London art law firm Crefovi is delighted to bring you this art law blog, to provide you with forward-thinking and insightful information on top business and legal issues in the art world
London art law firm Crefovi has been practising art law since 2003, in London, Paris and internationally. Crefovi advises a wide range of clients, from young artists in search of financing, gallery representation and exhibition spaces, to mature art players such as auction houses, established art collectors, galleries and museums, in need of legal advice to negotiate and finalise licensing or sales agreements and/or to enforce their intellectual property rights.
Crefovi’s international clients are mainly involved in contemporary art, either as collectors, art galleries, museums or art foundations. Their legal needs, met by London art law firm Crefovi, range from tax issues raised by corporations’ investments in art works, to the execution of wills with a large proportion of art works to be distributed to heirs.
Crefovi regularly attends, and speaks at, important art events such as the TEFAF, Art Basel, Frieze, FIAC & Miami Basel art fairs.
Crefovi is also an active and dedicated collector of contemporary art, maintaining and managing a corporate collection in England and France.
Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. One of the industry teams is the Art law department, which curates this art law blog below for you.
The GDPR is upon us: what is it? How is it going to impact you and your business? What do you need to do in order to become GDPR compliant?
There is not a moment to waste, as the stakes are very high, and since becoming GDPR compliant will definitely bring competitive advantages to your business.
On 27 April 2016, after more than 4 years of discussion and negotiation, the European parliament and council adopted the General Data Protection Regulation (“GDPR”).
Why the GDPR?
The GDPR repeals Directive 95/46/EC on the protection of individuals with regards to the processing of personal data and on the free movement of such data (the “Directive”).
The Directive, which entered into force more than 20 years’ ago, was no longer fit for purpose, as the amount of digital information businesses create, capture and store has vastly increased.
Data, the bigger the better, is here to stay. Today’s data more and more greases our digital world. Control of data is ultimately about power and data ownership does seriously impact competition on any given market. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. Data assets are, today, at least as important as other intangible assets such as trademarks, copyright, patents and designs, to companies. The stakes are way higher, today, as far as data ownership, control and processing are concerned, and GDPR addresses that data flow in the 21st century, as we all engage with technology, more and more.
Moreover, many legal cases, brought up in various member-states of the European Union (“EU”), pinpointed the severe weaknesses and gaps in providing satisfactory, strong and homogeneous protection of personal data, relating to EU citizens, and controlled by companies and businesses operating in the EU. For example, the Costeja v Google judgment, from the Court of Justice of the European Union (“CJEU”), commonly referred to as the “right to the forgotten” ruling, was handed down on 26 November 2014. This ground-breaking judgment recognised that search engine operators, such as Google, process personal data and qualify as data controllers within the meaning of Article 2 of the Directive. As such, the CJEU ruling recognised that a data subject may “request (from a search engine) that the information (relating to him/her personally) no longer be made available to the general public on account of its inclusion in (…) a list of results”. Through this decision, the CJEU forced search engines such as Google to remove, when requested, URL links that are “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed”. It was a huge step forward for personal data protection in the EU.
In addition, data breaches at, and cyber-attacks of, thousands of international businesses (Sony Pictures, Yahoo, Linkedin, Equifax, etc.) as well as EU national companies (Talktalk, etc.) make the news, consistently and on a very regular basis, dramatically affecting the financial and moral wellbeing of millions of consumers whose personal data was hacked because of these data breaches. These attacks and breaches raise very serious concerns as to whether businesses managing personal data of EU consumers are actually “up to scratch”, in terms of proactively fighting against cyber-crime and protecting personal data.
Finally, the GDPR, which will be immediately enforceable in the 28 member-states of the EU without any transposition from 25 May 2018, unlike the Directive which had to be transposed in each EU member-state by way of national rules, standardises all national laws applicable in these member-states and therefore provides more uniformity across them. The GDPR levels the playing field.
When will the GDPR enter into force?
The GDPR, adopted in April 2016, enters into force on 25 May 2018, ideally giving a 2-year preparation period to businesses and public bodies to adapt to the changes.
While many EU business owners take the view that the changes brought by the GDPR onto their businesses, will be of little or no importance or just as important as other compliance issues, there is not a minute to spare to prepare for compliance with the new set of complex and lengthy rules set out in the GDPR.
What is at stake? Which organisations are impacted by the GDPR?
A lot is at stake. All businesses, organisations or entities which operate in the EU or which are headquartered outside of the EU but collect, hold or process personal data of EU citizens must be GDPR compliant by 25 May 2018. Potentially, the GDPR may apply to every website and application on a global basis.
As most if not all multinationals have customers, employees and/or business partners in the EU, they must become GDPR compliant. Even start-ups and SMEs must be GDPR compliant, if their business model infer that they will collect, hold or process personal data of EU citizens (i.e. customers, prospects, employees, contractors, suppliers, etc).
The stakes are very high for most businesses and, for many companies, it is becoming a board-level conversation and issue.
To ensure compliance with the new legal framework for data protection, and the implementation of the new provisions, the GDPR introduced an enforcement regime of very heavy financial sanctions to be imposed on businesses that do not comply with it. If an organisation does not process EU individuals’ data in the correct way, it can be fined, up to 4% of its annual worldwide turnover, or Euros 20million – whichever is greater.
These future fines are way larger than the GBP500,000 capped penalty the UK Data Protection Authority (“DPA”), the Information Commissioner Office (“ICO”), or the maximum 300,000 euros capped penalty that the French DPA, the “Commission Nationale Informatique et Libertés” (“CNIL”), can currently inflict on businesses.
What are the GDPR provisions about?
The GDPR provides 99 articles setting out the rights of individuals and obligations placed on organisations within the scope of the GDPR.
Compared to the Directive, here are the new key concepts brought by the GDPR.
4.1. Privacy by design
The principle of privacy by design means that businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data. For example, a business that limits the quantity of data collected, or anonymises such data, does comply with the “privacy by design” principle.
This obligation of “privacy by design” implies that businesses must integrate – by all appropriate technical means – the security of personal data at the inception of their applications or business procedures.
Accountability means that the data controller, as well as the data processor, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. Moreover, data controllers and data processors must be able to demonstrate the execution of such measures, in all transparency and at any given point in time, both to their respective DPAs and to the natural persons whose data has been treated by them.
These measures must be proportionate to the risk, i.e. the prejudice that would be caused to EU citizens, in case of inappropriate use of their data.
In order to know whether a business is compliant, it is therefore necessary to execute an audit of the data processes made by such company. We, at Crefovi, often execute some audits certified by the CNIL or the ICO.
4.3. Privacy impact Assessment
The business in charge of treating and processing personal data, as well as its sub-contractors, must execute an analysis, a Privacy Impact Assessment (“PIA”) relating to the protection of personal data.
Businesses must do a PIA, a privacy risk assessment, on their data assets, in order to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness. Next to those risks, the PIA sets out the list of organisational, IT, physical and legal measures implemented to address and minimise these risks. The PIA aims at checking the adequacy of such measures and, if these measures fail that test, at determining proportionate measures to address those uncovered risks and to ensure the business becomes GDPR compliant.
Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests.
4.4. Data Protection Officer
The GDPR requires that a Data Protection Officer (“DPO”) be appointed, in order to ensure the compliance of treatment of personal data by public administrations and businesses which data treatments present a strong risk of breach of privacy. The DPO is the spokesperson of the organisation in relation to personal data: he or she is the “go to” point of contact, for the DPA, in relation to data processing compliance, but also for individuals whose data has been collected, so that they can exercise their rights.
In addition to holding the prerogatives of the “correspondant informatique et liberté” (“CIL”) in France, or chief privacy officer in the UK, the DPO must inform his/her interlocutors of any data breaches which may arise in the organisation, and analyse their impact.
Profiling is an automated processing of personal data allowing the construction of complex information about a particular person, such as her preferences, productivity at work or her whereabouts.
This type of data processing can generate automated decision-making, which may trigger legal consequences, without any human intervention. In this way, profiling constitutes a risk to civil liberties. This is why those businesses doing profiling must limit its risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention and/or contest the automated decision.
4.6. Right to be forgotten
As explained above, the right to be forgotten allows an individual to avoid that information about his/her past interferes with his/her actual life. In the digital world, that right encompasses the right to erasure as well as the right to dereferencing. On the one hand, the person can have potentially harmful content erased from a digital network, and, on the other hand, the person can dissociate a key word (such as her first name and family name) from certain web pages on a search engine.
4.7. Other individuals’ rights
The GDPR supplements the right to be forgotten by firmly putting EU citizens back in control of their personal data, substantially reinforcing the consent obligation to data processing, as well as citizens’ rights (right to access data, right to rectify data, right to limit data processing, right to data portability and right to oppose data processing), and information obligations by businesses about citizens’ rights.
Is there a silver lining to the GDPR?
5.1. An opportunity to manage those precious data assets
Compliance with GDPR should be viewed by businesses as an opportunity, as much as an obligation: with data being ever more important in an organisation today, this is a great opportunity to take stock of what data your company has, and how you can get most advantage of it.
The key tenet of GDPR is that it will give you the ability to find data in your organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.
5.2. Lower formalities and one-stop DPA
Moreover, the GDPR withdraws the obligation of prior declaration to one’s DPA, before any data processing, and replaces these formalities with mandatory creation and management of a data processing register.
In addition, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member-state in which the organisation has its main or unique establishment will be in charge of controlling compliance with the GDPR.
Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow to identify the main establishment, including when a sole company manages the operations of a whole group.
This unique one-stop DPA will allow companies to substantially save time and money by simplifying their processes.
5.3. Unified regulation, easier data transfers
In order to favour the European data market and the digital economy, and therefore create a favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties.
This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 28 EU member-states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.
Moreover, since data will comply with legislations applicable in all EU countries, it will become possible to exchange it and it will have the same value in different countries, while currently data has different prices depending on the legislation it complies with, as well as different costs for the companies that collect it.
5.4. A geographical scope extended by fair competition
The scope of the GDPR extends to companies which are headquartered outside the EU, but intend to market goods and services in the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these residents on internet, in order to create some profiles, is also covered by the GDPR scope.
Therefore, European companies, subjected to strict, and potentially expensive, rules, will not be penalised by international competition on the EU single market. In addition, they may buy from non-EU companies some data which is compliant with GDPR provisions, therefore making the data market wider.
5.5. Opening digital services to competition
The right to portability of data will allow EU citizens subjected to data treatment and processing to gather this data in an exploitable format or to transfer such data to another data controller if this is technically possible.
This way, the client will be able to change digital services provider (email, pictures, etc.) without having to manually retrieve all the data, during a fastidious and time-consuming process. By lifting such technical barriers, the GDPR makes the market more fluid, and offers to users enhanced digital mobility. Digital services providers will therefore evolve in a more competitive market, inciting them in providing better priced and higher quality services, as their clients will no longer be hostages to their initial provider.
5.6. Labels and certifications
The European committee on data protection, as well as EU institutions, will propose some certifications and labels in order to certify compliance with the GDPR of data processes performed by businesses.
Cashable recognition and true asset for the brand image of a company, labels and certifications will also become a strong commercial tool in order to gain prospects’ trusts and to win their loyalty.
What are the actionable steps to take, right now, to become GDPR compliant?
There is not a moment to lose to implement the following steps, below:
- Decide on the ownership of implementing the GDPR provisions in your organisation; assign ownership to the best suited department or team (Legal? Compliance? Technology?);
- Liaise with your one-stop DPA, as several of them have prepared useful explanatory information or guidance to comply with GDPR, such as the ICO in the UK, the CNIL in France and the Data Protection Commissioner in Ireland (the latter being the DPA of many a digital giant, such as Google, Facebook and Twitter);
- Draft a map of the data processes in your organisation, and identify the gaps in GDPR compliance in relation to these various processes – we, at Crefovi, have drafted some detailed documents on how to make this mapping of data processes and treatments and to support you on identifying the gaps in GDPR compliance;
- Value the various data processes and treatments and assess which ones are high risk and make a list of your high-risk data assets;
- Execute a PIA on those high-risk data assets (such as Human resources’ data, customers’ data) – Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests;
- Implement legal, technical, organisational and physical measures to lower risks on those data assets and become GDPR compliant;
- Ensure that your contractors and sub-contractors have put compliant security measures in place, by sending them a list of points to check;
- Do privacy awareness training for your employees as they must understand that personal data is anything that can be linked directly to an individual and that there will be some consequences if they break the GDPR provisions and steal personal data;
- Develop a Bring Your Own Device policy (“BYOD”) and enforce it within your organisation and among your employees, since you are accountable for all data user information stored in the cloud and accessible from both corporate devices (tablets, smartphones, laptops) and personal devices. Also, when employees leave or are terminated, make sure that you have included BYOD in your off-boarding process, so that leaving staff lose access to company confidential data immediately on their devices;
- Check and/or redraft the information notices or confidentiality policies in order that they set out the new information required by the GDPR;
- Put in place automated mechanisms in order to obtain explicit consent from EU citizens, especially if your business deals with behavioural data collection, behavioural advertising or any other form of profiling;
- Put in place a solid management plan in case personal data breaches happen, which will allow you to comply with the mandatory requirement to notify your DPA within 72 hours – our in-depth experience of alert, risk management, analytical and notification plans, in France and the United Kingdom, put us, at Crefovi, in a great position to support our clients to prepare for the demanding requirements set out in the GDPR.
 “The world’s most valuable resource is no longer oil, but data”, The economist, 6 May 2017.
 “Preparing for the general data protection regulation: a roadmap to the key changes introduced by the new European data protection regime”, Alexandra Varla, 2017.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
Tel: +44 20 3318 9603
On 23 June 2016, during an epic day of flooding in London and South East England, which did not deter a record 72.2 percent of voters to turn out, Little Britain decided to terminate its 43-year membership with the European Union (EU). What are the Brexit legal implications that creative industries need to know about?
Now, the United Kingdom (UK) – or possibly, only England and Wales if Northern Ireland and Scotland successfully each hold a referendum to stay in the EU in the near future – will join the ranks of the nine other European countries which are not part of the EU, i.e. Norway, Iceland, Liechtenstein, Albania, Switzerland, Turkey, Russia, Macedonia and Montenegro. Of these, two countries, Russia and Turkey, straddle Europe and Asia.
What are the short-term and long-term consequences, from a legal and business standpoint, for the creative industries based in the UK or in commercial relationships with UK creatives?
The two main treaties of the European Union, which are a set of international treaties between the EU member states and which sets out the EU’s constitutional basis, are the Treaty on European Union (TEU, signed in Maastricht in 1992) and the Treaty on the Functioning of the European Union (TFEU, signed in Rome in 1958 to establish the European Economic Community).
The TFEU in particular sets out some important policies which guide the EU, such as:
- Citizenship of the EU;
- The internal market;
- Free movement of people, services and capital;
- Free movement of goods, including the customs union;
- Area of freedom, justice and security, including police and justice co-operation;
- Economic and monetary policy;
- EU foreign policy, etc.
How is the ending of those policies, in the UK, going to change and affect UK creative professionals and companies, as well as foreign citizens and companies doing business in the UK?
1. Removal of EU citizenship for UK citizens and of freedom of movement of people coming in and out of the UK
Citizenship of the EU was introduced by the TEU and has been in force since 1993.
EU citizenship is subsidiary to national citizenship and affords rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or a consulate in the country in which they require protection.
By voting out of the EU, Little Britain has made it difficult for EU citizens to come to the UK, as a visa or work permit may be required in the future, depending on the agreement that the UK will strike with the EU. However, it will also be much more difficult for UK citizens to travel to EU member states, for work, studies or leisure.
Probably, the majority of people in the UK who voted out of the EU do not travel much out of the UK, either for work or leisure, so there was definitely a class battle going on there, during that Brexit referendum, as high flyers and Londoners (who have to be quite wealthy to live in such an expensive city) wanted to remain in the EU, while the working class population and English & Welsh regions were firmly on the Leave side. That’s democracy for you: one individual, one vote and the majority of votes always has the upper hand!
If we look at the example set by some of the other nine European states which are not part of the EU, we see that several options are available. Although Norway, Iceland and Liechtenstein are not members of the EU, they have bilateral agreements with the EU that allow their citizens to live and work in EU-member countries without work permits, and vice versa. Switzerland has a similar bilateral agreement, though its agreement is slightly more limited. At the other end of the spectrum, the decision about whether to permit Turkish citizens to live and work within member countries of the EU is left to the individual member nations, and vice versa.
So what’s it going to be like, for the UK?
Time will tell but as we now know that David Cameron, a relatively “mild” member of the conservative party, will step down as the UK prime minister in October 2016, we are under the impression that his leadership will be replaced with an atypical and highly-strung right-wing and nationalistic team, probably led by hard-core conservatives such as Boris Johnson. Mr Johnson not being renowned for his subtlety and impeccable political flair, we think that negotiations for new bilateral agreements between the UK and EU as well as non-EU countries will be a difficult, protracted and ego-tripped process which may take years to finalise.
The UK will try to reduce immigration from the EU, probably with a points-based system such as the one in place in Australia. It means giving priority to high-skilled workers and blocking entry to low-skilled ones. But first, the UK will have to clarify the status of the nearly 2.2 million EU workers living in the UK. The rules for family reunions may get tougher. Also, 2 million UK nationals also live abroad in EU countries – so any British measures targeting EU workers could trigger retaliation against UK nationals abroad.
This, of course, may have an extremely negative impact on the freedom of movement of people, in and out of the UK, which may have a catastrophic impact on trade, human rights and political relationships with other states, for the UK.
Article 50 of the Lisbon Treaty, another treaty from the set of international treaties between the EU member states and which sets out the EU’s constitutional basis, relates to the rules for exit from the EU and provides that:
“1. Any Member State may decide to withdraw from the EU in accordance with its own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the EU shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the EU. That agreement shall be negotiated in accordance with Article 218(3) of the TFEU. It shall be concluded on behalf of the EU by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the TFEU.
5. If a State which has withdrawn from the EU asks to rejoin, its request shall be subject to the procedure referred to in Article 49″.
Therefore, the UK nows needs to notify its intention to withdraw from the EU to the European Council. We understand that such notification will be handed over by the new prime minister in the UK, therefore after October 2016.
The UK will have, at the latest, a period of two years from such notification date to negotiate and conclude with the EU an agreement setting out the arrangements for its withdrawal, taking out of the framework for its future relationship with the EU. After this period of two years or, if earlier, the date of entry into force of the withdrawal agreement, the EU Treaties will cease to apply to the UK.
Let’s hope that the new UK government will have the ability and gravitas to strike a withdrawal agreement with the EU, in particular in relation to free movement of people coming in and out of the UK, which will be balanced and ensure fluid and constructive relationships with its fellow neighbours and main import partners.
Companies which have – or plan to have – employees in the UK, or which staff often travels to the UK for business reasons, should monitor the negotiation of the bilateral agreements relating to the freedom of movement of people, between the UK and EU member-states, as well as non-EU countries, very closely, as costs, energy and time to secure visas and work permits could become a significant burden to doing business in and with the UK, in the next two years.
2. Removal of free movement of goods, services and capital?
The EU’s internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU’s 28 member states.
The internal market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.
It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU.
Clearly, the internal market and its wider repercussions have gone totally over the head of Little Britain, who wiped out 43 years of hard-won progress towards economic integration in 12 hours on 23 June 2016! “Put Britain first”, which was what the mentally ill racist and right-wing extremist shouted when he murdered Jo Cox, a Labour politician and campaigner for the rights of refugees, a week and a half ago, summarises what Little Britain had in mind, when they voted out of the EU.
Having said that, it is possible that the internal market remains in place, between the UK and the EU, as such market has been extended to Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA) and to Switzerland through bilateral treaties.
Indeed, the EEA is the area in which the agreement on the EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU. The EEA was established on 1 January 1994 upon entry into force of the EEA Agreement.
The EEA Agreement specifies that membership is open to member states of either the EU or European Free Trade Association (EFTA). EFTA states, i.e. Iceland, Liechtenstein and Norway, which are party to the EEA Agreement participate in the EU’s internal market. One EFTA state, Switzerland, has not joined the EEA, but has a series of bilateral agreements with the EU which allow it to participate in the internal market. The EEA Agreement in respect of these states, and the EU-Swiss treaties have exceptions, notably on agriculture and fisheries.
2.1. Free movement of goods?
Thanks to the internal market, there is a guarantee to free movement of goods.
If the UK decides, during its withdrawal negotiations with the EU, to become a party to the EEA Agreement, then such freedom of movement of goods will be guaranteed.
If the UK decides, during its withdrawal negotiations with the EU, to put in place a series of bilateral agreements with the EU, then such freedom of movement of goods may be guaranteed.
Otherwise, there will be no freedom of movement of goods, between the UK and the EU, and non-EU countries, which would be an extremely perilous commercial situation for the UK. The EU is also a customs union. This means that member-states have removed customs barriers between themselves and introduced a common customs policy towards other countries. The overall purpose of the duties is “to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market“.
Article 30 TFEU prohibits EU member-states from levying any duties on goods crossing a border, both goods produced within the EU and those produced outside. Once a good has been imported into the EU from a third country and the appropriate customs duty paid, Article 29 TFEU dictates that it shall then be considered to be in free circulation between the EU member-states.
Neither the purpose of the charge, nor its name in domestic law, is relevant.
Since the Single European Act, there can be no systematic customs controls at the borders of EU member-states. The emphasis is on post-import audit controls and risk analysis. Physical controls of imports and exports now occur at traders’ premises, rather than at the territorial borders.
Again, if the UK becomes a party to the EEA Agreement, or signs appropriate bilateral agreements with the EU and other countries party to the internal market, customs duties will be prohibited between the UK, the EU, the EEA states and Switzerland. Otherwise, customs duties will be re-instated between the UK and all other European countries, including the EU, which would be again a very disadvantageous situation for UK businesses as the cost of trading goods with foreign countries will substantially increase.
The same goes for taxation of goods and products which will be reinstated if the UK does not manage to become a party to the EEA Agreement or to sign appropriate bilateral agreements with the EU.
This is going to become a major headache for the UK’s new leadership: goods exports of the EU, not including the UK, to the rest of the world, including the UK, are about 1,800bn euros; to the UK, about 295bn euros, or a little under 16 percent. So, in 2015, the UK accounted for 16 percent of the EU’s exports, while the US and China accounted for 15 percent and 8 percent respectively.
The UK would, indeed, become the EU’s single largest trading partner for trade in goods. However, this would probably not be the case for trade overall. Including services would probably reduce the UK’s share somewhat (the EU ex UK exports over 600bn euros in services, while the UK imports only about 40-45bn euros in services from the rest of the EU). Moreover, the US will very probably overtake the UK as the EU ex UK’s largest single export market.
What does this tell us about the UK’s bargaining power with the EU after a Brexit?
It certainly confirms that the UK would become one of the EU’s largest export markets, even if not necessarily the largest. But the UK would still be far less important to the EU than they are to the UK – the EU still takes about 45 percent of UK’s exports, down from 55 percent at the turn of the century. And, if you treat the EU as one country, as this analysis does, “exports” become considerably less important overall (intra-EU trade is far more important to almost all EU countries). Indeed, as this Eurostat table shows, only for Ireland and Cyprus does the UK represent more than 10 percent of total (including intra-EU) exports. So how important will exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards here.
Bearing in mind that the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers), we strongly doubt that currently feisty UK and its dubious future leadership (wasn’t Boris Johnson lambasted for being a womanising buffoon by both the press and members of the public until recently?) are cut from the right cloth to pull off a constructive, seamless and peaceful exit from the EU.
Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should monitor the UK negotiations of the withdrawal agreement with the EU extremely closely and, if need be, relocate their operations to the EU within the next 2 years, should new customs duties and taxation of goods and products become inevitable, due to a lack of successful negotiations with the EU.
The alternative would be to face high prices both inside the UK (as UK retailers and end-consumers will have to pay customs duties and taxes on all imported products) and while exporting from the UK (as buyers of UK manufacturers’ goods will have to pay customs duties and taxes on all exported products). Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. UK services – accounting for eighty percent of the UK economy – would lose their preferential access to the EU single market.
While an inevitably weaker pound sterling may set off some of the financial burden represented by these customs duties and taxes, it may still very much be necessary to relocate operations to another country member of the EU or EEA, to balance out the effect of the Brexit, and its aftermath, for creative businesses which produce goods and products and export the vast majority of their productions.
Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas. Analysts think that the most important consequence of Brexit is “a dent to global GDP prospects and damage to confidence. This is likely to develop on the back of downward asset markets adjustments. Hence, more than ever, the fashion industry will have to work on moderating costs and capital expenditures“.
2.2. Free movement of services and capital?
The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, legislation in the area is not as developed as in other areas.
There are no customs duties and taxation on services therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the potentially disastrous effects of unsuccessful negotiations between the EU and the UK, during the withdrawal period.
Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member-states of the EU, even those outside the eurozone providing the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.
Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.
Should the withdrawal negotiations between the EU and the UK not be successful, in the next two years, it is possible that such transfer costs, as well as some new controls on capital movements, be put in place when creative businesses and professionals want to transfer money across European territories.
It is advisable for creative companies to open business bank accounts, in euros, in strategic EU countries for them, in order to avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU.
To conclude, we think that it is going to be difficult for creative businesses to do fruitful and high growth business in the UK and from the UK for at least the next two years, as UK politicians and bureaucrats now have to not only negotiate their way out of the EU through a withdrawal agreement, but also to negotiate bilateral free trade deals that the EU negotiated on behalf of its 28 member-states with 53 countries, including Canada, Singapore, South Korea. Moreover, it would require highly-skilled, seasoned, non-emotional and consensual UK leadership to pull off successful trade negotiations with the EU and, in view of the populist campaign lead by a now victorious significant majority of conservative politicians in the UK up to Brexit, we think that such exceptional and innovative UK leaders are either not yet identified or not in existence, at this point in time. The pains and travails of the UK economy may last far longer than just two years and, for now, there is no foreseeable light at the end of the tunnel that all this fuss will be worth it, from a business and trade standpoint. Did Little Britain think about all that, when it went out to vote on 23 June 2016? We certainly do not think so.
Everything you always wanted to know about taxation of acquisition and sale of art works: auction and private sales
1. General overview
1.1. Key elements
The acquisition and sale of art works, by legal entities or natural persons, are done either during public auction sales, or during private sales by mutual agreement. There are therefore two categories : public and private sales.
Article L. 321-2 et seq. of the French commercial code provides that voluntary sales of furniture at public auctions may be organised and conducted :
- either by professional operators acting as agents of the owner of the piece of furniture, in order to best knock it down, practising as sole practitioners or under the form of companies of voluntary sales of furniture at public auctions (“sociétés de ventes volontaires de meubles aux enchères publiques“) ;
- or by notaries and bailiffs who comply with training criteria set by regulations
who act as agents to the owner of the piece of furniture or his representative.
During a private sale by mutual agreement, the art work can be bought directly to the artist or through a third party, who can be an art gallery, a broker, a dealer or one of the sales operators above-mentioned, provided that, in this last case, as set out in article L. 321-5 of the French commercial code, the operator has first informed in writing the seller of the option to conduct a voluntary sale at public auctions.
The acquisition and sale of art works raise many questions under tax law, and have moreover a wide tax effect, notably in terms of VAT to be paid by the buyer, as well as artist resale right and capital gain tax to be borne by the seller.
French tax authorities also incentivise legal entities which are tax residents in France, subject to corporation tax or not, to take up art sponsorship (“mécénat“), by investing in art and by acquiring art works.
1.2.1. Codified texts
- French tax code, art. 150 VI to art. 150 VM
- French tax code, art. 238 bis AB
- French tax code, art. 238 bis-0 A CGI
- French tax code, art. 278-0 bis
- French tax code, art. 278 septies
- French tax code, art. L. 122-8 and L. 334-1
1.2.2. Non-codified texts
- BOI-TVA-SECT-90-60, 12 Sept. 2012 : “TVA – Régimes sectoriels – Biens d’occasion, œuvres d’art, objets de collection ou d’antiquité – opérations effectuées entre deux états-membres“
- BOI-TVA-SECT-90-50, 12 Sept. 2012 : “TVA – Régimes sectoriels – Biens d’occasion, œuvres d’art, objets de collection et d’antiquité – Ventes aux enchères publiques“
- BOI-RPPM-PVBMC-10, 1er Apr. 2014 : “RPPM – Plus-values sur biens meubles et taxes forfaitaires sur les objets précieux – cession de biens meubles“
1.2.3. European directives
- EU Council, Dir. 94/5/EC, 14 Feb. 1994 (7th European directive)
- PE and EU Council, Dir. 2001/84/EC, 27 Sept. 2001
1.3. LexisNexis library
1.3.1. Practical forms
1.3.2. JurisClasseur booklets
- JCl. Fiscal Chiffres d’affaires, Booklet 2060-4 : “Régimes particuliers. – Biens d’occasion, objets d’art, de collection ou d’antiquité. – Définitions. – Principes d’imposition“
- JCl. Propriété littéraire et artistique, Booklet 1262 : “Droits des auteurs. – Droits patrimoniaux. Droit de suite (art. L. 122-8 French intellectual property code)“
- Annabelle Gauberti, “Fiscalité des œuvres d’art : une arme à double tranchant“: RFP 2013, study 13
- P. Schiele et E. Talec, “La taxe sur les oeuvres d’art : une législation elliptique qui nécessitait une «consolidation législative»“: Dr. fisc. 2006, n° 26, study 49
2.1. Prior information
Counsel will act to advise either the buyer or the seller in relation to the conditions of execution of the acquisition or sale of art works, antiques and cultural assets, but also and especially in relation to the tax consequences of such transaction.
2.1.1. When the practitioner advises the seller
In this case, the following questions should be asked :
- Is the seller a natural person or a legal entity? Is the seller a tax resident in France, within another member-state of the European Union (EU), or outside the EU?
- Is the seller the artist who has created the art work? Is this seller-artist subject to VAT?
- Will the sale by private or public?
- Who will organise the sale? An agent? The seller directly?
- In which country will the sale occur?
- Where is the art work that will be sold? In France? The EU? Outside the EU? In a free port?
- In a private sale, who is the buyer? Is it a natural person or a legal entity? Is this buyer a tax resident in France, in another member-state of the EU, outside the EU?
- What is the sale value of the art work?
2.1.2. When the practitioner advises the buyer
In this case, the following questions should be asked:
- Is the buyer a natural person or a legal entity? Is he a tax resident in France, in another member-state of the EU, outside the EU?
- Will the acquisition be private or public?
- Who will organise the sale? The artist or the collector directly? An agent, such as an intermediary, a “société de ventes publiques aux enchères“?
- In which country will the acquisition occur? In France, in the EU, outside the EU?
- Where is the artwork which will be sold? In France? In the EU? Outside the EU? In a free port?
- In case of a private sale, who is the seller? Is it a natural person or a legal entity? Is it the artist, author of the art work? Is this seller a tax resident in France, in another member-state of the EU, outside the EU? Is this seller-artist subject to VAT?
- If the buyer is a legal entity, is it subject to corporation tax or income tax?
- What is the price of the art work?
2.2. List of solutions and decision criteria
From the information gathered, counsel must inform and advise his client about the tax effects deriving from the acquisition or sale of the art work(s), and in particular explain the pros and cons of such transaction.
Moreover, it is advisable to let clients know about the option to organise the transaction on a particular geographical territory, in order to maximise the tax regime applicable to such transaction.
22.214.171.124. For transactions done on the French market
The sale of an original art work by the author or his beneficiaries is subject to a VAT rate of 5.5%, pursuant to the provisions of article 278-0 bis of the French tax code. All other sales (by third parties, such as collectors, galleries, brokers, etc.) are subject to the standard VAT rate of 20%.
126.96.36.199. For sales done in the EU
The 7th European directive (Cons. EU, dir. 94/5/EC, 14 Feb. 1994) relating to the particular regime applicable to VAT on art works, collecting items and antiques, is based on two principles:
- taxation of the beneficiary margin (i.e. the sale price minus the buying price, or, for auction house companies, the hammer price including premiums minus the net amount paid to the seller) is the standard VAT regime for these types of goods;
- in intra-community trade, applicable VAT is that of the country where the delivery is made (« TVA pays de départ »).
Article 278-0 bis of the French tax code provides that intra-community acquisitions of art works, collecting items or antiques, performed by a natural person or a legal entity either subject, or not subject, to VAT; who imported the goods on the territory of another member-state of the EU, are subject to a reduced VAT rate of 5.5% on the beneficiary margin.
The same article provides that the intra-community acquisitions of art works, collecting items or antiques, which have been delivered in another member-state by natural persons or legal entities subject to VAT but other than resellers subject to VAT, are also subject to a reduced VAT rate of 5.5% on the beneficiary margin.
A reseller subject to VAT refers to all natural persons or legal entities subject to VAT whose business consist in trading said goods: second-hand goods dealers, art galleries, antique dealers, bric-a-brac traders, “sociétés de ventes volontaires de meubles aux enchères publiques“.
All other intra-community acquisitions of art works, collecting items or antiques are subject to the standard VAT rate of 20% on the beneficiary margin.
Of course, intra-community acquisitions of art works which are delivered with no beneficiary margin are exempt from VAT.
188.8.131.52. For sales done outside the EU (and therefore outside France)
No VAT in France is due.
2.2.2. Wealth tax
In addition to VAT, it is worth checking whether the buyer of an art work may become subject to the French wealth tax, following such purchase.
To date, and despite many aborted bills leaning in this direction, art works are not included in the basis of the wealth tax. Article 885 I of the French tax code provides that antiques, art works or collecting items are not included in the basis of the wealth tax.
Therefore, a recent buyer of an art work, tax resident in France, does not have to disclose such art work or the sums of money used to pay for such art work, to the tax authorities. Such buyer could not be prosecuted by the tax authorities to pay the wealth tax on the basis of this new acquisition.
2.2.3. Artist resale right
Pursuant to the provisions of Article L. 122-8 of the French intellectual property code, artist resale right allows the author of fine art works, resident in a member-state of the European Union or a state part of the European Economic Area, to receive a percentage which goes from 0.5% to 4% of the sale price of an art work (sold either in a private or public sale), when an art market professional intervenes as a seller, buyer or intermediary. On the death of the artist, the artist resale right is passed on to his beneficiaries during a period of 70 years after his death.
Artist resale right being a right to share the profit in any sale, it is the seller who bears such artist resale right, as follows:
- 4% up to 50,000 euros ;
- 3% between 50,000.01 and 200,000 euros ;
- 1% between 200,000.01 and 350,000 euros ;
- 0,5% between 350,000.01 and 500,000 euros ;
- 0,25% above 500,000.01 euros.
The basis of such profit sharing is «exclusive of tax, the hammer price in case of public sale and, for other sales, the sale price perceived by the seller» pursuant to the provisions of article R. 122-5 of the French intellectual property code.
Artist resale right is not due when the sale price is lower than 750 euros.
Artist resale right cannot exceed 12,500 euros, which excludes any profit sharing pursuant to the artist resale right for the share of price above 2 million euros.
2.2.4. Capital gain tax
Capital gain occurring further to the sale of art works is taxable income, under the income tax regime for natural persons and legal entities subject to income tax.
If the seller has written evidence of the date and price of purchase, he will be able to choose the standard regime for capital gain. The rate is 34.5% (inclusive of social security deductions) with a 5% discount per year beyond the second year. There is therefore a full exemption after 22 years of ownership.
If the seller cannot justify either the price or date of purchase, or if he requests it, the tax flat-rate regime applies. Pursuant to the provisions of article 150 VI et seq. of the French tax code, sales of art works and collecting items are subject to a flat-rate tax.
This flat-rate tax is 6% of the selling price, for the sale of art works and collecting items. This tax is due at the time of the sale.
The capital gain tax is paid by the seller of the art work. This tax is due, under their liability, by the intermediary who is tax resident in France and who participes in the sale or, in case no intermediary is involved, by the buyer when such buyer is subject to VAT and tax resident in France; in other cases, capital gain tax is due by the seller.
However, sales of art works or collecting items are exempted from capital gain tax when the sale price of the art work is not above 5,000 euros or when the seller of an art work outside the territory of the member-states of the EU, does not have his tax residence in France.
Article 219 of the French tax code provides that if the seller of an art work is a legal entity subject to corporation tax, capital gain tax derives from a special regime, according to which:
- if the art work was owned for less than 2 years, capital gain tax is the same than taxes on the company’s benefit: 33.33%, with a first ladder of 15% up to the cap of 38,120 euros for companies with a turnover below 7,630,000 euros, a shareholding capital fully paid up and held for at least 75% by natural persons or legal entities owned by natural persons;
- if the art work was owned for at least 2 years, and was not amortised: 15%.
2.2.5. Deductions from corporation tax or income tax paid by legal entities
Article 238 bis AB of the French tax code provides that legal entities subject in France to corporation tax or income tax can deduct from their operating result a sum equal to the buying price of original art works made by living artists, during a period of 5 years, provided that:
- these works are set out in a fixed asset account;
- the deduction done for each fiscal year does not exceed a tax discount equal to 60% of the amount of the buying price, with a cap of 5 for one thousand of the turnover, less the total of the payments set out in article 238 bis of the French tax code;
- the legal entity exhibits in a location accessible to the public or its employees, but not in its offices, the acquired art work during the period corresponding to the fiscal year of the acquisition as well as the 4 following years.
This tax incentive to art sponsorship (“mécénat d’entreprise“) focuses on legal entities which either have a commercial purpose or offer professional services.
Moreover, article 238 bis-0 A of the French tax code provides that legal entities subject to corporation tax on their real profit (“bénéfice réel“) can benefit from a tax credit equal to 90% of the payments made to buy cultural assets presenting the features of national treasures, having been refused the delivery of an export certificate by the French administration and for which the French state made a purchase offer to the owner. This tax credit is also applicable to payments made for the purchase of cultural goods located in France or abroad which acquisition would present a major interest for the national estate from a historical, artistic or archeological standpoint. The tax credit applies on corporation tax due for the fiscal year during which the payments were accepted. This tax credit cannot be above 50% of the tax amount due by the legal entity for this fiscal year.
Let’s have a look at the tax regime for each case, before examining the tax return declaration formalities and the payment of tax charges.
3.1. Tax regime
Each case below is studied taking into account, as a starting point, the fact that the sale transaction of the art work happens in France.
3.1.1. In case of a transaction where both the buyer and the seller are tax residents in France
If the art work acquisition is done directly between the buyer and the seller, without the intervention of an agent, it is necessary to check whether the seller is the artist author of the sold art work, or one of his beneficiaries.
If the seller is the artist author of the art work or one of his beneficiaries, subject to VAT, then the sale is subject to VAT at 5.5% and no artist resale right will be due by the buyer, following such transaction.
Otherwise, all other sales (done by third parties, such as collectors, gallerists, traders, etc.) are subject to the standard VAT rate of 20%. In case where those other sales trigger the involvement of a art market professional, as seller, buyer or intermediary, and where the artist is a resident in a member-state of the European Union or a state from the European Economic Area, the seller must pay the artist or his beneficiaries an artist resale right as soon as the sale price is above 750 euros.
The seller, tax resident in France, and subject to income tax, must pay capital gain tax, if there is any capital gain, to the French tax authorities, either by paying a flat-fee tax of 6% of the selling price, or, if this is preferable for him and if the seller has written evidence justifying the buying price and date of the sold art work, by paying tax through the standard capital gain tax regime. The rate is therefore 34.5% (including social security payments) with a 5% discount per year beyond the second year. There is therefore a full exemption of payment of capital gain tax after 22 years of ownership of the art work.
If the seller is a legal entity subject to corporation tax, capital gain tax from the special tax regime applies. If the legal entity owned the art work for less than 2 years, and that its shareholding capital has been fully paid up and is owned in full by either a natural person or a legal entity subject to income tax, then that legal entity will be able to include the capital gain generated by the sale of the art work to its earnings. The first ladder, up to the cap of 38,120 euros, will be subject to 15% tax for legal entities having a turnover below 7,630,000 euros. Above 38,120 euros, the tax rate of 33.33% applies. If the art work was detained for at least 2 years, and was not amortised (i.e. the art work was not classified as a fixed asset by the legal entity), this rate of 15% applies.
If the buyer is a legal entity, French tax resident, it can deduct from its profit a sum equal to the purchase price of any original art work produced by living artists, during a period of 5 years, provided that the conditions set out in article 238 bis AB of the French tax code are met.
3.1.2. In case of a transaction where either the seller or the buyer is tax resident in another member-state of the EU
This case targets art work acquisitions taking place in France, by parties where at least one of them is a tax resident in another member-state of the EU than France. This or these parties resident in another member-state of the EU can be an intermediary (the reseller subject to VAT), the buyer or the seller.
Indeed, transactions performed outside France are not subject to French VAT, payable to French tax authorities.
If no beneficiary margin occurs, during the art work transaction happening in France, then the delivery will be exempted of VAT.
If a beneficiary margin occurs, and if the intra-community acquisition of art works, collecting items or antiques is performed by someone subject to VAT or a legal entity not subject to VAT, and if said works were imported in the territory of another member-state of the EU, then the transaction we be subject to a reduced VAT rate of 5.5% on the beneficiary margin.
If a beneficiary margin is realised, and that the intra-community acquisition of art works, collecting items and antiques was subject to a delivery in another member-state by other people subject to VAT than resellers subject to VAT, then that beneficiary margin will also be taxed at a reduced VAT rate of 5.5%.
All other intra-community acquisitions of art works, collecting items and antiques during which a beneficiary margin is realised, will be taxed at the standard VAT rate of 20% on the beneficiary margin.
Article R. 122-2 of the French intellectual property code provides that the sale, in any case, triggers the payment of artist resale right pursuant to article L. 122-8 of the French intellectual property code only if at least one of the following two conditions are met: « 1° the sale is performed on the French territory ; 2° the sale is subject to VAT». Therefore, when the intra-community transaction has occurred in France, artist resale right must be paid by the seller, within the conditions set out in paragraph 3.1.1 above.
Capital gain tax is due in France if the seller is a French tax resident since that tax is borne by the seller of the art work. It is due, under their liability, by the intermediary who is a tax resident in France, and who participates in the transaction or, in case no intermediary gets involved, by the buyer when that buyer is subject to VAT and tax resident in France; in other cases, capital gain tax is due by the seller.
If the buyer is a legal entity tax resident in France, tax credits incentivising art sponsorship (“mécénat”) set out in article 238 bis AB of the French tax code apply, as explained in paragraph 3.1.1. above.
3.1.3. In case of transactions where either the seller or the buyer is tax resident outside the EU
If the buyer is a legal entity tax resident outside the EU, no VAT is due by the seller.
If the buyer is a natural person tax resident outside the EU, VAT is due at the standard rate, by the seller subject to VAT.
As set out above in paragraph 3.1.2., artist resale right must be paid when the sale has been conducted in France, within the conditions set out in paragraph 3.1.1. above.
As set out above in paragraph 3.1.2., capital gain tax is due in France if the seller is a French tax resident. However, sales of art works or collecting items are exempted from capital gain tax when the seller of an art work outside the territory of the member-states of the EU does not have its tax residence in France. Therefore, if the sale was conducted outside the EU territory and the seller is a French tax resident, such seller must pay capital gain tax in France, to the French tax authorities.
Tax credits incentivising art sponsorship (“mécénat“) set out in article 238 bis AB of the French tax code apply to the buyer if the latter is a legal entity tax resident in France.
3.2. Tax return declaration formalities and payment of tax charges
VAT is paid during the occurence of the sale of the art work, by the buyer.
Both the seller and the buyer, if they are subject to VAT and tax residents in France, have the obligation to declare such VAT (as revenue for the seller and as expense for the buyer) during the filling out of the CA3 declaration (monthly or quarterly) to their respective tax center (“centre des impôts des entreprises“).
3.2.2. Artist resale right
Artist resale right, paid on the sale price, is borne by the seller. However, the liability of the payment of such artist resale right lies with the «professional who intervenes during the sale». In case of a public auction sale, article R. 122-9 of the French intellectual property code explicitly allocates the liability of the payment of artist resale right to the art market professional, who is either a “société de ventes volontaires” or the judicial auctioneer. In other cases, it is the art market professional intervening in the sale who bears such liability.
Article R. 122-10 of the French intellectual property code looks at two cases, relating to the obligations of this professional. If the professional responsible for the payment of the artist resale right is contacted for payment by the beneficiary of the artist resale right, the professional must pay such sum within 4 months. If the professional is not contacted by the beneficiary of the artist resale right for payment, he must inform, within 3 months from the end of the civil quarter during which the sale has occured, one of the collecting societies registered on the list maintained by the French ministry of culture, setting out the sale date, name of the author and, if applicable, information relating to the beneficiary of the artist resale right.
3.2.3 Capital gain tax
184.108.40.206. French tax resident subject to income tax
The seller of an art work, French tax resident subject to income tax, becomes liable to capital gain tax due under income tax, at the occurence of the sale.
However, this tax will only be paid after the seller has informed French tax authorities, by filling out and sending his income tax annual declaration form, of the existence of such capital gain, and after French tax authorities will have sent the seller his income tax notice, setting out the sum to be paid in relation to the capital gain tax.
220.127.116.11. French tax resident subject to corporation tax
The seller of an art work, French tax resident subject to corporation tax, becomes liable to capital gain tax due under corporation tax, when the sale occurs.
However, this capital gain tax will only be paid after the seller has informed the French tax authorities, through the filling out and sending of its annual corporation tax declaration form, of the existence of such capital gain.
18.104.22.168. Deductions from corporation tax and income tax for legal entities
Legal entities tax resident in France can deduct from their operating result an amount equal to the purchase price of original art works produced by living artists, during a 5 year’ period, if certain conditions set out in paragraph 2.2.3. above are met.
In relation to legal entities subject to income tax, they must enclose a special declaration form n°2069-M-SD to their operating result declaration form for the fiscal year during which the expenses triggering the tax credit were made, pursuant to article 238 bis AB of the French tax code.
In relation to self-employed individuals (“entreprises individuelles”), and independently from the “entreprise individuelle” sending the special declaration form n° 2069-M-SD, natural persons who benefit from the tax credit must set out, on their income tax declaration forms, the amount of the tax credit set out on the special declaration form and enclose to their income tax declaration form, when they benefit from tax credits from tax sponsorship (“mécénat“) non attributed to previous tax years, a follow-up statement of their tax credit.
In relation to legal entities subject to corporation tax, legal entities not belonging to a tax group within the meaning of article 233 A of the French tax code, as well as parent companies of such groups, must fill out and send a special declaration form and, whenever they benefit from tax credits of the same nature not attributed to corporation tax on the previous fiscal years, a follow-up statement of such tax credits (form n°2069-MS1-SD) to the accountant in charge of the payment of corporation tax. Moreover, parent companies of a tax group must enclose, with all these documents, a copy of the special declaration forms for their subsidiaries.
In relation to legal entities subject to corporation tax, the special declaration form is no longer enclosed to the net profit declaration form, except for special declaration forms subscribed by legal entities members of a tax group but without the status of parent company, which must annex the special declaration form to their operating result declaration form and send a copy to their parent company. The parent company will send a copy of such special declaration form, along with the statement of payment of corporation tax, to the accountant in charge of the payment of corporation tax.
The tax credit defined at article 238 bis AG of the French tax code is set off against either the income or corporation tax owed by the tax payer. As far as corporation tax is concerned, tax credit is set off against the tax balance.
However, whenever the amount of tax credit is higher than the amount of tax to pay, the unattributed balance can be used for the payment of tax during the next 5 fiscal years after the fiscal year during which the tax credit was granted.
These provisions apply both for legal entities liable for income tax or corporation tax.
- Inform the client of the tax rules applicable to the different cases of business transactions on art works;
- Ensure that the acquisition or sale is structured in a manner which is tax advantageous for the client;
- Ensure that the client complies with his tax obligations to declare and inform the French tax authorities, if need be;
- Ensure that the client settles, within the allocated timeframe, all tax due by himself, on the sale or purchase of art works, to the French tax authorities;
- Ensure that the client, legal entity, makes the most of the advantageous tax regime, relating to tax credits and tax incentives to art sponsorship (“mécénat“) and art works’ acquisition.
Tel: +44 20 3318 9603
2015 Legal 500 recommends Crefovi in the “Intellectual property – boutiques” category | London IP law firm CrefoviCrefovi : 08/04/2015 8:00 am : Art law, Consumer goods & retail, Copyright litigation, Entertainment & media, Fashion law, Fashion lawyers, gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, leisure, Life sciences, Litigation & dispute resolution, Media coverage, Music law, Technology transactions, Trademark litigation
London IP law firm Crefovi recommended by Legal 500 in the practice area “Intellectual property – boutique”. Awesome!
The Legal 500 Europe, Middle East & Africa 2015 has recommended London IP law firm Crefovi in the following practice area: “France – Intellectual property – Boutiques – Other recommended firms”.
Since Crefovi was founded three years ago, we are super proud to already be ranked in prestigious guide Legal 500.
This important recognition, coming from such a prominent legal guide, is a testament to the pioneering work and proprietary research that London IP law firm Crefovi has always strived to accomplish since its foundation, in particular in the growing legal field of the law of luxury goods and fashion.
Crefovi’s founding partner Annabelle Gauberti has acquired extensive knowledge and experience in the legal field, as it applies to the fashion and luxury industries, either in litigation related or non-litigation related matters.
She is delighted that her legal and sectorial expertise, as well as the quality of the services provided by London IP law firm Crefovi, are recognised as being outstanding.
London IP law firm Crefovi has an ambitious programme of seminars, entitled the “law of fashion and luxury goods series” which it is rolling out from 2014 to 2016, in partnership with the international association of lawyers for the creative industries (ialci), which it sponsors.
The third seminar to this programme of the law of fashion and luxury goods series is going to be announced soon, so stay tuned to snap up your attendance ticket to this high-profile event for the fashion and luxury industries, to be hosted in London.
Tel: +44 20 3318 9603
In the legal field, craftsmanship is usually referred to as “know-how” or “trade secrets”.
Unlike trademarks, copyright, designs and patents, trade secrets – which are an integral part of the creative strategy of 75% of companies in the European Union (“EU”) – do not currently benefit from strong protection granted by a harmonised and set framework of rules.
As a result, at the end of 2013, the European Commission proposed a new directive to harmonise the protection of trade secrets in the 28 member-states of the EU.
The directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, will protect trade secrets, being information that:
- is secret, in that it is not generally known or readily accessible to relevant persons in the field ;
- has commercial value because it is secret; and
- has been subject to reasonable steps to keep it secret.
The acquisition of a trade secret will be unlawful in a range of circumstances where it is a result of breach of a confidentiality agreement or other practice “contrary to honest commercial practices”.
A common set of remedies where there has been unlawful acquisition, disclosure and use of trade secrets, such as interim and permanent injunctions, seizure and destruction of goods which result from the misuse of trade secrets and damages to compensate the trade secrets holders for losses suffered, will be implemented by the new directive. Another key change introduced is that some procedures will be in place to ensure the confidentiality of trade secrets during legal proceedings.
Many legal practitioners hope that the new directive will come into force in 2015, and then implemented by each member-state by 2016.
The directive is good news for businesses, especially those focusing on craftsmanship. The new minimum level of protection for trade secrets will give them greater certainty that their trade secrets are safe and may facilitate cross-border investment and innovation. However, these changes will not remove the need for confidentiality agreements, especially as a pre-requisite to the exchange of valuable confidential information.
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What does 2015 hold in store for the art world? As 2014 draws to a close, Private Art Investor spoke to 15 key figures in the art world to discover their predictions and preoccupations for the coming year.
Annabelle Gauberti, founding partner of Crefovi, was interviewed by the Private Art Investor, to give her predictions for the art world in 2015.
Here is an extract from Annabelle’s interview and below the link to the full article from the Private Art Investor.
“A trend that I am seeing a lot, these days, is that art entrepreneurs are approaching me to launch some art-tech websites, in the same vein as The Art Stack, Articheck, Paddle8, Saatchi Art and Vastari.
I am advising some entrepreneurs who want to replicate the success of fashion/tech startups, such as Gilt (flash sale website), Net-a-porter, my-wardrobe.com, etc.
I am under the impression that my clients and prospects, all art entrepreneurs, have not really understood what is at stake here, and are sometimes willing to take large legal risk without even understanding those risks and legal exposure they are subjecting themselves to.
For example, many art entrepreneurs want to do away with setting out some strong terms and conditions of sale on their art websites, without realising that this is in total breach with the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. You can read more about this point in paragraph C (Practical applications of the new EU consumer contracts regulations for the art sector) in my article below:
I therefore expect some rising litigation in respect of all these art websites in 2015, because, to put it bluntly, they do not know what they are doing and they do not seek appropriate prior legal advice to remedy to these breaches.
– Annabelle Gauberti, founding partner of the London and Paris art law firm Crefovi, and president of the International Association of Lawyers for Creative Industries – ialci.
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Many people want to collect street art, but there are issues with taking it directly from the street. Annabelle Gauberti, founding partner of the London and Paris art law firm Crefovi, and president of ialci explains the issues you need to be aware of. Read it in Private Art Investor.
Works of street art can be found and bought in reputable art galleries, which legitimately represent famous street artists such as C215, Banksy and Invader.
This type of works of street art, which were purposefully created and then placed on consignment by the street artists in selected galleries, each comes with a certificate of authenticity.
However, some works of street art are found – and collected – directly in the streets, as a result of the illegal activities that these same street artists perform. For example, French street artist Invader is famous for circulating in Paris and other cities at night, then gluing his famous mosaic graffiti representing colourful space invaders on buildings and walls .
If a collector, who found the work of art in the streets, decides to sell that piece of street art either through a gallery or a broker, how can he make sure that such sale is lawful?
Before we answer this question, we need to check who owns the work of street art, which was gathered from the streets.
Unfortunately, there is no clear-cut answer to this question.
Before putting the work of street art in the public domain, on a wall, concrete sidewalk, etc. the artwork, and any copyright in such artwork, belonged to the street artist, of course.
However, by adding this work of street art on a wall, sidewalk, door, without asking for prior authorisation from the owner of such wall, sidewalk or door, then the street artist commits a crime.
In France, for example, the author of an unauthorised graffiti may be liable to a fine of Eu3,750 as well as community service if the damage caused to walls, vehicles, public alleys or urban assets is “light”. When it is not, the author may be sentenced to seven years of jail time as well as a Eu100,000 fine.
Therefore, pursuant to article L112-1 of the French intellectual property code and the most recent French case law, when the creative work is illicit, it will not benefit from the protection of copyright afforded by the French intellectual property code.
Moreover, the author of a criminal act consisting in degrading a wall or pieces of urban furniture (trains, letter boxes, etc.) does not have any incentive to come forward and be recognised as the author of such degradations (since the police and criminal courts could come after him if he admits that he is responsible).
There is therefore a “legal void”, in this situation, because the street artist, who puts the work of street art in the streets without obtaining prior authorisation, “looses” his ownership rights in the art object as well as his copyright in such art object.
Is the person who collects this illegal work of street art, in the streets, the new owner of this piece of street art, then?
De facto, yes, because this collector of the illegal work of street art has the physical possession of the art object.
However, this “gatherer” of the work of street art is definitely not the owner of the copyright in the work of street art. Indeed, this copyright was lost when the work of street art was put illegally in the streets, by the street artist.
This “legal void” creates a lot of complications and potentially, high risks of litigation should a sale of a work of street art gathered from the streets, be contested by the creator of this work – the street artist.
I therefore recommend sellers of works of street art collected in the streets to ask for prior written authorisation and agreement from the street artist, or his or her heirs if the street artist is no longer alive. If possible, it would be also very useful to obtain a certificate of authenticity from the artist, in relation to this work of art.
Such agreement with the street artist would most definitely entail money changing hands, between the “gatherer” of the work of art in the streets and the street artist, upon the completion of the sale with a buyer.
However, I advise my clients to reach such an agreement before the sale of the art work, since any early financial arrangement made between the “gatherer” of the work of street art and the street artist is better than long, costly and stressful litigation post-sale of the work of street art.
From the viewpoint of the buyer of the work of street art, I believe that he will want to do some due diligence on the art work, before committing to any sale contract.
The common standards, in relation to due diligence applicable to the trade of an art work, are as follows:
– Checking the vendor’s title. Where doubt arises, a specific check into the Art Loss Register, the ICOM red lists and the database of Interpol might be necessary.
– Checking the goods’ authenticity. Where necessary, request an expert’s certificate.
Street art is becoming an increasingly larger part of the contemporary art market, with sky-rocketing sales at auctions and in the secondary market. However, because of the illegal nature of “putting” a work of street art in the streets, it is more complex now to complete successful and lawful sales transactions of works of street art.
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In the past, major collectors would buy larger houses to show their art works. Now, many private collectors – in particular corporate art collectors – find or build large spaces to show their art and then continue to buy art to exhibit within them.
Increasingly, private collectors are taking on the role of non-profit institutions (such as museums and institutional associations).
They have large gallery spaces, often purpose-built, with storerooms, extensive archives, libraries and staff. They mount exhibitions that are open to the public, publish catalogues and organise education programmes. Some have artist residencies and ambitious mission statements.
In a nutshell, some private collectors are building private art museums and foundations.
While these private art collections are dotted around the globe and can be very interesting to visit, they may create tensions between public museums and private museum building: will these private museums act to divert private funds that might otherwise have gone towards public programming? Will there be fewer donations of artworks to public institutions? Should the government be supportive of, and incentivise, private museum building? Within the private collections, will this mean that the artworks are not maintained as rigorously as they might be in the public sector?
Before we answer these critical questions, let’s review how a corporate art collector may achieve such a project of building a “private museum”.
1. So, what do you want to build exactly?
Why have so many companies, large and small, chosen to collect art? The reasons are as varied as those for collecting personally, but generally fall into one of several camps.
The earliest, famously pioneered by Chase Manhattan (now J.P Morgan) under the direction of David Rockefeller, tended to be the offshoots of an owner’s intense personal interests.
Then comes a broad and ever-expanding category of companies with the foresight and means to enliven their properties with pieces that have both investment potential and prestige value.
From the perspective of the bottom line, it makes much more sense to buy art that has a reasonable chance of appreciation than to buy decorative works which will eventually become obsolete: faced with bare walls, particularly in areas used by clients and senior staff, a company would be wise to invest in promise and quality and hope to add both beauty and a source of future capital to their workplace.
Charlotte Appleyard and James Salzmann, in their book “Corporate Art Collections – a handbook to corporate buying” subdivide corporate collections in four broad categories:
– First, there is the traditional corporate collection, where works are being purchased directly from galleries or artists to enhance the office environment. These might be considered to be “curatorially led”, seeking to enrich the office cultural ecology. Many of the collections that fall into this category are owned by banks or financial service organisations such as Standard Bank of South Africa Limited.
– The second category includes those collections that seek to say something about the company’s corporate identity. Either by accident or design, these collections have become very involved with how the company is perceived or would like to project itself. For example, the law firm Simmons & Simmons is now the proud owner of a sizeable contemporary art collection, started by former partner Stuart Evans, which is famous for its ownership of many works from the Young British Artists.
– The third category is broadly referred to as “the philantropists” or “corporate patrons”. Whilst almost all of the collections extend their interests through sponsorship of the arts, a small but growing number have structured their entire collection strategy around a charitable remit through the creation of prizes or direct engagement with the domestic and international artistic community. For example, British Airways collects, commissions, educates and promotes through the visual arts, comprehensively and widely.
– Finally, the “all-rounders”, companies whose work with the arts permeates their identity, office environment, social outreach and sponsorship. The best example that comes to mind, when talking about “all-rounders”, is Louis Vuitton. The eponymous founder of Louis Vuitton developed an intense interest in contemporary culture, as his success grew. He frequented the salons heald in the studio of Felix Nadar, later patron and dealer of some of the most famous names in the 19th century painting, including Monet, Renoir, Sisley, Cezanne and Degas. The Louis Vuitton brand is proud of its close relationships with contemporary artists such as Yayoi Kusama, Takashi Murakami, Daniel Buren, etc. In addition to the Espace Culturel Louis Vuitton, where temporary exhibitions of contemporary artists are held, the Fondation Louis Vuitton is due to open its doors this month.
As a newcomer to corporate art collecting, it is critical to lay out some solid foundations to a private museum building project.
Indeed, the top management of the company toying with the idea of corporate collecting should seek professional advice from the outset, by consulting with reputable art galleries, curators, lawyers, brokers and researchers, in order to clarify what objectives are to be achieved through building a private art collection.
Ideally, a business plan should be drafted from the inception of this project, in order to set up some short-term, medium-term and long-term goals for the corporate art collection to reach, as milestones.
2. And where do you want to build your corporate art collection?
In parallel to this dialogue between the top management of the aspiring corporate collector and its advisors on the scope of the future art collection, room must be made – literally – to talk about the available space.
A full assessment of the space available to display art ought to be made at the outset. Most corporate collections concentrate on wall-based work because offices do not typically have the room to accommodate sculptures.
However, the London office of Deutsche Bank, which is the work base of some members of the team of around 20 staff who manage Deutsche Bank’s art collection, displays an impressive set of sculptures in its reception hall.
Other corporate art collections evolve, over the years, from office-hanging art to fully-fledged private museums located in purpose-built buildings. The Fondation Cartier, for example, was inaugurated on 20 October 1984 in Jouy-en-Josas, in Versailles and then moved, 10 years later, to its current location in Paris, which is a purpose-built architecture of glass and steel created by starchitect Jean Nouvel.
3. Is it a foundation? A trust? Is it a limited liability company?
Making decisions about the scope, space and location of the future art collection are essential to then decide which legal form such collection should take.
Options for a collector may be to either locate or transfer his or her collection to a trust or foundation, the choice often depending on state laws and the nature of the reporting requirements, some of which can be onerous.
Such arrangements may permit an individual collector to avoid estate taxes and maintain some control over the assets.
Trusts and foundations can offer viable, creative solutions for collectors concerned about the fate of their artworks.
In the UK, it is possible for anyone to set up an art owning charitable foundation and/or private museum and whose purposes include the holding, preservation, study and promotion of cultural property.
The majority of such organisations are established as charitable companies limited by guarantee, although some are established as charitable trusts.
In order to enjoy the full range of tax exemptions and reliefs, charities in England and Wales are obliged to register with the Charity Commission and HMRC to demonstrate public benefit. In France, private museums may be run by associations, state-approved or corporate foundations.
Let’s have a look at the example of Don and Doris Fisher, founders of the Gap. They put together an outstanding collection of contemporary art through the years and then created a trust through which their collection would be loaned to the San Francisco Museum of Modern Art for a period of 100 years (renewable for another 25) as if absorbed into the permanent collection. The Fisher heirs would maintain control of the collection with a trust that stipulated: (1) 75 percent of works displayed in the new wing must be Fisher works; (2) the most important works must be shown every five years; and (3) the work can be deaccessioned (i.e. sold) only to upgrade the collection and in consultation with the collection curator, who has veto power over certain pieces. This creative arrangement was a win for all, preserving the collectors’ vital legacy and catapulting an average museum into a premier position.
Other collectors, like the Rubells and Martin Z. Margulies, have established private-operating foundations which, by sharing their collections with the public, provide certain tax deductions while allowing them to maintain control of their collections during their lifetimes.
An additional tax strategy employed by collectors is to convey the artworks to a limited liability company and transfer interests in the entity to family members or trusts.
This allows the collector, through the entity, to maintain a degree of control over the collection while discounting the value of the collector’s estate at death. The caveat here is that the entity needs to have a legitimate business purpose and the collector should not retain too much control.
While François Pinault built some of his very substantial art collection firstly in his own name, he then transferred his cultural assets into the holding company Artemis that manages his and his son’s (François-Henry Pinault) shareholdings in the various businesses of the group (luxury with Kering, art auctions with Christie’s, real estate, art, vineyards, press, etc). The François Pinault Foundation was then founded and currently owns and manages the two permanent display spaces of this powerful contemporary art collector: Palazzo Grassi and Punta della Dogana in Venice.
4. Because tax matters
Anywhere in the world, the corporation is at its heart about the balance sheet, no matter how large or small the figures.
While the stated reasons for corporate collecting will almost never include taxes, it remains a fact that tax codes may permit, albeit in a grey manner and to varying degrees, deductions along three principal lines: depreciation, investment credits and charitable donations.
For example, American depreciation laws allow companies to deduct against their profits the cost of their assets, so long as three conditions are met: the assets have been acquired for a business purpose, they have a lifespan and they can be said to deteriorate over time.
While the usual candidates for depreciation range from computers to plant machinery, there is an argument to be made – particularly in the contemporary primary market – that works of art or decorations can also be classified as depreciating.
Despite the international bad rep that France has in relation to its tense and versatile relationship with taxation, this country is at the forefront of adopting fiscally-friendly policies for corporate art collectors and sponsors.
The law of 1 August 2003 relating to sponsorship, associations and foundations, so-called “Aillagon law”, greatly contributed to creating a favourable legal and tax framework for the financing of privately-funded art and cultural initiatives of general interest.
All art sponsorship payments (“mécénat”) allow corporate taxpayers to benefit from a 60% tax reduction on corporate tax (up to 0.5% of the EBIT). If such cap is reached, or if the EBITDA is nil or negative, the French company can roll such tax reduction during the next 5 tax years.
Both the US and France grant hefty tax relief to companies which buy works of art to constitute corporate art collections. For example, article 238 AB of the French tax code provides that companies can deduct, from their taxable turnover, the acquisition price of original art works produced by living artists, over a period of five years.
Another Gallic example is the tax cuts granted to French companies that make donations to public bodies which main activity is to present contemporary art fairs to the public.
In the United Kingdom, a new Cultural Gifts Scheme has been set up in 2012, to boost charitable donations. Companies which donate prominent cultural or art objects to the nation can now receive a reduction in their corporate tax liabilities.
The maximum value of the tax reduction available in relation to the donor’s liability to corporation tax is 20 per cent of the agreed value of the object. Total tax reductions under this scheme, and taxes offset under the existing inheritance tax Acceptance in Lieu scheme, is subject to an increased annual limit of £30 million a year overall. This scheme enables UK companies which own corporate art collections to gift important works of art to UK public institutions and receive a reduction on their corporation tax liabilities.
5. Get me some art, baby!
Now that the scope, space, legal form of the corporate art collection have been set and clarified, and now that the tax advantages of setting up a corporate art collection have been assessed, it is time for the corporate collector to get to work and buy some art works.
A number of the best corporate art collections started with modest budgets. Quality rather than profit has steered most of them, and in most cases this approach has resulted in the formation of very valuable collections.
The budget needs to be set to cover not only the costs of the works themselves but any professional fees, including consultants, legal fees, art handlers, installation and insurance.
Many books have been written on the subject of sound art collection management – from buying art, to practicalities of ownership and deaccessioning. I recommend, in particular, “Owning art – the contemporary art collector’s handbook”, “The Art collector’s handbook” and “Commissioning contemporary art – a handbook for curators, collectors and artists”.
Since these topics pertaining to art collection management are similar for all types of collectors – individual or corporate – I will not delve further into these.
However, I emphasise that a corporate art collector must take particular care in its dealings with art works, artists, art galleries, auction houses and other collectors because any behaviour deemed inappropriate in the art world, adopted by such corporate art collector, may have a severe impact on the reputation of this company, even beyond the microcosm that is the art world.
To conclude, I do not think that private collections are diverting fluxes of money from public non-profit art institutions (such as public museums) to more “egotistic” projects. I think that certain types of corporations will be happy with sticking to charitable donations and sponsorship – widely incentivised by tax regimes around the world -; while others will want to go a step further and fulfil with a more personal touch their cravings for the arts.
These more intense and passionate art collectors will decide to set up a corporate art collection and/or private museum, depending on their goals, available space and budget.
Certain countries, such as France and the US, are extremely proactive in fostering both types of corporate involvement with the arts, while others, such as the UK and Italy for example, have much room for improvement, especially in relation to supporting corporate art collections and private museums.
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Through selective distribution, a brand wishing to distribute its products on British soil or on the whole territory of the European Union, has the right to set a certain number of criteria allowing it to select which dealers will have the right to resell its products.
This sales technique has been, and still is, used in particular for luxury goods, as well as products with high technicality such as high-end cars or hi-fi sound systems.
Selective distribution is a useful tool at the disposal of the supplier since it can refuse to sell to those dealers that do not comply with the set criteria.
This system is therefore interesting since it allows the supplier of products to organise its distribution according to its wishes and strategy.
1. Selective distribution of luxury products
Luxury maisons, always mindful about their image, often use selective distribution to sell their products. It is, indeed, the most-used distribution technique for perfumes, cosmetics, leather accessories or even ready-to-wear.
This distribution method presents a lot of flexibility, compared to exclusive distribution or franchising, because it allows a supplier to select dealers according to criteria which are mainly qualitative, and to consequently ensure a commercialisation within conditions which befit the prestige of the luxury products.
Selective distribution allows to differentiate between luxury products and potentially competing – albeit more “common” – products. It mainly allows to manage scarcity and prestige, which constitute two of the essential characteristics of luxury products.
From an economic standpoint, luxury maisons currently face a strong paradox consisting in, on the one hand, maintaining and even enhancing their luxury image and, on the other hand, widening access to their products to an ever-increasing clientele.
Therefore, these luxury businesses must adapt their classical methods of distribution to these new economic constraints. Indeed, setting up some very restrictive criteria would allow to limit the number of dealers, while some flexibility in implementing these same criteria would allow a wider access to consumers with, however, the risk of degrading the conditions of commercialisation.
This is the reason why certain luxury brands which, in the past, used to rely on distributing their products on their own, via a network of strategic points of sale, now mainly deal with selective dealers. As a result, there is a multiplication of trading names for genuine selective distribution, such as Sephora or Marionnaud.
Nowadays, the majority of luxury houses sell particularly prestigious products exclusively in their own shops and network, while, at the same time, they give clients a wider access to certain products through “corners” and “shops-in-shops” in spaces frequented by the wider public. It is certain that selective distribution is the distribution system which is the most adapted to luxury products and that to which luxury maisons are the most attached.
Therefore, the evolution of competition law towards more flexibility – in particular as far as the definition and application of those criteria to select dealers are concerned – is highly valued by luxury brands.
European regulation n. 330/2010 of 20 April 2010 concerning the application of article 101 3) of the treaty on the functioning of the European Union (“TFEU“) to categories of vertical agreements and concerted practices (“Regulation 330/2010“) (which replaces regulation n. 2790/1999 of 22 December 1999 concerning the application of article 81(3) of the treaty to categories of vertical agreements and concerted practices (“Regulation 2790/1999“)), as well as the directing guidelines on vertical restrictions, provide for an exemption system to the general prohibition of vertical agreements (set out in article 101(1) of the TFEU).
This exemption system is mainly based on the importance of market shares held by the companies in question.
2. Validity of agreements of selective distribution pursuant to competition law
From the standpoint of competition law, selective distribution can have the effect of limiting intra-brands competition since it may exclude a certain type of distributors from the market, while encouraging some colluding behaviour between suppliers and retailers.
This is why the legality of agreements of selective distribution is always assessed via the fundamental rules applying to competition law, in particular article 101 of the TFEU which prohibits agreements between companies and any concerted practice, susceptible to affect trade between member-states and which object, or effect, is to limit or alter the competition game, inside the common market.
However, since the publication of Regulation 2790/1999, it is clear that some agreements of selective distribution are outside the scope of article 81 of the EC treaty (now article 101 of the TFUE), while others may be forbidden by anti-trust law.
Accordingly, agreements of selective distribution which belong to this second category are, a priori, prohibited, but they may however be “exempted” if they meet certain standards.
The old vertical agreements block exemption (set out in Regulation 2790/1999), which expired on 31 May 2010, was drafted so that some selective distribution systems would (if caught by article 101(1) of the TFEU) qualify for block exemption treatment.
In the case of motor vehicles, there is even a dedicated block exemption, which covers certain forms of selective distribution for the sale of new cars. In all other instances, however, suppliers must either structure their systems so that they are not caught by article 101(1) of the TFEU or consider whether they meet the exemption criteria of article 101(3) (note that, since May 2004, it has not been possible to seek such confirmation from the European Commission on this point by way of notification).
2.1. Article 101(1) of the TFEU
The first question is whether the selective distribution agreement or network of the luxury house is caught by article 101(1) of the TFEU, the main competition provision governing commercial agreements in the EU.
Under the approach of the European Commission and European Court of Justice (“ECJ“), it is generally accepted that selective distribution agreements will not be caught by article 101(1) provided three conditions are met:
- Nature of goods: the nature of the goods is such that selective distribution is necessary to ensure they are properly distributed (for example, the European Commission has accepted selective systems that limit supplies to dealers having specific expertise, trained staff, suitable premises or adequate servicing arrangements in cases involving cars, TV, cameras, hi-fi products, computers, premium watches, jewellery, glass crystal, ceramic tableware) ;
- Necessity/proportionality: dealers are selected solely on the basis of qualitative criteria that are not excessive as a means of ensuring that the goods are distributed under appropriate conditions (for example, a requirement that the dealer provide after-sales service and a requirement that the dealer’s staff be technically qualified and that the premises be suitable, including the ability to display the luxury products) and
- Objectivity: the qualitative criteria are applied objectively and without discrimination, so that any dealer meeting the criteria will be admitted to the network. Suppliers should be prepared to provide written and reasoned responses to applications (identifying what would need to be done to meet the supplier’s criteria) as this will make the non-discriminatory nature of the criteria more evident.
Quantitative limits on the number of dealers will invariably fall within the scope of article 101(1) of the TFEU as will restrictions having similar effects. For example, an obligation to achieve a minimum turnover in the supplier’s goods could have the effect of limiting the number of authorised dealers in a territory, so may fall within the scope of article 101(1).
2.2. Article 101(3) of the TFEU
Where a supplier wishes to impose significant additional restrictions going beyond those relating to its dealers’ technical qualifications, staff and premises, its distribution system will generally fall within the prohibition of article 101(1) and any justification for the additional restrictions will have to be considered under article 101(3) of the TFEU.
Selective distribution systems may qualify for block exemption treatment under the vertical agreements block exemption set out in article 101(3) of the TFEU.
Under this new policy of the European Commission in relation to the single block exemption applying to all vertical agreements (including selective distribution arrangements), vertical restraints are presumed legal in the absence of market power. The test for the existence of such market power uses a market share threshold of 30% of the relevant market.
Below this threshold, no market power is presumed and agreements may benefit from the block exemption. Above the 30% threshold, there is no presumption of illegality and no obligation to notify an agreement, but companies have to make their own assessment to determine whether an agreement is restrictive of competition.
The vertical restraints guidelines are intended to assist with this analysis.
This “safe harbour” threshold of 30% will apply to both the market share of the supplier and the market share of the buying dealer.
The following types of restrictions have been permitted by the European Commission under article 101(3) of the TFEU, taking account of the products in question and the structure of the market concerned (and will generally be exempted by the vertical agreements block exemption, provided its other conditions are satisfied):
- Quantitative restrictions: in the Omega case for example, the European Commission accepted a restriction on the number of dealers because Omega was only physically capable of manufacturing a relatively restricted quantity of its luxury watches and there was only limited demand for such watches.
- Territorial limitations on the appointment of dealers: in BMW (OJ 1975/L29/1) and Omega (OJ1970 L242/22), the European Commission indicated that it was prepared to exempt agreements involving territorial limitations where dealers have to undertake substantial investments in order to maintain stocks and servicing facilities. The European Commission has also stated that it may accept territorial limitations where the specific nature of the products may justify close co-operation between manufacturers and dealers.
- Geographic restrictions limiting the number of dealers per area: These may be justifiable if there is insufficient local demand to justify an additional account. For example, in Chanel (OJ1994 C334/11), the Commission stated its intention to clear a requirement that luxury watch concessionnaires only be established in towns with over 20,000 inhabitants or with a substantial tourist trade.
- Obligations on dealers to purchase minimum quantities and to stock the whole or an agreed range of products.
However, article 101(1) restrictions which are most unlikely to qualify for individual exemption (and which are treated as “hardcore” restrictions under the vertical agreements block exemption) include:
- Resale price maintenance obligations: dealers must be free to determine their own resale prices. However, article 101(1) of the TFEU does not prohibit a supplier from suggesting or recommending resale prices.
- Absolute territorial protection: restrictions on resale and exports bans within the European Economic Area will not be permitted under article 101(3).
- Customer restrictions: dealers must be free to identify and supply end-customers of their choice, also with the help of the internet. The European Commission will regard it as a hardcore restriction where criteria are imposed for online sales that are not overall equivalent to the criteria imposed on sales from brick and mortar shops, albeit that the criteria need not be identical due to differences in the distribution modes.
3. Internet sales in a selective distribution network
Pierre Fabre Dermo-Cosmetique (“PFDC“) is a producer and merchant of cosmetic and personal care products. The general terms and conditions of its selective distribution network required sales to be made in a physical space in the presence of a qualified pharmacist, which had the de facto effect of preventing all internet sales of the PFDC products.
Following a first negative ruling by the French competition authority (which fined PFDC for anticompetitive practices, holding that this clause excessively restricted the commercial freedom of PFDC’s dealers), PFDC brought the case before the Court of Appeal of Paris, which referred the matter to the ECJ for a preliminary ruling on the following questions:
(i) did the de facto ban on internet sales by authorised dealers in a selective distribution network constitute a restriction per se,
(ii) was the clause covered by the block exemption provided by Regulation 2790/1999,
(iii) if not, could the contract be potentially eligible for an individual exemption?
The ECJ applied a classical method to its analysis of the antitrust legislation (article 101 of the TFEU).
On each of the three questions, it held that:
(i) Article 101(1) of the TFEU prohibits all agreements between undertakings which may affect trade between member-states and which have as their objective or effect the prevention, restriction or distortion of competition within the internal market. The ECJ considered that a de facto prohibition of any internet sales constituted a restriction per se (and so, was incompatible with article 101(1) of the TFEU) if the clause could not be objectively justified. The ECJ then excluded the two most commonly used arguments to justify such a clause, considering that neither the necessity to provide customers with personal advice to ensure their safeguard nor the necessity to protect the prestigious brand image, constituted a legitimate purpose justifying such a clause.
(ii) In principle, an agreement which is anti-competitive under the meaning of article 101(1) of the TFEU, may nevertheless be exempted pursuant to article 101(3) of the TFEU (individual or block exemption). However, the ECJ held that the agreement had as its object the restriction of passive sales to online end-users outside the dealer’s area and consequently excluded the application of the block exemption.
(iii) The ECJ held that it did not have enough elements to appreciate whether the agreement could benefit from an individual exemption, and left this point to be determined by the French courts. It is clear that the prohibition of internet sales constitutes an anti-competitive restriction.
In reality, each case will turn on its facts so we could eventually see such a clause being justified, even individually exempted, but unfortunately the ECJ did not provide any concrete advice for such an analysis in practice to be made.
This case highlights the hurdles which luxury brands face when using selective distribution networks to generate and control brand exclusivity.
Bearing in mind the ECJ’s rejection of “maintaining a prestigious image” as a legitimate aim for restricting competition, brand owners must ensure they are comfortable that their network conditions either apply equally to online and bricks and mortar dealers, or at least that any differences are objectively justifiable on the basis of the practical distinctions between the two retail structures.
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New EU consumer contracts legislation came into force on 13 June 2014. Are you ready for this tsunami?Crefovi : 29/06/2014 3:03 pm : Art law, Articles, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, leisure, Music law, News, Product liability, Trademark litigation
There has been a drastic change to consumer contracts legislation in each of the 28 member-states of the European Union, further to the coming into force, on 13 June 2014, of new national rules transposing Directive n. 2011/83/EU on consumer rights. Let’s have a look at how these changes will affect businesses operating in France and the United Kingdom.
According to the European Commission, the Directive 2011/83/EU on consumer rights (the “Directive“) aims at “achieving a real-business-to-consumer (B2C) internal market, striking the right balance between a high level of consumer protection and the competitiveness of businesses“. Is this really so? How are companies going to be impacted, in France and the UK?
A. What the Directive is about
The Directive replaces, as of 13 June 2014, Directive 97/7/EC on the protection of consumers in respect of distant contracts and Directive 85/577/EEC to protect consumer in respect of contracts negotiated away from business premises.
Directive 1999/44/EC on certain aspects of the sale of consumer goods and associated guarantees, as well as Directive 93/13/EEC on unfair terms in consumer contracts, remain in force but are amended by the Directive.
Member-states had to transpose the Directive into national law by 13 December 2013. Member-states must apply the national laws implementing the Directive from 13 June 2014.
1. The Directive will eliminate hidden charges and costs on the internet
Consumers will be protected against “cost traps” on the Internet. This happens when fraudsters try to trick people into paying for ‘free’ services, such as horoscopes or recipes. From now on, consumers must explicitly confirm that they understand that they have to pay a price.
2. Increased price transparency
Traders have to disclose the total cost of the product or service, as well as any extra fees.
3. Banning pre-ticked boxes on websites
When shopping online – for instance buying a plane ticket – you may be offered additional options during the purchase process, such as travel insurance or car rental. These additional services may be offered through so-called ‘pre-ticked’ boxes. Consumers are currently often forced to untick those boxes if they do not want these extra services. With the new Directive, pre-ticked boxes will be banned across the European Union.
4. 14 days to change your mind on a purchase (compared to the 7 days legally prescribed before)
If the trader has not clearly informed the customer about the withdrawal right, the return period will be extended to 1 year.
5. Better refund rights
Traders must refund consumers for the product within 14 days of the withdrawal. This includes the costs of delivery.
6. Introduction to a EU-wide model withdrawal form
Consumers will be provided with a model withdrawal form which they can use if they change their mind and wish to withdraw from a contract concluded at a distance or at the doorstep.
7. Eliminating surcharges for the use of credit cards and hotlines
Traders will not be able to charge consumers more for paying by credit card (or other means of payment) than what it actually costs the trader to offer such means of payment. Traders who operate telephone hotlines allowing the consumer to contact them in relation to the contract will not be able to charge more than the basic telephone rate for the telephone calls.
8. Clearer information on who pays for returning goods
If traders want the consumer to bear the cost of returning goods after they change their mind, they have to clearly inform consumers about that beforehand, otherwise they have to pay for the return themselves. Traders must clearly give at least an estimate of the maximum costs of returning bulky goods bought by internet or mail order, such as a sofa, before the purchase, so consumers can make an informed choice before deciding from whom to buy.
9. Better consumer protection in relation to digital products
Information on digital content will also have to be clearer, including about its compatibility with hardware and software and the application of any technical protection measures, for example limiting the right for the consumers to make copies of the content.
Consumers will have a right to withdraw from purchases of digital content, such as music or video downloads, but only up until the moment the actual downloading process begins.
10. Common rules for businesses will make it easier for them to trade all over Europe
- A single set of core rules for distance contracts (sales by phone, post or internet) and off-premises contracts (sales away from a company’s premises, such as in the street or the doorstep) in the European Union, creating a level playing field and reducing transaction costs for cross-border traders, especially for sales by internet.
- Standard forms will make life easier for businesses: a form to comply with the information requirements on the right of withdrawal;
- Specific rules will apply to small businesses and craftsmen, such as a plumber. There will be no right of withdrawal for urgent repairs and maintenance work. Member States may also decide to exempt traders who are requested by consumers to carry out repair and maintenance work in their home of a value below €200 from some of the information requirements.
While it is undeniable that the Directive is going to significantly improve the security and easiness of distant-selling transactions for consumers, traders and their legal advisers must get to grips as soon as possible with the terms of the national laws which have transposed the provisions of the Directive in the EU countries in which they offer their goods and services for sale. Indeed, these national laws have entered into force on 13 June 2014 so, any trader which is not compliant with them, risks severe sanctions.
We will have a look now at the specific rules adopted in the 2 member-states where we, at Crefovi, operate; namely the new national laws applicable in the United Kingdom and France.
B. The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 in the UK
The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the “Regulations“) came into force on 13 June 2014.
The Regulations apply to contracts entered into on or after that date. The Consumer (Distance Selling) Regulations 2000 and the Cancellation of Contracts made in a Consumer’s home or place of work regulations 2008 will not longer apply to any consumer contract entered into on or after 13 June 2014.
Therefore, businesses, in particular e-businesses (which sell or provide goods and services via websites or apps), either located in the UK or targeting consumers in the UK, should review their terms and conditions of sale now.
The majority of the new consumer rights cannot be excluded from contracts; any contractual terms that waive or restrict the rights will not be binding on the consumer.
Failure to meet the requirements of the Regulations can have many consequences: the consumers may be granted additional rights (such as increased cancellation periods), may be entitled to recover damages and in some circumstances the contract itself may be void. The business concerned may also face significant adverse publicity for their failure to comply with the mandatory requirements.
The most important new consumer rights set out in the Regulations, are detailed as follows.
1. Pre-contract information
Examples of the specific information to be provided include a description of the goods or services; the identity of the trader (including its geographical address, not just its registered office); the total price payable including any taxes, delivery charges or additional costs; and the duration of the contract or any conditions for terminating it. This is not an exhaustive list and the information may differ depending on the type of contract (e.g. distance, off-premises or on-premises).
The information must be “made available”, meaning that the consumer must reasonably be expected to know how to access it. For online orders, the information must be provided before the order is placed “in a clear and prominent manner”.
2. Cancellation and returns
The Regulations provide for an extended “cooling-off” period for distance and off-premises contracts, of 14 calendar days (this used to be 7 days). For goods, this period starts from the date of delivery of the goods to the consumer and, for services, this period starts from the day the contract between the service provider and the consumer was entered into .
If the trader has not provided enough pre-contract information, the cancellation period is extended to 12 months (although the period can be reduced to 14 days once the breach is corrected).
To obtain a refund, the consumer must return the goods or show evidence of a return. For distance and off-premises contracts, consumers can be required to return within 14 calendar days of cancelling the contract.
There are certain exemptions to the cancellation rights including contracts for bespoke and customised goods, goods sealed for health or hygiene reasons that have been unsealed and goods that deteriorate rapidly.
3. Model cancellation form
It is a requirement that traders inform consumers of their cancellation rights. To assist with this, the Regulations contain model cancellation instructions and a model cancellation form. If the trader gives the consumer the option of filling it and submitting this or a similar form, the consumer need not use it – any “clear statement” of cancellation is sufficient.
Express consent is required from the consumer where extra payments are to be charged in addition to the price of the goods or services. Hidden charges or pre-ticked boxes (where purchasing optional extras are made the default) are not acceptable. Consumers will not be liable for any costs which they were not told about before entering into the contract. For online transactions, it must be obvious when clicking a button will result in payment. The button should be labelled “order with an obligation to pay”, or other similar unambiguous formulation.
The consumer is liable to pay an amount proportionate to the services already provided up until the time he notified the business that he wishes to cancel.
Businesses must refund all payments made by the consumer (including, if applicable, the costs of delivery) without undue delay and no later than 14 calendar days from the day the business receives either the unwanted goods or proof of return, whichever is earlier.
In respect of goods, unless businesses have offered to collect the goods themselves, they may withhold the refund until they have received the unwanted goods or proof of return, whichever is earlier.
In relation to services, consumers must be refunded within 14 calendar days from the day the business is notified of the cancellation.
Businesses are required only to refund the cost of the least expensive type of outbound standard delivery, even if express delivery was used. Businesses can avoid covering the inbound cost of returning the goods by informing the consumer that they will be responsible for these costs.
Calls to customer helplines must be at basic rate, not premium rate (otherwise the trader is liable to compensate the consumer for any charges over the basic rate).
Confirmation of the contract must be supplied to the consumer via a durable medium, such as e-mail, text, letter, in a personal account or on a CD or DVD. Sending an e-mail to an e-mail address provided by the consumer would fulfil this requirement.
The rules set out above are fully harmonised throughout the European Union. Member-states are not allowed to maintain or introduce national laws that provide for less or more stringent levels of consumer protection. E-commerce businesses may, however, offer more favourable terms to consumers, as long as the consumer is provided with full information about these before making a purchase.
In light of these changes, businesses should health-check their current processes, policies, terms and documentation and implement any changes before the 13 June 2014 deadline.
We, at Crefovi, have conducted a number of website audits for clients which sell goods or services to UK consumers. Audits can be done quickly and cost-effectively.
If you have not already done these health-checks or if you would like us to review your consumer-facing website or app please contact us on +44 20 3318 9603 or " href="mailto:%" target="_blank">.
C. The “Hamon” law of 17 March 2014 in France
The new law relating to consumer protection measures, known as the “Hamon” law, was adopted on 13 February 2014 and published on 17 March 2014 after being declared lawful by the French Constitutional Council (the “Law“).
The provisions of the Law go well beyond consumer protection and aim at extending measures to business-to-business relationships including sub-contracting. Penalties for failure to comply with these new requirements have been reinforced.
The main changes set out in the Law are therefore affecting both consumers and businesses, as follows.
1. How French consumers will benefit from the Law
1.1. Class action à la française known as “action de groupe”
The Law has added a new chapter to the French Consumer code creating a class action à la française, known as the “action de groupe”.
The Law creates a French-law class action, but it is restricted both in terms of scope and damages awardable. It is more in the nature of a “trial run” than a definitive statute, since article 2 VI of the French Consumer code provides that “no later than 30 months following promulgation of the (Law), the government shall submit to Parliament a report evaluating the implementation of the class action and examining possible extension to the areas of health and environment“. Thus, although it is possible that the procedure will be extended to new areas, this will depend on the satisfactory implementation of the procedure in its current form.
Although a decree still to be adopted will specify certain details of the new procedure, it is useful to outline its main features.
a. The limited scope of the class action
New article L. 421-1 of the French Consumer Code provides as follows:
“An association for the defence of consumers that is representative at the national level and approved in accordance with article L. 211-1 may bring an action before a civil jurisdiction in order to obtain redress for individual damage suffered by consumers placed in an identical or similar situation and having as its cause a failure by one or the same professionals to comply with their legal and contractual obligations:
1. With respect to the sale of goods or the supply of services;
2. Or when such damages result from anticompetitive practices as defined in Title II of Book IV of the Commercial Code or articles 101 and 102 of the Treaty on the Functioning of the European Union.
The class action may only relate to damages for damage to proprietary interests resulting from material damage suffered by consumers.”
The Law therefore considerably limits the scope of application of the class action, which is confined to consumer disputes and to certain damages incurred by consumers resulting from anti-competitive practices such as cartels or abuse of dominant positions.
Only natural persons who have concluded an agreement for sale of goods or supply of services for personal use are entitled to be indemnified under a class action.
In order for a class action to be constituted, it is also necessary that the consumers have suffered damages resulting from the same legal or contractual breach by the professional.
The Law also drastically limits the type of damages for which redress may be sought, since class action may only be brought to obtain redress for “damage to proprietary interests resulting from material damage suffered by consumers”. This not only means that the breach must relate to material damages but that the amount awarded is limited to the monetary consequences of such breach.
b. Procedure for class actions
The French-law class action may only be brought by associations for the defence of consumers that are representative on a national scale and approved to do so. Only 16 associations are so recognised in France, at the present time. Lawyers may not, under the current statute, bring class actions on behalf of consumers.
c. New class action in France and its impact on insurers
The ability to bring a French class action increases the exposure of insurers:
- for the insurance products that they sell to consumers
- for the coverage of the liability of the insured traders, subject of a class action
- to numerous small individual claims that may not otherwise have been brought.
It is likely that insurers will face increasing risks relating to insurance products sold to consumers. The wide range of products and distribution channels used means that it is therefore impossible to assess the risk.
In addition to the direct risk of facing a French class action, insurers should be aware of the fact that the traders that they insure may face class actions.
Insurers should monitor the activity and reports of consumer associations that can initiate class actions in France. It is also important that insurers continue to assess the practices of insured companies who sell goods and services to consumers.
Bringing French-law class actions through the Law is definitely a step way beyond the requirements of the Directive. The Law has, of course, transposed in France, the provisions set out in the Directive, as follows.
1.2. Pre-contractual information requirements
These requirements have been strengthened in relation to:
– the general duty to give information that applies to any sales of goods or services agreement entered into on a business-to-consumer basis (on-premises sales, distance sales and off-premises sales) and
– information specific to distance contracts about the existence (or non existence) of the withdrawal right. The precise list and content of such information will be determined by a future decree taken by the French “Conseil d’Etat”.
1.3. Withdrawal right
The current withdrawing period of 7 days has been increased to 14. This period can be extended by 12 months from the date of expiration of the initial period when the consumer did not receive information relating to the withdrawal right.
The Law also introduces the use of a standard form (the presentation and wording of which will also be set out by a decree taken by the “Conseil d’Etat”) that can be used by consumers to exercise their withdrawal right. This form must either be made available to consumers online or sent to them before the contract is entered into. If a consumer exercises this right, the business must refund the consumer for all amounts paid, including delivery costs, within a period of 14 calendar days.
1.4. Order process
The trader must ensure that the consumer is explicitly informed, when placing his/her order, of his/her payment obligation, by including (on penalty of invalidity) a clear and legible notice “order with payment obligation” or similar unambiguous wording.
Also, e-commerce websites must clearly and legibly indicate, by no later than the start of the ordering process, the means of payment that are accepted and the possible restrictions that may apply to deliveries.
An order confirmation must be sent. Indeed, the trader must send the consumer, on a durable medium and within a reasonable timeframe after the contract is entered into, and by no later than the date of delivery of the good or commencement of fulfilment of the service, a confirmation setting out the main provisions of the contract.
In case of pre-ticked boxes, the consumer is entitled to claim for a refund of any paying options that were billed to him/her and which he/she did not request.
The French Autority for Competition Policy, Consumer Affairs and Fraud Control (“DGCCRF“) (the French anti-fraud watchdog) will perform controls and apply, as appropriate, administrative fines to non-compliant websites. Failure to give the required information carries a maximum fine of €3,000 for vendors who are natural persons and of €15,000 for vendors which are legal entities.
Breach of the obligations relating to the exercise of the withdrawal right carries a maximum fine of €15,000 for vendors who are natural persons and of €75,000 for vendors which are legal entities. These administrative fines apply without prejudice to any possible criminal penalties.
Businesses incorporated in France and/or targeting French consumer customers, should update their general terms and conditions and, if they are distance sellers, their online practices, as soon as possible, in order to comply with these new French legal requirements.
If you have not already done these health-checks or if you would like us to review your consumer-facing website or app please contact us on +33 1 78 76 52 23 or
2. How the Law implements changes in business-to-business contracts
Below is a description of the main changes concerning business contracts, i.e. agreements entered into by 2 natural entities which are traders.
2.1. Greater regulation of trade negotiations
Several provisions of the Law seek to impose greater regulation over B-to-B purchase terms and business negotiations. In this respect, the role of the seller’s general terms and conditions of sale becomes preponderant as the “only foundation for trade negotiations” (article L. 441-6 of the French commercial code). Although the real impact of this provision is uncertain, the French government’s stated objective is to achieve “balanced” business negotiations.
Indeed, in France, general conditions of purchase are often presented at best as the basis for trade negotiations and, at worst, as a document that must be signed by the supplier which will become the only agreement in place. The French government, through the Law, wishes to clearly reaffirm the rule: negotiations must rely on and solely on general terms and conditions of sale.
Therefore, general terms and conditions of sale must not be ignored by purchasers in the context of trade negotiations and their terms must be discussed between the parties in order to come to a final agreement. Parties will have to demonstrate that they are in compliance with this legislation. Parties are therefore advised to keep all documents evidencing that some effective negotiations have occurred between them regarding conditions of the parties’ cooperation, and, in particular, the agreed price of services or products.
2.2. Reduced payment terms
The Law revised payment terms for “periodic invoices”. For any summary invoice edited at the end of the month, the new payment term is 45 days from the date of issuance of the invoice (article L. 441-6 of the French commercial code).
This new payment term is likely to apply to intermediate invoices in the framework of global services.
Existing payment terms of 45 days end of month or 60 days from the invoice date remain in force for any other invoices.
2.3. Increased penalties
Failure to comply with the provisions of the Law set out above in 2.1. and 2.2., may lead to a fine of €375,000 for companies and €75,000 for an individual and may be imposed by the DGCCRF. These amounts may be doubled in case of repetition of the breach within a period of 2 years from the date on which the first decision became final.
These fines mentioned above reflect the desire to increase the effects of sanctions. Civil and criminal penalties have been replaced by administrative fines which may be imposed faster and are deemed to be more dissuasive.
These administrative fines will be enforceable in the event of failure to comply with rules applicable to payment terms, rules regarding contractual formalism and clauses or practices that have an effect of delaying the starting point for payment terms (article L. 441-6, L. 441-8 and L. 441-9 of the French commercial code).
D. Practical applications of the new EU consumer contracts regulations for the art sector
The Regulations in the UK and the Law in France will significantly impact dealer and gallery sales.
1. Cancellation rights in the art world and disclosure of the identity and details of the consigning dealer
The main issues for dealers and galleries selling art, antiques and collectibles are the consumer’s right to cancel the sale without giving any reason or incurring any costs and the obligation on the dealer selling on consignment for another dealer to provide the consumer-buyer with the identity and address of the consigning dealer.
Art dealers and galleries should consider adjusting their way of doing business to comply with the Regulations in the UK, and the Law in France. Violation of certain provisions is an offence, particularly the obligation to give consumers buying off-premises information on their right to cancel.
If the art sale qualifies as a distance sale, the dealer or gallery must offer the consumer-buyer the right to cancel the sale within a period of 14 calendar days commencing after the day on which the art object comes into the physical possession of the consumer or their agent. The consumer can cancel the art sale without giving reasons, and the dealer or gallery must give the consumer a full refund (including the cost of delivery to the consumer unless the consumer selected a particularly expensive method of delivery). The contract may specifically set out that the consumer is liable to pay the cost of returning the property if the sale is cancelled. Otherwise, if the contract is silent, the cost must be borne by the art dealer or gallery.
The cancellation right should prompt dealer and galleries selling on consignment to reconsider their payment terms, to avoid being under an obligation to pay the consignor before the expiry of the period during which the consumer may exercise the cancellation right.
The other unattractive consequence of selling at a distance is the obligation to disclose the geographical address and identity of the other trader where the art dealer or gallery sells on consignment for another dealer or gallery. Auctioneers selling by public auction are exempt from that obligation. Failure to provide that information amounts to a breach of contract by the art dealer or gallery.
2. Sales at art fairs: off-premises or on-premises sales?
Do art sales at art fairs qualify as off-premises sales? In the definition of “off-premises contract”, the Regulations provide that this includes “a contract concluded during an excursion organised by the trader with the aim or effect of promoting or selling goods or services to the consumer”. It does seem to infer that an art fair is an “excursion” away from the dealer’s or gallery’s premises.
3. Cross-border art sales
As far as cross-border sales are concerned, the question is whether the rights given to consumers under the Regulations in the UK, and the Law in France, apply if the consumer is outside the UK or France, or the dealer or gallery is based outside the UK or France.
The Regulations and the Law derive from the Directive. Accordingly, consumers in other EU member-states must be expected to benefit from the same protection as UK or French consumers.
Also, agreeing that the sale contract with the consumer will be subject to the law of a country outside the EU will not have the effect of depriving EU consumers of the protection afforded by EU and national laws.
Finally, the courts in EU member-states will enforce their own consumer protection laws if the consumer resides in the EU, even if the dealer or gallery is based outside the EU. This means that non-EU dealers and galleries should not assume that they are immune from the new EU consumer protection framework. If they conduct business in the EU or direct their activity to consumers located in one or more EU countries, they are bound to comply with the Regulations in the UK, the Law in France, and any other national transposition regulations in the other 26 member-states of the EU.
Tel: +44 20 3318 9603
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