Brexit: How to protect your creative business when the UK will crash out of the EU on 30 March 2019

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On 30 March 2019, the UK will crash out of the EU without a withdrawal deal in place, and without a request for an extension of the 2 years’ notification period of its decision to withdraw. No second referendum will be organised by the current UK government. Therefore, what’s in the cards, for the creative industries, in order to do fruitful business with, and from, the UK in the near future? [hr]

Brexit: How to protect your creative businessMy previous article on the road less travelled & Brexit legal implications, published just after the Brexit vote, on Saturday 25 June 2016, delivered the main message that it was worth monitoring the negotiation process that would ensue the notification made by the United Kingdom (UK) to the European Union (EU) of its intention to withdraw from the EU within 2 years.

We have therefore been monitoring those negotiations for you, in the last couple of years, and came to the following predictions, which will empower your creative business to brace itself for, and make the most of the imminent changes triggered by, the crashing of the UK out of the EU, on 30 March 2019. 

1. End of freedom of movement of UK and EU citizens coming in and out of the UK

On 30 March 2019, UK citizens will lose their EU citizenship, i.e. the citizenship, subsidiary to UK citizenship, that provide 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 consulate in the country in which they require protection.

Since no withdrawal agreement will be signed by 29 March 2019, between the EU and the UK, UK nationals living in one of the 27 EU member-states will be on their own, as no reciprocal arrangements will have been put in place, in particular in relation to reciprocal healthcare and social security coordination, work permits, right to stand and vote in local elections.

UK nationals living in one of the states which are members of the European Free Trade Association (EFTA), i.e. Iceland, Liechtenstein, Norway and Switzerland, will also have no safety net, as the UK will also crash out of the EU bilateral agreements with EFTA members, such as the EEA Agreement which ties Iceland, Liechtenstein, Norway and the EU together, on 29 March 2019. Meanwhile, “the UK is seeking citizens’ rights agreement with the EFTA states to protect the rights of citizens“, as set out on the policy paper published by the UK Department for exiting the EU.

It therefore makes sense for UK nationals living in a EU member-state, or in one of the EFTA states, to reach out to the equivalent of the UK Home Office in such country, and inquire how they can secure either a visa or national citizenship in this country. Since negotiating some new bilateral agreements with EU member-states and EFTA states will take years, for the UK to finalise such negotiations, UK nationals cannot rely on these protracted talks to get any leverage and obtain permanent right to remain in a EU member-state or an EFTA state.

For example, France is ready to pass a decree after 30 March 2019, to organise the requirement to present a visa to enter French territory, and to obtain a residency permit (“carte de séjour”) to justify staying here, for UK citizens already living, or planning to live for more than three months, in France. Therefore, soon after 30 March 2019, British nationals and their families who do not have residency permits may have an “irregular status” in France.

While applying for a “carte de séjour” is free in France, and applying for French citizenship triggers only a 55 euros stamp duty to pay, EU nationals living in the UK, or planning to live in the UK, won’t be so lucky.

Indeed, it will set EU nationals back GBP1,330 per person, from 6 April 2018, to obtain UK citizenship, including the citizenship ceremony fee. However, there may be no fee to enrol into the EU Settlement Scheme, which will open fully by 30 March 2019, in particular if a EU citizen already has a valid “UK permanent residence document or indefinite leave to remain in or enter the UK”. The deadline for applying in the EU Settlement Scheme will be 31 December 2020, when the UK leaves the EU without a withdrawal deal on 30 March 2019.

Business owners and creative companies working in and from the UK will be impacted too, if they have some employees and staff. It will be their responsibility to ensure and be able to prove that their staff who are EU citizens, have all obtained a settled status: in a display of largesse, the UK government has therefore published an employer toolkit, to “support EU citizens and their families to apply to the EU Settlement Scheme“.

For short term stays of less than three months per entry, the UK government currently promises that “arrangements for tourists and business visitors will not look any different“. “EU citizens coming for short visits will be able to enter the UK as they can now, and stay for up to three months from each entry“.

To conclude, leaving the EU without a withdrawal agreement is going to create a lot of red tape, and be a massive time and energy hassle for EU citizens living in the UK, their UK employers who need to ensure that their staff are all enrolled into the EU Settlement Scheme, and for UK citizens living in one of the remaining 27 EU member-states. There will be no certainty of obtaining settled status from the UK Home Office, until EU citizens have actually obtained it further to enrolling into the EU Settlement Scheme. This is going to be a very anxiety-inducing process for EU citizens living in the UK, and for their UK employers who rely on these members of their staff to get the job done.

Contingency plans should therefore be put in place by UK employers who have EU citizens on their payroll, in particular by setting up offices and subsidiaries in one of the remaining 27 EU member-states, so that EU citizens whose settled status was refused by the UK Home Office may keep on working for their UK employers by relocating to this EU member-state where they will have freedom of movement thanks to their EU citizenships. Besides the Home Office and immigration lawyers’ fees, UK employers need to take into account the legal, accounting, IT and real estate costs of setting up additional offices and subsidiaries in a EU member-state, after 30 March 2019.

2. Removal of free movement of goods, services and capital

The EU 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 28 member-states.

After 30 March 2019, the single market will no longer count the UK, as it will cease to be a EU member-state.

While it was an option for the internal market to remain in place, between the UK and the EU, as such market has been extended to EFTA states Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA), and to EFTA state Switzerland through bilateral treaties, this alternative was not pursued by the UK government. Indeed, 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). The UK, as well as EFTA members who were less than keen to have the UK join their EFTA club, ruled out such option, not seeing the point of still contributing to the EU budget while not having a seat at the table to take any decisions in relation to how the single market is governed and managed.

2.1. Removal of free movement of goods and new custom duties and tariffs

As far as the removal of the free movement of goods is concerned, it will be a – hopefully temporary – hassle, since the UK does not have any bilateral customs and trade agreements in place with the EU (because no withdrawal agreement will be entered into between the EU and the UK by 30 March 2019) and with non-EU countries (because the 53 trade agreements with non-EU countries were secured by the EU directly, on behalf of its then 28 member-states, including with Canada, Singapore, South Korea).

On 30 March 2019, the UK will regain its right to conclude binding trade agreements with non-EU countries, and with the EU of course.

While the UK government laboriously launches itself into the negotiation of at least 54 trade agreements, including with the EU, customs duties will be reinstated between the UK and all other European countries, including the UK. This is going to lead to a very disadvantageous situation for UK businesses, as the cost of trading goods and products with foreign countries will substantially increase, both for imports and exports.

Creative companies headquartered in the UK, which export and import goods and products, such as fashion, design and tech companies, are going to be especially at risk, here, with the cost of imported raw material increasing, and the rise or appearance of custom duties on exports of their products to the EU and non-EU countries. Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas.

Since the UK has most of its trade (57% of exports and 66% of imports in 2016) done with countries bound by EU trade agreements, both UK companies and UK consumers must brace themselves for a shock, when they will start trading after 30 March 2019. The cost of life is going to become more expensive in the UK (since most products and goods are imported, in particular from EU member-states), and operating costs are also going to increase for UK businesses.

While some Brexiters claim that the UK will be fine, by reverting to trading with the “rest of the world” under the rules of the World Trade Organisation (WTO), it is important to note that right now, only 24 countries are trading with the UK on WTO rules (like any one of the 28 member-states of the EU because no EU trade deal was concluded with these non-EU countries). After 30 March 2019, the UK will trade with the rest of the world under WTO rules, as long as the other state is also a member of the WTO (for example, Algeria, Serbia and North Korea are not WTO members). Moreover, some tariffs will apply to all UK exports, under those WTO rules.

It definitely does not look like a panacea to trade under WTO rules, so the UK government and its Bank of England will weaken the pound sterling as much as possible, to set off the financial burden represented by these custom duties and taxes.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should now relocate their manufacturing operations to the EU or low wages and low tax territories, such as South East Asia, as soon as possible, to avoid the new customs duties and taxation of goods and products which will inevitably arise, after 30 March 2019.

While a cynical example, since James Dyson was a fervent Brexiter who called on the UK government to walk away from the EU without a withdrawal deal, UK creative businesses manufacturing goods and products must emulate vacuum cleaner and hair dryer technology company Dyson, that will be moving its headquarters from Wiltshire to Singapore this year.

Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. Non-tariff barriers are any measure, other than a customs tariff, that acts as a barrier to international trade, such as regulations, rules of origin or quotas. In particular, regulatory divergence from the EU will make it harder to trade goods, introducing non-tariff barriers: when the UK will leave the EU customs union, on 30 March 2019, any goods crossing the border will have to meet rules of origin requirements, to prove that they did indeed come from the UK – introducing paperwork and non-tariff barriers.

2.2. Removal of free movement of services and VAT changes

On 30 March 2019, UK services – accounting for eighty percent of the UK economy – will lose their preferential access to the EU single market, which will constitute another non-tariff barrier. 

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, on average, in all 28 EU member-states, most legislation in this 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 exit of the UK from the EU without a withdrawal agreement.

However, since the UK will become a non-EU country from 30 March 2019 onwards, EU businesses and UK business alike will no longer be able to apply the EU rules relating to VAT, and in particular to intra-community VAT, when they trade with UK and EU businesses respectively. This therefore means that, from 30 March 2019 onwards, a EU business will no longer charge VAT to a UK company, but will keep on charging VAT to its UK client who is a natural person. Also, a UK business will no longer charge VAT to a EU company, but will keep on charging VAT to its EU client who is a natural person.

Positive changes on VAT are also in the works, because the UK will no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero-rating, etc.): the UK will have more flexibility in those areas.

However, there will no doubt be disputes between taxpayers and HMRC over the VAT treatment of transactions that predate 30 March 2019, where EU law may still be in point. Because the jurisdiction of the Court of Justice of the European Union (CJEU) will cease completely in relation to UK matters on 30 March 2019, any such questions of EU law will be dealt with entirely by the UK courts. Indeed, UK courts have stopped referring new cases to the CJEU in any event, since last year.

2.3. Removal of free movement of capital and loss of passporting rights for the UK financial services industry

Since the UK will leave the EU without a withdrawal agreement, free movement of capital, which is intended to permit movement of investments such as property purchases and buying of shares between EU member-states, will cease to apply between the EU and the UK on 30 March 2019.

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 EU central payments infrastructure is based around TARGET2 and the Single Euro Payments Area (SEPA). This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euros. 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.

However, as the UK will crash out of the EU without a deal on 30 March 2019, such transfer costs, as well as new controls on capital movements, will be put in place and impact creative businesses and professionals when they want to transfer money from the UK to EU member-states and vice-versa. While the UK government is looking to align payments legislation to maximise the likelihood of remaining a member of SEPA as a third country, the fact that it has decided not to sign the withdrawal agreement with the EU will not help such alignment process.

The cost of card payments between the UK and EU will increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).

It is therefore advisable for UK creative companies to open business bank accounts, in euros, either in EU countries which are strategic to them, or online through financial services providers such as Transferwise’s borderless account. UK businesses and professionals will hence 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, and other non-EU countries.

Also, forging ties with banking, insurance and other financial services providers in one of the remaining 27 member-states of the EU may be really useful to UK creative industries, after 30 March 2019, because the UK will no longer be able to carry out any banking, insurance and other financial services activities through the EU passporting process. Indeed, financial services is a highly regulated sector, and the EU internal market for financial services is highly integrated, underpinned by common rules and standards, and extensive supervisory cooperation between regulatory authorities at an EU and member-state level. Firms, financial market infrastructures, and funds authorised in any EU member-state can carry out many activities in any other EU member-state, through a process known as “passporting”, as a direct result of their EU authorisation. This means that if these entities are authorised in one member-state, they can provide services to customers in all other EU member-states, without requiring authorisation or supervision from the local regulator.

The European Union (Withdrawal) Act 2018 will transfer EU law, including that relating to financial services, into UK statutes on 30 March 2019. It will also give the UK government powers to amend UK law, to ensure that there is a fully functioning financial services regulatory framework on 30 March 2019.

However, on 30 March 2019, UK financial services firms’ position in relation to the EU will be determined by any applicable EU rules that apply to non-EU countries at that time. Therefore, UK financial services firms and funds will lose their passporting rights into the EU: this means that their UK customers will no longer be able to use the EU services of UK firms that used to passport into the EU, but also that their EU customers will no longer be able to use the UK services of such UK firms.

For example, the UK is a major centre for investment banking in Europe, with UK investment banks providing investment services and funding through capital markets to business clients across the EU. On 30 March 2019, EU clients may no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts.

3. Legal implications of Brexit in the UK

On 30 March 2019, the European Union (Withdrawal) Act 2018 (the “Act“) will take effect, repeal the European Communities Act 1972 (the “ECA“) and retain in effect almost all UK laws which have been derived from the EU membership of the UK since 1 January 1973. The Act will therefore continue enforce all EU-derived domestic legislation, which is principally delegated legislation passed under the ECA to implement directives, and convert all direct EU legislation, i.e. EU regulations and decisions, into UK domestic law. 

Consequently, the content of EU law as it stands on 30 March 2019 is going to be a critical piece of legal history for the purpose of UK law for decades to come.

Some of the legal practices which are going to be strongly impacted by the UK crashing out of the EU are intellectual property law, dispute resolution, financial services law, franchising, employment law, product compliance and liability, as well as tax.

In particular, there is no clarity from the UK government, at this stage, on how EU trademarks, registered with the European Union Intellectual Property Office (EUIPO) are going to apply in the UK, if at all, after 30 March 2019. The same goes for Registered Community Designs (RCD), which are also issued by the EUIPO.

At least, some clarity exists in relation to European patents: the UK exit from the EU should not affect the current European patent system, which is governed by the (non-EU) European Patent Convention. Therefore, UK businesses will be able to apply to the European Patent Office (EPO) for patent protection which will include the UK. Existing European patents covering the UK will also be unaffected. European patent attorneys based in the UK will continue to be able to represent applicants before the EPO.

Similarly, and since the UK is a member of a number of international treaties and agreements protecting copyright, the majority of UK copyright works (such as music, films, books and photographs) are protected around the world. This will continue to be the case, following the UK exit from the EU. However, certain cross-border copyright mechanisms, especially those relating to collecting societies and rights management societies, and those relating to the EU digital single market, are going to cease applying in the UK.

Enforcement of IP rights, as well as commercial and civil rights, is also going to be uncertain for some time: the UK will cease to be part of the EU Observatory, and of bodies such as Europol and the EU customs’ databases to register intellectual property rights against counterfeiting, on 30 March 2019. 

The EU regulation n. 1215/2012 of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, will cease to apply in the UK once it is no longer an EU member-state. Therefore, after 30 March 2019, no enforcement system will be in place, to enforce an English judgment in a EU member-state, and vice-versa. Creative businesses will have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This will likely introduce additional procedural steps before a foreign judgment is recognised, which will make enforcement more time-consuming and expensive.

 

To conclude, the UK government seems comfortable with the fact that mayhem is going to happen, from 30 March 2019 onwards, in the UK, in a very large number of industrial sectors, legal practices, and cross-border administrative systems such as immigration and customs, for the mere reason than no agreed and negotiated planning was put in place, on a wide scale, by the UK and the EU upon exit of the UK from the EU. This approach makes no economic, social and financial sense but this is besides the point. Right now, what creative businesses and professionals need to focus on is to prepare contingency plans, as explained above, and to keep on monitoring new harmonisation processes that will undoubtedly be put in place, in a few years, by the UK and its trading partners outside and inside the EU, once they manage to find common ground and enter into bilateral agreements organising this new business era for the UK. 

 

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Brexit legal implications: the road less travelled

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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 Brexit legal implications that creative industries need to know about?[hr]

Brexit legal implicationsNow, 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 set 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;
  • Competition;
  • 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. Brexit legal implications: 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. Brexit legal implications: 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 reinstated 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. Brexit legal implications

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, provided 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.

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ialci and Tranoï become official partners for 2016 trade shows worldwide | London fashion and luxury law firm Crefovi

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ialci, the international association of lawyers for creative industries, and Tranoï, fashion and luxury trade shows’ organiser and platform, partner up on all trade shows for 2016 worldwide.[hr]

ialci, the international association of lawyers for creative industriestranoï, ialci, crefovi, new york, paris, was founded by Crefovi’s founding partner, Annabelle Gauberti, in 2013.

Today, ialci is a dynamic association, which members are currently drafting a book on the law of luxury goods and fashion (to be released in 2016) and which organises several high-profile seminars from the law of luxury goods and fashion series.

ialci’s president, Annabelle Gauberti, struck a partnership with fashion and luxury goods platform and trade shows’ organiser, Tranoï.

Tranoï is a series of international fashion trade shows as well as an artistic platform with a stern selection of more than 1000 premium designers from all over the world, created for them to meet the most influential fashion ambassadors. As set out on its website, Tranoï is more than trade shows. “It also includes artistic installations, designers exhibitions, catwalk shows, fashion parties and all sorts of events which arouse the dreams and desires inherent to fashion“.

It was founded by the Hadida family, renowned for establishing multi-labels concept stores L’Eclaireur. L’Eclaireur founder, Mr Armand Hadida, is its creative director while his son, Mr David Hadida, is its general director. 

The objectives of Tranoï are to:

  • Facilitate connections between fashion businesses and the right professionals to support them with their challenges;
  • Present highly curated fashion products, sold by the exhibitors, to the most high-profile and sought after multi-label stores, department stores, online stores in the world;
  • Showcase the French and international innovations that serve the fashion industry.

ialci’s lawyers will attend all trade shows in 2016, worldwide, in order to provide free legal advice, short one-to-one introductory meetings as well as workshops on hot topics pertaining to the law of luxury goods and fashion, to all Tranoï’s exhibitors and visitors.

With more than 80% of exhibitors at Tranoï New York and Paris coming from Europe, and most visitors to New York and Paris trade shows coming from the US, Japan, Italy, France, Germany and the UK, Tranoï’s clients will benefit from responsive, international and expert legal advice and services provided by several member lawyers of ialci, qualified under English law, French law, New York law, Brazilian law, Belgium law, Italian law and German law.

Already, in September 2015, the lawyers from ialci, including Crefovi’s founding partner Annabelle Gauberti, had a booth at New York trade show at the Tunnel in Chelsea. During that September trade show, ialci lawyers were delighted to have their booth visited by numerous exhibitors and visitors, who asked them many legal questions relating to fashion law and their business affairs and/or were simply curious to know more about ialci.

Exhibitors and visitors also attended with great curiosity and interest ialci’s workshops held at Tranoï New York Show, on 19 and 20 September. These 40 minutes’ seminars focused on which types of intellectual property rights are worth protecting for a luxury and fashion brand, as well as tips to negotiate well an agency or distribution agreement in the fashion sector.

The presence of ialci on the trade show in New York, in September 2015, was duly noticed and even got press coverage! 

Now that an official partnership has been signed between ialci and Tranoï, ialci will attend and participate to all trade shows worldwide in 2016, as follows:

  • Tranoï Homme and Preview, from 23 to 25 January 2016, at Cité de la Mode et du Design and Palais de la Bourse in Paris ;
  • Tranoï New York, from 21 to 23 February 2016, at the Tunnel, Chelsea, in New York City;
  • Tranoï Femme, from 4 to 7 March 2016, at Cité de la Mode et du Design, Palais de la Bourse and Carrousel du Louvre in Paris.

In order to organise an appointment with ialci lawyers, please fill out and send us an online contact form

Crefovi and ialci will revert back to you in due course, with some suggested appointment times, in order to meet up during the trade shows, and with some questions and points about your legal enquiries in order to address them adequately during those appointments.

In addition to being present at ialci booth during the whole duration of each trade show, for free advice and consultations to Tranoï’s exhibitors and visitors,  ialci lawyers will also organise various workshops on legal topics of particular interest to the exhibitors and visitors of Tranoï’s trade shows, on intellectual property, fashion finance, agency and distribution agreements, lawful use of social media, etc.

Annabelle Gauberti, founding partner of London fashion and luxury law firm Crefovi, will coordinate ialci’s and her law firm’s presence at Tranoï. She will be present on ialci’s booth at all times. 

Tranoï’s goal is to welcome more than 4,000 visitors over three days at its multiple sites in Paris, and more than 1,000 visitors over three days at the Tunnel, Chelsea, in New York.

One of the USPs of Tranoï events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend some panel discussions or workshops Annabelle is participating in, or if you see ialci’s booths on Tranoï Paris and New York, please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!

crefovi, ialci, annabelle gauberti, fashion law
Annabelle Gauberti on ialci’s stand in Paris fashion week in March 2016
Tranoi, Crefovi, ialci, Amy Goldsmith, Annabelle Gauberti
Amy Goldsmith and Annabelle Gauberti in NYC in February 2016
Tranoi, ialci, Crefovi, Annabelle Gauberti, Amy Goldsmith
Amy Goldsmith and Annabelle Gauberti in NYC in February 2016
Tranoi, ialci, Crefovi, Amy Goldsmith
Amy Goldsmith during her presentation on “Social media and online marketing: best conduct guidelines for fashion and luxury businesses” at Tranoï NYC in February 2016

 

Tranoi NYC 0216 AG
Annabelle Gauberti during her presentation on “Social media and online marketing: best conduct guidelines for fashion and luxury businesses” in NYC in February 2016

 

Highlight trailer of ialci and Tranoi partnership during Paris and New York fashion weeks, in January, February and March 2016

crefovi, ialci, annabelle gauberti, fashion law, paolo gelato
Paola Gelato in Paris in January 2016

 

crefovi, ialci, annabelle gauberti, fashion law
Adarsh Ramanujan and Annabelle Gauberti, lawyers members of ialci, in Paris in January 2016
ialci, crefovi, tranoi, tranoi NYC
Annabelle Gauberti, Amy Goldsmith, Holger Alt and Philippe Laurent in NYC in September 2015

 

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Taxation of acquisition & sale of art works: auctions & private sales | Art tax law

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Everything you always wanted to know about taxation of acquisition & sale of art works: auction and private sales.[hr]

Taxation of acquisition & sale of art works1. Taxation of acquisition & sale of art works: 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. Texts

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)

1.3.3. Reviews

  • 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. Taxation of acquisition & sale of art works: preparation

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 artwork? 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 artwork 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.

2.2.1. VAT

2.2.1.1. For transactions done on the French market

The sale of an original artwork 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%.

2.2.1.2. 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.

2.2.1.3. 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 participates 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 artwork is a legal entity subject to corporation tax, capital gain tax derives from a special regime, according to which:

  • if the artwork 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 artwork 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.

3. Taxation of acquisition & sale of art works: implementation

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 artwork 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 artwork, 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 artwork, 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 artwork 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 artwork was detained for at least 2 years, and was not amortised (i.e. the artwork 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 artwork 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 artwork 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 artwork 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

3.2.1 VAT

VAT is paid during the occurrence 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 occurred, 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

3.2.3.1. 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 occurrence 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.

3.2.3.2. 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.

3.2.3.3. 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 taxpayer. 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.

4. Taxation of acquisition & sale of art works: tools

Checklist

  • 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 time frame, 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.

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London fashion & luxury law firm Crefovi to partner up with Tranoi during NYC trade show

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London fashion and luxury law firm Crefovi will provide legal services to exhibitors and visitors during Tranoi NYC trade show at the Tunnel, Chelsea, from 18 to 20 September 2015 [hr]

 

tranoi trade show, crefovi, ialci, legal services, fashion, luxuryCrefovi and the international association of lawyers for creative industries ialci are delighted to team up with prestigious fashion trade show organiser Tranoi, in order to provide on-site legal services to exhibitors and visitors attending Tranoi NYC trade show at the Tunnel, in Chelsea, from 18 to 20 September 2015.

Tranoi is the ever-expanding fashion trade show business founded by the Hadida family, renowned for establishing multi-labels concept stores L’Eclaireur. L’Eclaireur founder, Mr Armand Hadida, is the creative director of Tranoi while his son, Mr David Hadida, is Tranoi’s general director.

With more than 90% of exhibitors at Tranoi NYC coming from Europe, and most visitors to Tranoi NYC coming from the US, Japan, Italy and France, it will benefit from responsive and expert legal services provided by several member lawyers of ialci, qualified under English law, French law, NY law, Belgium law, Italian law and German law.

ialci is formed by a group of lawyers who specialise in advising fashion and luxury brands. The lawyers from ialci, including Crefovi’s founding partner Annabelle Gauberti, will have a booth at Tranoi NYC trade show at the Tunnel, from 18 to 20 September 2015, where both exhibitors and visitors will be able to come and ask their legal questions.

Exhibitors and visitors can meet and talk to ialci’s lawyers during short one-to-one introductory meetings, at Tranoi New York Show, on 18, 19 and 20 September.

In order to organise an appointment with ialci’s lawyers, please fill in and send us an online contact formCrefovi and ialci will revert back to you with suggested appointment times and questions about your legal enquiries.

Crefovi and ialci will organise various workshops on legal topics of particular interest to the exhibitors at NYC Tranoi, on intellectual property, fashion finance, etc.

The objectives of Tranoi are to:
– Facilitate connections between fashion businesses and the right professionals to support them with their challenges;
– Present highly curated fashion products, sold by the exhibitors, to the most high-profile and sought after multi-label stores, department stores, online stores in the world;
– Showcase the French and international innovations that serve the fashion industry.

Annabelle Gauberti, founding partner of London fashion and luxury law firm Crefovi, will coordinate ialci’s and her law firm’s presence at Tranoi. She will be present on ialci’s booth at all times. 

Tranoi’s goal is to welcome more than 1,000 visitors over three days at the Tunnel, Chelsea, in NYC.

One of the USPs of Tranoi events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend some panel discussions or workshops Annabelle is participating in, or if you see ialci’s booth on Tranoi NYC, please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!

ialci, crefovi, tranoi

Annabelle Gauberti, Amy Goldsmith, Holger Alt and Philippe Laurent, all members of ialci at Tranoi NYC in September 2015

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Amy Goldsmith and Philippe Laurent during their presentation on “What intellectual property rights are worth protecting and how?” at Tranoi NYC in September 2015

 

Tranoi NYC, Crefovi, ialci

Annabelle Gauberti and Holger Alt during their presentation on “Distribution and agency agreements: what to look out for? How to make sure that you will get a winning deal for you and your brand” at Tranoi NYC in September 2015 

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