analyzed above, the deregistration of a film and television project company does not mean that historical tax risks are extinguished. The tax authority may still initiate retrospective review after deregistration and pursue recovery of taxes from the surviving parent company or the original shareholders. This risk is particularly pronounced for listed companies: supplementary payments must be directly recognized in the current period's profit or loss, impacting the group's earnings and share price and triggering disclosure obligations. Regional tax incentive issues have thus ceased to be purely the tax affairs of individual project companies, and may instead evolve into material risks at the level of group financial statements and corporate governance.

In the face of the above risks, for film and entertainment enterprises that have already established entities in Horgos, Tibet, Hainan, Hengqin, Nansha, and other preferential regions, the truly sustainable path to compliance is not simply to seek out new tax havens, but rather to establish genuine business substance and a supporting evidentiary framework within those preferential jurisdictions that can withstand retrospective review. Specifically, enterprises should build an evidentiary chain covering production and business operations, personnel, accounting records, and assets, and should conduct systematic self-examinations of the incentive arrangements applied in prior years, with a particular focus on verifying the policy basis, the filing positions adopted, the proportion of principal business revenues, and the completeness of supporting documentation. When faced with uncertainty, it is advisable to proactively communicate with and seek confirmation from the competent tax authority, and where necessary to engage professional tax lawyers, so as to resolve compliance risks before they materialize.