Wahaha chairman Zong Qinghou, who is being investigated for alleged tax evasion, was "set up" by French food and dairy giant Danone Groupe SA, the entrepreneur said this week.

Zong and the legal consultant of Wahaha's trade union said Danone, once a model joint venture partner of the Chinese beverage producer, tipped off authorities, which are now investigating Zong for possible tax evasion of up to 300 million yuan ($43 million).

Danone's move was linked to the yearlong dispute between the firms, Zong said.

The French company, however, said the tax probe has nothing to do with the ongoing negotiations, and hopes a peaceful solution can be found to end the controversy over the ownership of the Wahaha brand and other business ventures.

Tax departments in Hangzhou, where Wahaha is based, yesterday declined to comment on the case.

In an interview with Chinese media earlier this week, billionaire entrepreneur Zong said he was asked by the Hangzhou taxation authorities to take part in a tax checkup.

Zong said he had paid all due income tax as well as a late-payment penalty in the second half of last year, "after he acknowledged Danone failed to realize its commitment of paying tax on service fees, bonuses and stock earnings on his behalf," the Xinhua News Agency said.

Zong accused Danone and its China CEO Qin Peng of being connected to the probe, as their negotiations are falling apart.

Both parties are ready for a split and peaceful talks are no longer possible, Qian Weiqing, a lawyer on Wahaha's side, said during a legal forum yesterday in Beijing.

"The chances of a peaceful resolution are getting increasingly slim."

But the French company said in a statement that the probe has nothing to do with its talks with Wahaha, claiming it will continue to strive for a peaceful solution.

Danone, which owns a 51-percent stake in 39 Danone-Wahaha joint ventures, accused its Chinese partner of setting up independent companies and selling products identical to those sold by the joint venture. Zong claimed Danone was aiming for a malicious takeover.

Since last April, the two companies have filed numerous complaints and lawsuits against each other in different Chinese and foreign jurisdictions. In December, the two sides agreed to temporarily suspend lawsuits and arbitrations and stop issuing aggressive and hostile statements so that peace talks could restart.

(China Daily April 18, 2008)