With the coming into force of the "Announcement of the Ministry of Finance and the State Administration of Taxation on the Administration of the Collection of Individual Income Tax on Income from Equity Investment and Operation" (Announcement No. 41 of the Ministry of Finance and the State Administration of Taxation in 2021), various regions have gradually implemented policies for the collection of accounts of individual proprietorship enterprises, making the practice of high income groups in the cultural and entertainment field relying on registration for independence and achieving the goal of reducing tax burden through the verification of collection policies completely become history. At the same time, it can be seen from the exposure of tax evasion by many employees such as Weiya and Deng Lun who used fictitious businesses to convert personal labor remuneration into corporate income and falsely declare it, that the country is determined to thoroughly rectify the tax related issues in the field of cultural and entertainment. This can not help but make relevant practitioners begin to ponder how to reduce tax burden in a compliant manner. The Hainan Free Trade Zone, with relatively large tax preferential policies, has become the consideration and aspiration of high-income people. So, is it feasible for cultural and entertainment practitioners to invest in the Hainan Free Trade Zone? How should they achieve tax compliance?

1、 "Double 15%" tax preferential policy for investment in Hainan Free Trade Zone

On June 1, 2020, after the Central Committee of the Communist Party of China and the State Council issued the "Overall Plan for the Construction of Hainan Free Trade Port", which defined the implementation scope of Hainan Free Trade Port as the entire island of Hainan Island, and proposed multiple tax preferential policies, the Ministry of Finance and the State Administration of Taxation issued the "Notice of the Ministry of Finance and the State Administration of Taxation on the Preferential Policies for Enterprise Income Tax of Hainan Free Trade Port" (CS [2020] No. 31) on June 23, 2020 "Notice on the Personal Income Tax Policy for High end Talents in Short Supply in Hainan Free Trade Port" (CS [2020] No. 32), "For encouraged industrial enterprises registered in the Hainan Free Trade Port and operating substantively, corporate income tax will be levied at a reduced rate of 15%." "For high-end talents and scarce talents working in the Hainan Free Trade Port, the actual personal income tax burden exceeding 15% will be exempted." From the level of the Ministry of Finance and the State Administration of Taxation, a preferential tax policy of 15% will be granted to local governments, Make Hainan a place to invest with the greatest tax incentives.

2、 Practitioners in the field of cultural and entertainment meet the conditions for enjoying the preferential policies of the Hainan Free Trade Zone

With the implementation of a series of specific documents and nearly two years of practical experience in Hainan, we can see that practitioners in the field of cultural and entertainment who invest in Hainan are eligible to apply the "15%" tax preferential policy. As one practitioner said, "Half of the cultural and entertainment industry is located in Hainan, and the other half is on the way to Hainan."

（1） The industry to be invested must comply with the "Catalogue of Encouraged Industries in Hainan Free Trade Port (2020 Edition)"

On July 31, 2020, the State Administration of Taxation Hainan Provincial Taxation Bureau issued the Announcement of the State Administration of Taxation Hainan Provincial Taxation Bureau on Issues Related to the Preferential Policies for Enterprise Income Tax in Hainan Free Trade Port (Announcement No. 4 of the State Administration of Taxation Hainan Provincial Taxation Bureau in 2020), which clearly stated that "enterprises in encouraged industries shall be subject to enterprise income tax at a reduced rate of 15%", which means that the enterprises invested by investors need to be listed in the encouraged industries of Hainan Province. According to the Catalogue of Encouraged Industries in Hainan Free Trade Port (2020 Edition), item 143 of the Catalogue is "Performance Brokerage Services, Performance Venues, and Entertainment Venues Operation." Therefore, practitioners in the field of cultural and entertainment who register companies in this category and conduct substantive operations will have the opportunity to enjoy a 15% corporate income tax policy.

（2） Practitioners need to comply with the Hainan Free Trade Port Industry Shortfall Talent Demand Catalog (2020 Edition)

According to the Notice of the Ministry of Finance and the State Administration of Taxation on the Individual Income Tax Policy for High end and Shortage Talents in Hainan Free Trade Port (CS [2020] No. 32), the Notice of the People's Government of Hainan Province on the Issuance of the Interim Measures for the Administration of the List of High end and Shortage Talents in Hainan Free Trade Port to Enjoy the Preferential Individual Income Tax Policy (Qiongfu [2020] No. 41) According to the Notice on Issues Related to the Implementation of Personal Income Tax Preferential Policies for High end and Shortage Talents in Hainan Free Trade Port (QCS [2020] No. 1019), "High end and Shortage Talents have the opportunity to enjoy a 15% personal income tax preferential policy.".

In Item 10 of the "List of Shortened Talents in the Hainan Free Trade Port Industry" released by the People's Government of Hainan Province, it is specified that "screenwriters, directors, composers, conductors, performers, stage designers, stage technicians, news editing and broadcasting talents, cultural and art curators, animation design and creative talents, advertising designers, graphic designers, and new media operating talents" and other cultural and entertainment professionals are in short supply in Hainan Province.

Therefore, individuals engaged in the cultural and entertainment field who "work in Hainan Free Trade Port and continuously pay social insurance such as basic endowment insurance for more than 6 months within a tax year in Hainan Free Trade Port (including the current month of December of this year), and have signed a labor contract or employment agreement for more than 1 year with an enterprise or unit registered and substantially operating in Hainan Free Trade Port, are entitled to a 15% personal income tax preference.".

3、 Precautions and Risk Analysis for Cultural and Entertainment Professionals Investing in Hainan

Judging from the dynamics of the past two years, Hainan's tax authorities have indeed made greater efforts to investigate and expose illegal tax related activities. Based on tax related cases in the past two years, we have looked at the risk points that cultural and entertainment professionals should pay attention to when investing in the Hainan Free Trade Zone.

（1） Enterprises must meet the standard of "substantial operation" and beware of "empty shell" operation

The Announcement on Issues Related to the Substantive Operation of Encouraged Industrial Enterprises in Hainan Free Trade Port (Announcement No. 1 of the Hainan Provincial Taxation Bureau of the State Administration of Taxation in 2021) clarifies that:, "For resident enterprises that are registered only in the Free Trade Port and whose production and operation, personnel, accounting, assets, and any other items are not located in the Free Trade Port, they do not belong to substantive operations in the Free Trade Port and may not enjoy the preferential policies for enterprise income tax in the Free Trade Port." If an enterprise operates in a shell, it is inevitable that it cannot enjoy the preferential policies. Therefore, cultural and entertainment enterprises should meet the following operational standards:

The production and operation is conducted in the free trade port, which means that resident enterprises have fixed production and operation sites in the free trade port, and the main production and operation location is in the free trade port, or the institutions that implement substantive overall management and control over production and operation are in the free trade port.

The employees are in the free trade port, that is, the resident enterprise has employees who meet the production and operation requirements to work in the free trade port, and has signed a labor contract or employment agreement with the resident enterprise for more than one year.

Finance is located in the Free Trade Port, where accounting documents, accounting books, financial reports, and other accounting files of resident enterprises are stored. The main bank accounts of resident enterprises are opened in the Free Trade Port.

The assets are located in the free trade port, which means that a resident enterprise has the ownership or use right of the assets, and the assets actually used are located in the free trade port, matching the production and operation of the enterprise.

（2） Beware of being listed as a business anomaly due to "inability to contact through registered residence or business premises"

On December 20, 2021, the Market Supervision and Administration of Hainan Province issued a "Notice on Ordering Rectification within a Time Limit" (hereinafter referred to as the "Notice"), requiring enterprises that are listed as operating abnormalities due to "inability to contact their registered domicile or business premises" to complete rectification and apply to the local market supervision department for removal from the operating abnormality list by January 31, 2022. If the company fails to rectify within the time limit, the Hainan Provincial Market Supervision and Administration Bureau will investigate and deal with it according to law. If the circumstances are serious, the business license will be revoked according to law. In this notice, there are also many enterprises registered by online celebrities and celebrities in Hainan that have been listed as operating abnormalities due to "inability to contact through their registered domicile or business premises.". "If the registered domicile or business premises of the enterprise cannot be contacted, it is obvious that the preferential policies will be cancelled because they do not meet the actual operating standards.".

（3） Attach importance to corporate financial compliance management, and do not regard Hainan as a "tax haven"

Since the Overall Plan for the Construction of Hainan Free Trade Port was put forward, many documents have emphasized the "substantial operation" of investment in Hainan to prevent it from becoming the second Khorgos. Supported by big tax data, Hainan's tax inspection efforts and exposure to tax violations are extremely high. The websites of relevant government departments in Hainan continue to report all kinds of illegal behaviors of enterprises. For example, one of the ten cases published on the official account of Hainan Taxation WeChat on May 13, 2021 is "a case of tax evasion by an art troupe with false invoices", and one of the ten cases exposed in Hainan on February 2, 2022 is "a case of underpayment of taxes by a cultural media company". In addition, the Hainan Market Supervision and Administration Bureau will continue to publish a list of "operating anomalies", including some well-known practitioners. Every exposure will trigger public opinion and have a significant social impact on practitioners in the entertainment industry. If it involves tax violations, it will even affect their career.

Star artists, online anchor brokerage companies, brokers, and related producers shall perform their individual income tax withholding obligations in accordance with the law. Enterprises and individuals engaged in the field of cultural and entertainment should enjoy full tax benefits in accordance with the law and regulations, while also doing a good job in tax compliance management. We suggest that entertainment industry practitioners who invest in the Hainan Free Trade Zone should, while meeting the requirements stipulated by laws and regulations, hire professionals such as lawyers to assist in tax compliance and prevent tax risks.