Economics Market China

China puts on its best tax-friendly face

Cultural free-trade zones and freeports are intended to bring in more foreign art business

Sheltered from tax: Christie’s could benefit from new exemptions in the Pudong district of Shanghai

In a bid to supplant Hong Kong as Asia’s art market hub, China is developing cultural free-trade zones that aim to make it a more competitive place to buy, sell and store art.

China wants art and culture to aid economic growth. According to the research firm ArtTactic, Beijing wants to double the sector’s share of the economy from 2.5% to at least 5% by 2015. The strategy mirrors the creation of economic zones to kickstart its manufacturing base in the 1980s and 1990s.

Under a plan approved by China’s State Council in July, companies in a new zone in Shanghai’s Pudong district will be able to exchange foreign currencies freely, and the movement of goods in and out of the zone will be exempt from duties and taxes from as early as next year. Christie’s, which announced in April that it had secured permission to hold auctions in the city, is expected to benefit.

Another high-profile project is under way in the capital, where the Beijing Gehua Cultural Development Group, a conglomerate backed by the municipal government, is constructing the Beijing Freeport of Culture, a 500,000 sq. m area that is part of the Tianzhu Free Trade Zone and is expected to be exempt from all government taxes.

After the zone is completed in 2015, the freeport aims to do business worth Rmb50bn ($8bn) a year, according to the state news agency Xinhua. Gehua has already attracted international partners including Sotheby’s, the Swiss-backed art storage specialists Euroasia, the German art transporters Hasen­kamp and the organisers of the European Fine Art Fair.

A relative deterrent

If the freeports emerge as planned, they will make China a more attractive place for overseas auction houses, art fair operators and dealers to do business and will help to restore confidence in the country’s art market after a tax crackdown in 2012 deterred buyers, according to Nancy Murphy, a partner and specialist in art law at the Beijing law firm Jincheng Tongda & Neal. “They are a response to Hong Kong and Singapore, which are getting a lot of business because of their extremely easy tax situations,” she says.

China’s art market has flourished in recent years, but high taxes—which, until recently, added up to around 30% of an item’s value (see box)—encouraged tax evasion and have become a drag on growth. Before 2012, Murphy says, customs duties on art were not rigorously enforced, and many art importers and collectors routinely underdeclared the value of art shipments.

It is assumed that the freeports will not be subject to import duties or sales, value-added and other taxes, but little is known about how they will operate. Although they are likely to provide an attractive base for overseas players to test the Chinese market, it is not clear to what extent local art buyers will benefit, as taxes will be imposed once works of art leave the freeport zones.

Gan Xuejun, the chairman and president of Huachen Auctions, says cultural freeports will make it easier for companies like his to collaborate with overseas partners. “This has always been technically possible, but in reality, there were lots of hoops to jump through to enable an auction to take place,” he says.

His company held a 360-lot auction of Western works, consigned by a group of 21 regional British auctioneers, in the southern city of Xiamen in April. Although the results were lacklustre, he says the auction was significant because the items were permitted to leave the freeport without incurring taxes for a travelling show before the sale.

Early days

With China’s tax-friendly projects still in their infancy, they are unlikely to mount a challenge to Hong Kong or Singapore, says Antony Dapiran, a Hong Kong-based partner at the law firm Davis Polk. Singapore has given strong government backing to art-related projects and opened its freeport—a 25,000 sq. m storage facility managed by Euroasia, the same company that operates the Geneva Freeport and is collaborating on the Beijing project—at Changi Airport in 2010. The group is also behind a 20,000 sq. m freeport that is due to be launched in Luxembourg by late 2014. Hong Kong, where the entire city is a duty-free area, has seen an influx of auctioneers, fairs and dealers as the art market’s centre of gravity has shifted east.

Dapiran, who has advised international galleries and dealers setting up in Asia, warns that collectors and businesses considering using facilities offered by the Chinese freeports need to be aware of the risks of storing valuable assets in a country without a strong rule of law. “If they want to confiscate your assets because they think you are withholding tax, they can.”

The cost of importing art

A collector who wants to ship art to China needs to pay value-added tax of 17% plus import duties, which currently stand at 6% for original works of art. Until 2011, customs duties often added up to around 30% of an item’s value but varied widely.

There has since been an attempt to standardise duties to discourage tax evasion. A gallery looking to import work temporarily for a commercial art fair has to pay a deposit, equal to the tax and customs duties payable on the work, but the money will be refunded on unsold items shipped out of the country within six months of the date of entry.

Works of art to be exported or imported may also be subject to a “content check” to ensure they do not breach a list of 11 criteria that include endangering national security, disrupting social order or publicising obscenity.

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