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This art law blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global art and culture community, in particular in the United Kingdom and France. This art law blog also provides timely updates and commentary on legal issues in the museum and visual arts sectors. It is curated by the arts’ lawyers of our law firm, who specialise in advising our art, artefacts & cultural clients in London, Paris and internationally on all their legal issues.
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 writes and curates this art law blog to guide its clients through the complexities of art law.
Crefovi’s international clients are mainly involved in contemporary art and antics, 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 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.
Annabelle Gauberti, founding and managing partner of London art law firm Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.
Druet v Cattelan: a missed opportunity to capitalise on the legal framework for collaborative art worksCrefovi : 26/10/2022 12:25 pm : Art law, Articles, Copyright litigation, Employment, compensation & benefits, Intellectual property & IP litigation, Litigation & dispute resolution, News, Outsourcing, Webcasts & Podcasts
It’s the story of a baffling legal case, where neither of the parties come out on top, having lost either reputation, or money, or both, in the process. Daniel Druet lost an occasion to make a splash in the art world, because his statement of claims was extremely poorly drafted and badly structured. Emmanuel Perrotin and Maurizio Cattelan came out as a bunch of amateurs, no more than unsophisticated stakeholders of the contemporary art business, from this legal saga. Here is how it could have boosted the ego and pockets, of Mr Druet, and adorned the respective blasons of Mr Perrotin and Mr Cattelan.
As explained in our two previous articles relating to Brexit, ‟How to protect your creative business after Brexit?” and ‟Brexit legal implications: the road less travelled”, the European Union (‟EU”) regulations and conventions on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, ceased to apply in the United Kingdom (‟UK”) once it no longer was a EU member-state. Therefore, since 1 January 2021 (the ‟Transition date”), no clear legal system is in place, to enforce civil and commercial judgments after Brexit, in a EU member-state, or in the UK. Creative businesses now have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This introduces additional procedural steps before a foreign judgment is recognised, which makes the enforcement of EU civil and commercial judgments in the UK, and of UK civil and commercial judgments in the EU, more time-consuming, complex and expensive.
1. How things worked before Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK
a. The EU legal framework
Before the Transition date on which the UK ceased to be a EU member-state, there were, and there still are between the 27 remaining EU member-states, four main regimes that are applicable to civil and commercial judgments obtained from EU member-states, depending on when, and where, the relevant proceedings were started.
Each regime applies to civil and commercial matters, and therefore excludes matters relating to revenue, customs and administrative law. There are also separate EU regimes applicable to matrimonial relationships, wills, successions, bankruptcy and social security.
The most recent enforcement regime applicable to civil and commercial judgments is EU regulation n. 1215/2012 of the European parliament and of the council dated 12 December 2012 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Recast Brussels regulation”). It applies to EU member-states’ judgments handed down in proceedings started on or after 10 January 2015.
The original Council regulation n. 44/2001 dated 22 December 2000 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Original Brussels regulation”), although no longer in force upon the implementation of the Recast Brussels regulation on 9 January 2015, still applies to EU member-states’ judgments handed down in proceedings started before 10 January 2015.
Moreover, the Brussels convention dated 27 September 1968 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Brussels convention”), also continues to apply in relation to civil and commercial judgments between the 15 pre-2004 EU member-states and certain territories of EU member-states which are located outside the EU, such as Aruba, Caribbean Netherlands, Curacao, the French overseas territories and Mayotte. Before the Transition date, the Brussels convention also applied to judgments handed down in Gibraltar, a British overseas territory.
Finally, the Lugano convention dated 16 September 1988 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Lugano convention”), which was replaced on 21 December 2007 by the Lugano convention dated 30 October 2007 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟2007 Lugano convention”), govern the recognition and enforcement of civil and commercial judgments between the EU and certain member-states of the European Free Trade Association (‟EFTA”), namely Iceland, Switzerland, Norway and Denmark but not Liechtenstein, which never signed the Lugano convention.
The 2007 Lugano convention was intended to replace both the Lugano convention and the Brussels convention. As such it was open to signature to both EFTA members-states and to EU member-states on behalf of their extra-EU territories. While the former purpose was achieved in 2010 with the ratification of the 2007 Lugano convention by all EFTA member-states (except Liechtenstein, as explained above), no EU member-state has yet acceded to the 2007 Lugano convention on behalf of its extra-EU territories.
The UK has applied to join the 2007 Lugano convention after the Transition date, as we will explain in more details in section 2 below.
b. Enforceability of remedies ordered by a EU court
Before Brexit, the Recast Brussels regulation, the Original Brussels regulation, the Brussels convention, the Lugano convention and the 2007 Lugano convention (together, the ‟EU instruments”) provided, and still provide with respect to the 27 remaining EU member-states, for the enforcement of any judgment in a civil or commercial matter given by a court of tribunal of a EU member-state, whatever it is called by the original court. For example, article 2(a) of the Recast Brussels regulation provides for the enforcement of any ‟decree, order, decision or writ of execution, as well as a decision on the determination of costs or expenses by an officer of the court”.
The Original Brussels regulation also extends to interim, provisional or protective relief (including injunctions), when ordered by a court which has jurisdiction by virtue of this regulation.
c. Competent courts
Before the Transition date, proceedings seeking recognition and enforcement of EU foreign judgments in the UK should be brought before the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland.
Article 32 of the Brussels convention provides that the proceedings seeking recognition and enforcement of EU foreign judgments in France should be brought before the president of the ‟tribunal judiciaire”. Therefore, before the Transition date, a UK judgment had to be brought before such president, in order to be recognised and enforced in France.
d. Separation of recognition and enforcement
Before the Transition date, and for judgments that fell within the EU instruments other than the Recast Brussels regulation, the process for obtaining recognition of a EU judgment was set out in detail in Part 74 of the UK civil procedure rules (‟CPR”). The process involved applying to a high court master with the support of written evidence. The application should include, among other things, a verified or certified copy of the EU judgment and a certified translation (if necessary). The judgment debtor then had an opportunity to oppose appeal registration on certain limited grounds. Assuming the judgment debtor did not successfully oppose appeal registration, the judgment creditor could then take steps to enforce the judgment.
Before the Transition date, and for judgments that fell within the Recast Brussels regulation, the position was different. Under article 36 of the Recast Brussels regulation, judgments from EU member-states are automatically recognised as if they were a judgment of a court in the state in which the judgment is being enforced; no special procedure is required for the judgment to be recognised. Therefore, prior to Brexit, all EU judgments that fell within the Recast Brussels regulation were automatically recognised as if they were UK judgments, by the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland. Similarly, all UK judgments that fell within the Recast Brussels regulation were automatically recognised as if they were French judgments, by the presidents of the French ‟tribunal judiciaires”.
Under the EU instruments, any judgment handed down by a court or tribunal from a EU member-state can be recognised. There is no requirement that the judgment must be final and conclusive, and both monetary and non-monetary judgments are eligible to be recognised. Therefore, neither the UK courts, nor the French courts, are entitled to investigate the jurisdiction of the originating EU court. Such foreign judgments shall be recognised without any special procedures, subject to the grounds for non-recognition set out in article 45 of the Recast Brussels regulation, article 34 of the Original Brussels regulation and article 34 of the Lugano convention, as discussed in paragraph e. (Defences) below.
For the EU judgment to be enforced in the UK, prior to the Transition date, and pursuant to article 42 of the Recast Brussels regulation and Part 74.4A of the CPR, the applicant had to provide the documents set out in above-mentioned article 42 to the UK court, i.e.
- a copy of the judgment which satisfies the conditions necessary to establish its authenticity;
- the certificate issued pursuant to article 53 of the Recast Brussels regulation, certifying that the above-mentioned judgment is enforceable and containing an extract of the judgment as well as, where appropriate, relevant information on the recoverable costs of the proceedings and the calculation of interest, and
- if required by the court, a translation of the certificate and judgment.
It was incumbent on the party resisting enforcement to apply for refusal of recognition of the EU judgment, pursuant to article 45 of the Recast Brussels regulation.
Similarly, for UK judgments to be enforced in France, prior to the Transition date, the applicant had to provide the documents set out in above-mentioned article 42 to the French court, which would trigger the automatic enforcement of the UK judgment, in compliance with the principle of direct enforcement.
While a UK defendant may have raised merits-based defences to liability or to the scope of the award entered in the EU jurisdiction, the EU instruments contain express prohibitions on the review of the merits of a judgment from another EU member-state. Consequently, while a judgment debtor may have objected to the registration of a judgment under the EU instruments (or, in the case of the Recast Brussels regulation, which does not require such registration, appeal the recognition or enforcement of the foreign judgment), he or she could have done so only on strictly limited grounds.
In the case of the Recast Brussels regulation, there are set out in above-mentioned article 45 and include:
- if recognition of the judgment would be manifestly contrary to public policy;
- if the judgment debtor was not served with proceedings in time to enable the preparation of a proper defence, or
- if conflicting judgments exist in the UK or other EU member-states.
Equivalent defences are set out in articles 34 to 35 of the Original Brussels regulation and the 2007 Lugano convention, respectively. The court may not have refused a declaration of enforceability on any other grounds.
Another ground for challenging the recognition and enforcement of EU judgments is the breach of article 6 of the European Convention on Human Rights (‟ECHR”), which is the right to a fair trial. However, since a fundamental objective underlying the EU regime is to facilitate the free movement of judgments by providing a simple and rapid procedure, and since it was established in Maronier v Larmer  QB 620 that this objective would be frustrated if EU courts of an enforcing EU member-state could be required to carry out a detailed review of whether the procedures that resulted in the judgment had complied with article 6 of the ECHR, there is a strong presumption that the EU court procedures of other signatories of the ECHR are compliant with article 6. Nonetheless, the presumption can be rebutted, in which case it would be contrary to public policy to enforce the judgment.
To conclude, pre-Brexit, the EU regime (and, predominantly, the Recast Brussels regulation) was an integral part of the system of recognition and enforcement of judgments in the UK. However, after the Transition date, the UK left the EU regime as found in the Recast Brussels regulation, the Original Brussels regulation and the Brussels convention, since these instruments are only available to EU member-states.
So what happens now?
2. How things work after Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK
In an attempt to prepare the inevitable, the EU commission published on 27 August 2020 a revised notice setting out its views on how various conflicts of laws issues will be determined post-Brexit, including jurisdiction and the enforcement of judgments (the ‟EU notice”), while the UK ministry of justice published on 30 September 2020 ‟Cross-border civil and commercial legal cases: guidance for legal professionals from 1 January 2021” (the ‟MoJ guidance”).
a. The UK accessing the 2007 Lugano convention
As mentioned above, the UK applied to join the 2007 Lugano convention on 8 April 2020, as this is the UK’s preferred regime for governing questions of jurisdiction and enforcement of judgments with the 27 remaining EU member-states, after the Transition date.
However, accessing the 2007 Lugano convention is a four-step process and the UK has not executed those four stages in full yet.
While step one was accomplished on 8 April 2020 when the UK applied to join, step two requires the EU (along with the other contracting parties, ie the EFTA member-states Iceland, Switzerland, Norway and Denmark) to approve the UK’s application to join, followed in step three by the UK depositing the instrument of accession. Step four is a three-month period, during which the EU (or any other contracting state) may object, in which case the 2007 Lugano convention will not enter into force between the UK and that party. Only after that three-month period has expired, does the 2007 Lugano convention enter into force in the UK.
Therefore, in order for the 2007 Lugano convention to have entered into force by the Transition date, the UK had to have received the EU’s approval and deposited its instrument of accession by 1 October 2020. Neither have occured.
Since the EU’s negotiating position, throughout Brexit, has always been ‟nothing is agreed until everything is agreed”, and in light of the recent collision course between the EU and the UK relating to trade in Northern Ireland, it is unlikely that the UK’s request to join the 2007 Lugano convention will be approved by the EU any time soon.
b. The UK accessing the Hague convention
Without the 2007 Lugano convention, the default position after the Transition date is that jurisdiction and enforcement of judgments for new cases issued in the UK will be determined by the domestic law of each UK jurisdiction (i.e. the common law of England and Wales, the common law of Scotland and the common law of Northern Ireland), supplemented by the Hague convention dated 30 June 2005 on choice of court agreements (‟The Hague convention”).
I. At common law rules
The common law relating to recognition and enforcement of judgments applies where the jurisdiction from which the judgment relates does not have an applicable treaty in place with the UK, or in the absence of any applicable UK statute. Prominent examples include judgments of the courts of the United States, China, Russia and Brazil. And now of the EU and its 27 remaining EU member-states.
At common law, a foreign judgment is not directly enforceable in the UK, but instead will be treated as if it creates a contract debt between the parties. The foreign judgment must be final and conclusive, as well as for a specific monetary sum, and on the merits of the action. The creditor will then need to bring an action in the relevant UK jurisdiction for a simple debt, to obtain judicial recognition in accordance with Part 7 CPR, and an English judgment.
Once the judgment creditor has obtained an English judgment in respect of the foreign judgment, that English judgment will be enforceable in the same way as any other judgment of a court in England.
However, courts in the UK will not give judgment on such a debt, where the original court lacked jurisdiction according to the relevant UK conflict of law rules, if it was obtained by fraud, or is contrary to public policy or the requirements of natural justice.
With such blurry and vague contours to the UK common law rules, no wonder that many lawyers and legal academics, on both sides of the Channel, decry the ‟mess” and ‟legal void” left by Brexit, as far as the enforcement and recognition of civil and commercial judgments in the UK are concerned.
II. The Hague convention
As mentioned above, from the Transition date onwards, the jurisdiction and enforcement of judgments for new cases issued in England and Wales will be determined by its common law, supplemented by the Hague convention.
The Hague convention gives effect to exclusive choice of court clauses, and provides for judgments given by courts that are designated by such clauses to be recognised and enforced in other contracting states. The contracting states include the EU, Singapore, Mexico and Montenegro. The USA, China and Ukraine have signed the Hague convention but not ratified or acceded to it, and it therefore does not currently apply in those countries.
Prior to the Transition date, the UK was a contracting party to the Hague convention because it continued to benefit from the EU’s status as a contracting party. The EU acceded on 1 October 2015. By re-depositing the instrument of accession on 28 September 2020, the UK acceded in its own right to the Hague convention on 1 January 2021, thereby ensuring that the Hague convention would continue to apply seamlessly from 1 January 2021.
As far as types of enforceable orders are concerned, under the Hague convention, the convention applies to final decisions on the merits, but not interim, provisional or protective relief (article 7). Under article 8(3) of the Hague convention, if a foreign judgment is enforceable in the country of origin, it may be enforced in England. However, article 8(3) of the Hague convention allows an English court to postpone or refuse recognition if the foreign judgment is subject to appeal in the country of origin.
However, there are two major contentious issues with regards to the material and temporal scope of the Hague convention, and the EU’s and UK’s positions differ on those issues. They are likely to provoke litigation in the near future.
The first area of contention relates to the material scope of the Hague convention: more specifically, what is an ‟exclusive choice of court agreement”?
Article 1 of the Hague convention provides that the convention only applies to exclusive choice of courts agreements, so the issue of whether a choice of court agreement is ‟exclusive” or not is critical as to whether such convention applies.
Exclusive choice of court agreements are defined in article 3(a) of the Hague convention as those that designate ‟for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting state or one or more specific courts of one Contracting state, to the exclusion of the jurisdiction of any other courts”.
Non-exclusive choice of court agreements are defined in article 22(1) of the The Hague convention as choice of court agreements which designate ‟a court or courts of one or more Contracting states”.
Although this is a fairly clear distinction for ‟simple” choice of court agreements, ‟asymmetric” or ‟unilateral” agreements are not so easily categorised. These types of jurisdiction agreements are a common feature of English law-governed finance documents, such as the Loan Market Association standard forms. They generally give one contracting party (the lender) the choice of a range of courts in which to sue, while limiting the other party (the borrower) to the courts of a single state (usually, the lender’s home state).
There are divergent views as to whether asymmetric choice of court agreements are exclusive or non-exclusive for the purposes of the Hague convention. While two English high court judges have expressed the view that choice of court agreements should be regarded as exclusive, within the scope of the Hague convention, the explanatory report accompanying the Hague convention, case law in EU member-states and academic commentary all suggest the opposite.
This issue will probably be resolved in court, if and when the time comes to decide whether asymmetric or unilateral agreements are deemed to be exclusive choice of court agreements, susceptible to fall within the remit of the Hague convention.
The second area of contention relates to the temporal scope of the Hague convention: more specifically, when did the Hague convention ‟enter into force” in the UK?
Pursuant to article 16 of the Hague convention, such convention only applies to exclusive choice of court agreements concluded ‟after its entry into force, for the State of the chosen court”.
There is a difference of opinion as to the application of the Hague convention to exclusive jurisdiction clauses in favour of UK courts entered into between 1 October 2015 and 1 January 2021, when the UK was a party to the Hague convention by virtue of its EU membership.
Indeed, while the EU notice states that the Hague convention will only apply between the EU and UK to exclusive choice of court agreements ‟concluded after the convention enters into force in the UK as a party in its own right to the convention” – i.e. from the Transition date; the MoJ guidance sets out that the Hague convention ‟will continue to apply to the UK (without interruption) from its original entry into force date of 1 October 2015”, which is when the EU became a signatory to the convention, at which time the convention also entered into force in the UK by virtue of the UK being a EU member-state.
To conclude, the new regime of enforcement and recognition of EU judgments in the UK, and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention, at best.
Therefore, and since these legal issues relating to how to enforce civil and commercial judgments after Brexit are here to stay for the medium term, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.
Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries”, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). Such convention is unaffected by Brexit and London, the UK capital, is one of the most popular and trusted arbitral seats in the world.
Until the dust settles, with respect to the recognition and enforcement of EU judgments in the UK, and vice versa, it is wise to resolve any civil or commercial dispute by way of arbitration, to obtain swift, time-effective and cost-effective resolution of matters, while preserving the cross-border relationships, established with your trade partners, between the UK and the European continent.
In the creative industries, the talent is often represented by middle men, who reach out to end customers, and find avenues whereby, and marketplaces on which, the products and/or services and skillset of the talent they represent are marketed, sold, distributed, licensed, etc. So, in the art world, these middle men are art galleries and auction houses. In the book publishing sector, these middle men are called literary agents, while in the film industry, those representing the above-the-line talent (actors, directors, writers) are called acting agents and agencies. Even music composers have their own composer agents, with a handful of players in this niche, in France and the United Kingdom (‟UK”). So, why do you need an agent, as a creative? How do you find an agent? How will your relationship with the agent work?
Cancel culture is upon us. This is what we are currently being told by British and French mass media, who have finally caught up with the content of the latest, and first non-fictional, book ever published by acclaimed, yet heavily criticised, American author Bret Easton Ellis, ‟White”. The polemic rages on both sides of the pond, ignited by more than 150 public figures signing a controversial letter denouncing cancel culture. So, what’s going on? What is ‟cancel culture”? Why should you pay attention to, and be cautious about it, as a creative professional? Is this even a thing in Europe and, in particular, in France and the United Kingdom? If so, how should you position yourself, as a creative, on, and about, cancel culture?
1. What is it? Where does it come from?
Following the 1990s’ culture wars, which sprung up in the United States of America as a way of denouncing and forbidding contemporary art exhibitions and other medium of creative expression judged by those instigating such culture wars as indecent and obscene, ‟cancel culture” has taken off in the early 2000s on social media, and has since become a cultural phenomenon in the USA and Canada – especially in the last five years or so – pervading every aspect of Northern America’s mass media.
‟Cancel culture” refers to the popular desire, and practice, of withdrawing support for (i.e. cancelling) public figures, communities or corporations, after they have done or said something considered objectionable or offensive. ‟Cancel culture” is generally performed on social media, in the form of group online shaming.
Therefore, as a result of something said or done, which triggered negative reactions and emotions such as anger, disgust, annoyance and hate from some members of the public, a natural person or legal entity or group of natural persons ends up being publicly shamed and humiliated, on internet, via social media platforms (such as Twitter, Facebook and Instagram) and/or more localised media (such as email groups). Online shaming takes many forms, including call-outs, cancellation or cancel culture, doxing, negative reviews, and revenge porn.
While the culture wars of the 1990s were driven by right-wing religious and conservative individuals in the US (triggered by ‟hot-button” defining issues such as abortion, gun politics, separation of church and state, privacy, recreational drug use, homosexuality), the cancel culture of our 21st century is actually a left-leaning supposedly ‟progressive” identity movement which has taken hold in recent years due to the conversations prompted by #MeToo and other movements that demand greater accountability from public figures. According to the website Merriam-Webster, ‟the term has been credited to black users of Twitter, where it has been used as a hashtag. As troubling information comes to light regarding celebrities who were once popular, such as Bill Cosby, Michael Jackson, Roseanne Barr and Louis C.K. – so come calls to cancel such figures”.
Yep. Check out your Twitter feed by typing in the search bar the hashtags #cancelled, #cancel or #cancel[then name of the individual, company, organisation you think might be cancelled], and you will be able to review the top current cancellation campaigns and movements launched against Netflix, British actress Millie Bobby Brown, twitter user @GoatPancakes_, etc.
So under the guise of defending laudable causes such as the recognition of the LGBTQ community and fighting against racism, sexism, sexual assault, homophobia, transphobia, etc., some communities of online ‟righteous” vigilante use violent methods, such as cancellation, in order to administer a virtual punishment to those who are on their radar.
This call-out and cancel culture is becoming so pervasive and effective that people lose their jobs over a tweet, some upsetting jokes or inappropriate remarks.
The Roseanne Barr’s story is the ultimate cancellation example, since her ABC show, ‟Roseanne”, was terminated with immediate effect, after Ms Barr posted a tweet about Valerie Jarrett, an African-American woman who was a senior advisor to Barack Obama throughout his presidency and considered one of his most influential aides. R. Barr wrote, in her litigious tweet, if the ‟muslim brotherhood & planet of the apes had a baby = vj”. Whilst Ms Barr’s remark was undoubtedly in extreme bad taste, it is fair to ask whether her tweet – which could have easily been deleted from Twitter to remove such kick well below the belt dealt to Ms Jarrett – justified wrecking Ms Barr’s long-lasting entertainment and broadcasting career in one instant, permanently and for eternity.
To conclude, social media channels have become the platforms of virtual trials, where justice (i.e. cancellation) is administered in an expeditious manner, with no possibility of dialogue, forgiveness and/or statute of limitation. This arbitrary mass justice movement is not only cruel, but tends to put everything under the same umbrella, indiscriminately: so a person who cracked a sexist joke on Twitter would become vilified and even ‟cancelled”, in the same manner than an individual effectively sentenced for sexual assault by an actual court of justice.
How did we get to this point? Why does a growing number of Northern Americans feel the uncontrollable need to call-out, cancel and violently pillory some of their public figures, corporations and communities?
A pertinent analysis, although skewed by a European perspective, is that made by French sociologist Nathalie Heinich in French newspaper Le Monde and explained on the podcast ‟Histoire d’Amériques”, dedicated to Bret Easton Ellis’ ‟White”.
According to Ms Heinich, there is no legal limitation to freedom of speech – a personal liberty which is enshrined in the first amendment to the US constitution, in the USA. As a consequence, the US congress cannot adopt laws which may limit or curb freedom of expression, as is set out in this first amendment. Therefore, according to N. Heinich, since the US authorities cannot forbid speech and freedom of expression, it is down to US citizens to take on the role of vigilante and organise spectacular information and public campaigns, in order to request the prohibition of such expression and such speech.
This analysis made by this French sociologist needs to be nuanced: whilst it is true that no US statute or law may curtail freedom of speech in the USA, there is consistent and ample body of case law and common law, which rule on the categories of speech that are given lesser or no protection by the first amendment of the Bill of rights. Those exceptions include:
- incitement (i.e. the advocacy of the use of force when it is directed to inciting or producing imminent lawless action, Brandenburg v Ohio (1969));
- incitement to suicide (in 2017, a juvenile court in Massachusetts, USA, ruled that repeatedly encouraging someone to complete suicide was not protected by the first amendment);
- false statement of fact and defamation (Gertz v Robert Welch, Inc. (1974));
- obscenity (Miller v California (1973) established the Miller test whereby speech is unprotected if ‟the average person, applying contemporary community standards, would find that the subject or work in question, taken as a whole, appeals to the prurient interest”, and ‟the work depicts or describes, in a patently offensive way, sexual conduct or excretory functions specifically defined by applicable state law”, and ‟the work, taken as a whole, lacks serious literary, artistic, political or scientific value”), and
- child pornography (New York v. Ferber (1982) which ruled that if speech or expression is classified under the child pornography exception at all, it becomes unprotected).
Therefore, there are some common law exceptions to the first amendment consecrating freedom of speech in the USA, but they are few and far between, and they need to be hotly, and expensively, debated in court, probably months or years after the triggering content was made available in the public space in the first instance, before being found, by a court, unprotected by freedom of speech, in favour of higher public policy interests.
As a result, many American and Canadian citizens resort to violent tactics, in order to request the immediate, swiftly-enforced and free of legal fees and court fees, prohibition of controversial art exhibitions, entertainment shows, movies, jokes, remarks, etc. first through the 1990s culture wars, and now through the 21st century’s cancel culture.
This is paradoxical since cancel culture and call-out culture are some of the tools used to advocate for worthy causes such as fighting against racism, sexism, sexual predation and aggression, promoting LGBTQ rights. However, the methods used, through cancel culture and online shaming, to achieve those laudable goals, are very violent and totalitarian, all taking place in the virtual realm of social media, but with very serious and long-lasting ‟real-life” consequences such as loss of employment, loss of reputation, self-harm and sometimes, suicide.
2. Can cancel culture enter through our European borders, in particular in France and the United Kingdom?
I hate to break it to you, but cancel culture is already upon us in France and the United Kingdom. We are in a globalised world, all of us are online and check the media and social media from all over the world, thanks to the internet. So this Northern American trend has, of course, reached our European shores.
It is worth noting that the recognition of ‟cancel culture”, and the realisation that is has become a sizable part of online culture, took place in the United Kingdom (‟UK”) at the beginning of the year 2020, when British television presenter and socialite Caroline Flack committed suicide allegedly because she was vilified on social media and by British tabloids, further to being sacked from British reality show ‟Love Island”. This UK epiphany about ‟cancel culture” arrived earlier than elsewhere in Europe, probably due to the shared language, and culture, that the British have with Americans and Canadians.
France is only now getting familiar with this new concept of ‟cancel culture”, further to hearing about the ‟letter on justice and open debate”, drafted, and signed, in July 2020, by more than 150 global intellectuals and authors (among whom Margaret Atwood, Wynton Marsalis, Noam Chomsky, J.K. Rowling and Salman Rushdie), and denouncing the excesses of online shaming and cancel culture. France is currently going through a phase of introspection, asking itself whether ‟la culture de l’annulation” could take off on its Gallic shores. And it is.
Proof is, I was interviewed for the 8.00pm TV News of France TV on Sunday 20 September 2020, to discuss the attempts made by no less than the new very controversial French minister of the interior, Gerald Darmanin – who was himself under criminal investigation for sexual coercion, harassment and misconduct in 2009, and then again between 2014 and 2017 – to eradicate from all SVoD services platforms such as YouTube, Spotify, Deezer, Dailymotion, the release of the first music album created by Franco-Senegalese 28 years’ old rapper, Freeze Corleone, ‟La Menace Fantôme” (‟LMF”). On which grounds is such cancellation requested? Provoking racial hatred and racial slander, no less.
Artist Freeze Corleone is an uncompromising rapper, abundantly peppering his raps with the French translations of ‟nigger” (‟négro”) and ‟bitches” (‟pétasses”) in the purest Northern American rap tradition (F. Corleone lived in Montreal, Canada, before settling down in Dakar, Senegal). He also obscurely refers to ‟Adolf”, ‟Goebbels”, ‟Ben Laden” and ‟Sion” in his rather enigmatic LMF lyrics. However, qualifying his body of work in LMF as racial slander and/or provoking racial hatred is a stretch. If you do not like it, because this content triggers you, just move on and don’t listen to it.
Freedom of speech is enshrined in the French declaration of rights of the human being and citizen, dated 1789. Article 11 of such declaration provides that the ‟free communication of thoughts and opinions is one of the most precious rights of the human being: any Citizen may therefore speak, write, print freely, except where he or she has to answer for the abuse of such freedom in specific cases provided by law”.
And such specific cases where freedom of speech may be curtailed, under French statutory law, include:
- Law dated 1881 on the freedom of the press which, while recognising freedom of speech in all publication formats, provides for four criminally-reprehensible exceptions, which are insults, defamation and slander, incentivising the perpetration of criminal offences, if it is followed by acts, as well as gross indecency;
- Law dated 1972 against opinions provoking racial hatred, which – like the four above-mentioned exceptions, is a criminal offense provided for in the French criminal code;
- Law dated 1990 against revisionist opinions, which is also a criminal offense in order to penalise those who contest the materiality and factuality of the atrocities committed by the Nazis on minorities, such as Jews, homosexuals and gypsies before and during world war two, and
- Law dated July 2019 against hateful content on internet, which provisions (requiring to remove all terrorist, pedopornographic, hateful and pornographic content from any website within 24 hours) were almost completely censored by the French constitutional council as a disproportionate infringement to freedom of speech, before entering into force in its expurgated finalised version later on in 2019.
Therefore, according to French sociologist Nathalie Heinich, France does not need ‟cancel culture” because freedom of speech is already strictly corseted by French statutory laws. By this, she means that French individuals won’t have to take to social media platforms, in order to ‟cancel” whoever is misbehaving, since the all-pervading French nanny state will strike the first blow to the ‟offender”, in the same manner than French minister of justice G. Darmanin unilaterally requested all cultural streaming and video platforms, from YouTube to Spotify and Deezer, as well as all French radio and TV channels, to immediately and permanently remove the songs of Freeze Corleone’s LMF, further to opening a criminal inquiry against the latter, for allegedly committing racial slander and/or provoking racial hatred through his lyrics.
Is this above-mentioned French regal method a better tool than having the populace publicly decrying and shaming an individual who ‟steps out of line”, by using ‟cancel culture”? By no means, because, at the end of the day, it’s our collective freedom of speech which is being breached and infringed, on a whim. And that is unacceptable, in a democracy.
On the other side of the channel, the legal framework around freedom of speech is no panacea either. Freedom of expression is usually ruled through common law, in the UK. However, in 1998, the UK transposed the provisions of the European Convention on human rights – which article 10 provides for the guarantee of freedom of expression – into domestic law, by way of its Human rights act 1998.
Not only is freedom of expression tightly delineated, in article 12 (Freedom of expression) of the Human rights act 1998, but there is a broad sweep of exceptions to it, under UK common and statutory law. In particular, the following common law and statutory offences, narrowly limit freedom of speech in the UK:
- threatening, abusive or insulting words or behaviour intending or likely to cause harassment, alarm or distress, or cause a breach of the peace (which has been used to prohibit racist speech targeted at individuals);
- sending any letter or article which is indecent or grossly offensive with an intent to cause distress or anxiety (which has been used to prohibit speech of a racist or anti-religious nature, as well as some posts on social networks), governed by the Malicious communications act 1988 and the Communications act 2003;
- incitement (i.e. the encouragement to another person to commit a crime);
- incitement to racial hatred;
- incitement to religious hatred;
- incitement to terrorism, including encouragement of terrorism and dissemination of terrorist publications;
- glorifying terrorism;
- collection or possession of a document or record containing information likely to be of use to a terrorist;
- treason including advocating for the abolition of the monarchy or compassing or imagining the death of the monarch;
- indecency including corruption of public morals and outraging public decency;
- defamation and loss of reputation, which legal framework is set out in the Defamation act 2013;
- restrictions on court reporting including names of victims and evidence and prejudicing or interfering with court proceedings;
- prohibition of post-trial interviews with jurors, and
In Europe, and in particular in France and the UK, there is already a tight leash on freedom of speech, whether at common law or statutory law. However, ‟cancel culture” is nonetheless permeating our European online shores, following the trend started in Northern America. As a result, it is a tough time to be a free and creative European citizen, let alone a public figure or corporation, in this 21st century Europe. Indeed, not only could you have trouble with the law, if you were to make triggering or contentious comments or jokes or lyrics in the public domain, but you could also be shot down in flames by the online community, on social media, for your speech and expression.
3. How to ride the storm of ‟cancel culture”, while remaining consistently creative and productive?
In the above-mentioned cultural and legal context, it is crucial for creative professionals to think long and hard before posting, broadcasting, speaking, and even behaving.
As a result, book publishers use the services of ‟sensitivity readers”, before releasing a new work, whereby such consultants read books to be published, in order to look for, and find out, any clichés, stereotypes, scenes, formulations that may offend a part of the readership. This use of sensitivity readers is becoming more and more systematic, especially when the author speaks about themes which he, or she, does not personally master.
For example, an heterosexual author who describes a gay character, or a white author who describes Mexicans, in his or her new book, will most definitely have a sensitivity consultant review his or her output before publication. Almost inevitably, such sensitivity reader will request that some changes be made to the written content, so as to avoid a boycott of the published book, or cancellation of the author and book, altogether.
Whilst some of the classics of global literature were perceived as very shocking when they were first released (think ‟Lolita” from Vladimir Nabokov about the obsession of a middle-aged literature professor with a 12 year’s old girl, which today would probably be described as a glorification of pedophilia), they would probably never see the light of day, if they were to be published in our era.
Therefore, today’s cultural sensitivities push towards the publication and broadcasting, of written, audio and visual creative content which is bland, right-thinking, watered-down, in which the author only refers to what he or she knows, in the most neutral way possible.
This need to use ‟auto-censorship” in any content a creator wishes to publish is compounded by the fact that today, consumers of creative content do not differentiate between the author of the work, and his or her creative output. There is no separation between the author and content creator, and his or her body of work and/or fictional characters. With Millenials and US universities becoming obsessed with identity questions (i.e. the identity or feeling of belonging to a group, such as the gay community, the black community, etc.), it is the person who writes the book, or song, or writes or directs a film, who is now also important, maybe even more important than the work itself.
As a result, any content creator who writes or sings or produces an audiovisual work about a community other than his or her own, may be accused of cultural appropriation (i.e. the adoption of an element or elements of one culture or identity by members of another culture or identity) and even become the object of victimhood culture (i.e. a term coined by sociologists Bradley Campbell and Jason Manning, in their 2018 book ‟The rise of victimhood culture: microaggressions, safe spaces and the new culture wars”, to describe the attitude whereby the victims publicize microaggressions to call attention to what they see as the deviant behaviour of the offenders, thereby calling attention to their own victimization, lowering the offender’s moral status and raising their own moral status).
In this climate, it is therefore easier to publish or broadcast creative content if you belong to a minority (by being, for example, homosexual, black, brown, or a female), while white heterosexual male creators have definitely become disadvantaged, and more susceptible to being targets of ‟cancel culture”.
To conclude, a lot of prior thoughts and research and preparation and planning need to be put into the creation, and then broadcasting and publication, of any creative content today, not only with respect to such output, but also in relation to the identity, and positioning, of his or her author. If this conscious effort of adhering to right-thinking and bland ideologies is appropriately and astutely done, you and your creative output may successfully ride the storm of, not only French and UK legal limitations to your freedom of expression, but also the nasty impact of cancel culture and online shaming, hence maximising your chances that your creative work generates a commercial success.
Why the valuation of intangible assets matters: the unstoppable rise of intangibles’ reporting in the 21st century’s corporate environmentCrefovi : 15/04/2020 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Restructuring, Sports & esports, Tax, Technology transactions, Trademark litigation, Unsolicited bids
It is high time France and the UK up their game in terms of accounting for, reporting and leveraging the intangible assets owned by their national businesses and companies, while Asia and the US currently lead the race, here. European lenders need to do their bit, too, to empower creative and innovative SMEs, and provide them with adequate financing to sustain their growth and ambitions, by way of intangible assets backed-lending.
Back in May 2004, I published an in-depth study on the financing of luxury brands, and how the business model developed by large luxury conglomerates was coming out on top. 16 years down the line, I can testify that everything I said in that 2004 study was in the money: the LVMH, Kering, Richemont and L’Oreal of this word dominate the luxury and fashion sectors today, with their multibrands’ business model which allows them to both make vast economies of scale and diversify their economic as well as financial risks.
However, in the midst of the COVID 19 pandemic which constrains us all to work from home through virtual tools such as videoconferencing, emails, chats and sms, I came to realise that I omitted a very important topic from that 2004 study, which is however acutely relevant in the context of developing, and growing, creative businesses in the 21st century. It is that intangible assets are becoming the most important and valuable assets of creative companies (including, of course, luxury and fashion houses).
Indeed, traditionally, tangible and fixed assets, such as land, plants, stock, inventory and receivables were used to assess the intrinsic value of a company, and, in particular, were used as security in loan transactions. Today, most successful businesses out there, in particular in the technology sector (Airbnb, Uber, Facebook) but not only, derive the largest portion of their worth from their intangible assets, such as intellectual property rights (trademarks, patents, designs, copyright), brands, knowhow, reputation, customer loyalty, a trained workforce, contracts, licensing rights, franchises.
Our economy has changed in fundamental ways, as business is now mainly ‟knowledge based”, rather than industrial, and ‟intangibles” are the new drivers of economic activity, the Financial Reporting Council (‟FRC”) set out in its paper ‟Business reporting of intangibles: realistic proposals”, back in February 2019.
However, while such intangibles are becoming the driving force of our businesses and economies worldwide, they are consistently ignored by chartered accountants, bankers and financiers alike. As a result, most companies – in particular, Small and Medium Enterprises (‟SMEs”)- cannot secure any financing with money men because their intangibles are still deemed to … well, in a nutshell … lack physical substance! This limits the scope of growth of many creative businesses; to their detriment of course, but also to the detriment of the UK and French economies in which SMEs account for an astounding 99 percent of private sector business, 59 percent of private sector employment and 48 percent of private sector turnover.
How could this oversight happen and materialise, in the last 20 years? Where did it all go wrong? Why do we need to very swiftly address this lack of visionary thinking, in terms of pragmatically adapting double-entry book keeping and accounting rules to the realities of companies operating in the 21st century?
How could such adjustments in, and updates to, our old ways of thinking about the worth of our businesses, be best implemented, in order to balance the need for realistic valuations of companies operating in the “knowledge economy” and the concern expressed by some stakeholders that intangible assets might peter out at the first reputation blow dealt to any business?
1. What is the valuation and reporting of intangible assets?
1.1. Recognition and measurement of intangible assets within accounting and reporting
In the European Union (‟EU”), there are two levels of accounting regulation:
- the international level, which corresponds to the International Accounting Standards (‟IAS”), and International Financial Reporting Standards (‟IFRS”) issued by the International Accounting Standards Board (‟IASB”), which apply compulsorily to the consolidated financial statements of listed companies and voluntarily to other accounts and entities according to the choices of each country legislator, and
- a national level, where the local regulations are driven by the EU accounting directives, which have been issued from 1978 onwards, and which apply to the remaining accounts and companies in each EU member-state.
The first international standard on recognition and measurement of intangible assets was International Accounting Standard 38 (‟IAS 38”), which was first issued in 1998. Even though it has been amended several times since, there has not been any significant change in its conservative approach to recognition and measurement of intangible assets.
An asset is a resource that is controlled by a company as a result of past events (for example a purchase or self-creation) and from which future economic benefits (such as inflows of cash or other assets) are expected to flow to this company. An intangible asset is defined by IAS 38 as an identifiable non-monetary asset without physical substance.
There is a specific reference to intellectual property rights (‟IPRs”), in the definition of ‟intangible assets” set out in paragraph 9 of IAS 38, as follows: ‟entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights”.
However, it is later clarified in IAS 38, that in order to recognise an intangible asset on the face of balance sheet, it must be identifiable and controlled, as well as generate future economic benefits flowing to the company that owns it.
The recognition criterion of ‟identifiability” is described in paragraph 12 of IAS 38 as follows.
‟An asset is identifiable if it either:
a. is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
b. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations”.
‟Control” is an essential feature in accounting and is described in paragraph 13 of IAS 38.
‟An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way”.
In order to have an intangible asset recognised as an asset on company balance sheet, such intangible has to satisfy also some specific accounting recognition criteria, which are set out in paragraph 21 of IAS 38.
‟An intangible asset shall be recognised if, and only if:
a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
b. the cost of the asset can be measured reliably”.
The recognition criteria illustrated above are deemed to be always satisfied when an intangible asset is acquired by a company from an external party at a price. Therefore, there are no particular problems to record an acquired intangible asset on the balance sheet of the acquiring company, at the consideration paid (i.e. historical cost).
1.2. Goodwill v. other intangible assets
Here, before we develop any further, we must draw a distinction between goodwill and other intangible assets, for clarification purposes.
Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process (= purchase price of the acquired company – (net fair market value of identifiable assets – net fair value of identifiable liabilities)).
The value of a company’s brand name, solid customer base, good customer relations, good employee relations, as well as proprietary technology, represent some examples of goodwill, in this context.
The value of goodwill arises in an acquisition, i.e. when an acquirer purchases a target company. Goodwill is then recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets’ account.
Under Generally Accepted Accounting Principles (‟GAAP”) and IFRS, these companies which acquired targets in the past and therefore recorded those targets’ goodwill on their balance sheet, are then required to evaluate the value of goodwill on their financial statements at least once a year, and record any impairments.
Impairment of an asset occurs when its market value drops below historical cost, due to adverse events such as declining cash flows, a reputation backlash, increased competitive environment, etc. Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. If the company’s acquired net assets fall below the book value, or if the company overstated the amount of goodwill, then it must impair or do a write-down on the value of the asset on the balance sheet, after it has assessed that the goodwill is impaired. The impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet.
This expense is also recognised as a loss on the income statement, which directly reduces net income for the year. In turn, earnings per share (‟EPS”) and the company’s stock price are also negatively affected.
The Financial Accounting Standards Board (‟FASB”), which sets standards for GAAP rules, and the IASB, which sets standards for IFRS rules, are considering a change to how goodwill impairment is calculated. Because of the subjectivity of goodwill impairment, and the cost of testing impairment, FASB and IASB are considering reverting to an older method called ‟goodwill amortisation” in which the value of goodwill is slowly reduced annually over a number of years.
As set out above, goodwill is not the same as other intangible assets because it is a premium paid over fair value during a transaction, and cannot be bought or sold independently. Meanwhile, other intangible assets can be bought and sold independently.
Also, goodwill has an indefinite life, while other intangibles have a definite useful life (i.e. an accounting estimate of the number of years an asset is likely to remain in service for the purpose of cost-effective revenue generation).
1.3. Amortisation, impairment and subsequent measure of intangible assets other than goodwill
That distinction between goodwill and other intangible assets being clearly drawn, let’s get back to the issues revolving around recording intangible assets (other than goodwill) on the balance sheet of a company.
As set out above, if some intangible assets are acquired as a consequence of a business purchase or combination, the acquiring company recognises all these intangible assets, provided that they meet the definition of an intangible asset. This results in the recognition of intangibles – including brand names, IPRs, customer relationships – that would not have been recognised by the acquired company that developed them in the first place. Indeed, paragraph 34 of IAS 38 provides that ‟in accordance with this Standard and IFRS 3 (as revised in 2008), an acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognised by the acquiree before the business combination. This means that the acquirer recognises as an asset separately from goodwill an in-process research and development project of the acquiree, if the project meets the definition of an intangible asset. An acquiree’s in-process research and development project meets the definition of an intangible asset when it:
a. meets the definition of an asset, and
b. is identifiable, i.e. separable or arises from contractual or other legal rights.”
Therefore, in a business acquisition or combination, the intangible assets that are ‟identifiable” (either separable or arising from legal rights) can be recognised and capitalised in the balance sheet of the acquiring company.
After initial recognition, the accounting value in the balance sheet of intangible assets with definite useful lives (e.g. IPRs, licenses) has to be amortised over the intangible asset’s expected useful life, and is subject to impairment tests when needed. As explained above, intangible assets with indefinite useful lives (such as goodwill or brands) will not be amortised, but only subject at least annually to an impairment test to verify whether the impairment indicators (‟triggers”) are met.
Alternatively, after initial recognition (at cost or at fair value in the case of business acquisitions or mergers), intangible assets with definite useful lives may be revalued at fair value less amortisation, provided there is an active market for the asset to be referred to, as can be inferred from paragraph 75 of IAS 38:
‟After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.”
However, this standard indicates that the revaluation model can only be used in rare situations, where there is an active market for these intangible assets.
1.4. The elephant in the room: a lack of recognition and measurement of internally generated intangible assets
All the above about the treatment of intangible assets other than goodwill cannot be said for internally generated intangible assets. Indeed, IAS 38 sets out important differences in the treatment of those internally generated intangibles, which is currently – and rightfully – the subject of much debate among regulators and other stakeholders.
Internally generated intangible assets are prevented from being recognised, from an accounting standpoint, as they are being developed (while a business would normally account for internally generated tangible assets). Therefore, a significant proportion of internally generated intangible assets is not recognised in the balance sheet of a company. As a consequence, stakeholders such as investors, regulators, shareholders, financiers, are not receiving some very relevant information about this enterprise, and its accurate worth.
Why such a standoffish attitude towards internally generated intangible assets? In practice, when the expenditure to develop intangible asset is incurred, it is often very unclear whether that expenditure is going to generate future economic benefits. It is this uncertainty that prevents many intangible assets from being recognised as they are being developed. This perceived lack of reliability of the linkage between expenditures and future benefits pushes towards the treatment of such expenditures as ‟period cost”. It is not until much later, when the uncertainty is resolved (e.g. granting of a patent), that an intangible asset may be capable of recognition. As current accounting requirements primarily focus on transactions, an event such as the resolution of uncertainty surrounding an internally developed IPR is generally not captured in company financial statements.
Let’s take the example of research and development costs (‟R&D”), which is one process of internally creating certain types of intangible assets, to illustrate the accounting treatment of intangible assets created in this way.
Among accounting standard setters, such as IASB with its IAS 38, the most frequent practice is to require the immediate expensing of all R&D. However, France, Italy and Australia are examples of countries where national accounting rule makers allow the capitalisation of R&D, subject to conditions being satisfied.
Therefore, in some circumstances, internally generated intangible assets can be recognised when the relevant set of recognition criteria is met, in particular the existence of a clear linkage of the expenditure to future benefits accruing to the company. This is called condition-based capitalisation. In these cases, the cost that a company has incurred in that financial year, can be capitalised as an asset; the previous costs having already been expensed in earlier income statements. For example, when a patent is finally granted by the relevant intellectual property office, only the expenses incurred during that financial year can be capitalised and disclosed on the face of balance sheet among intangible fixed assets.
To conclude, under the current IFRS and GAAP regimes, internally generated intangible assets, such as IPRs, can only be recognised on balance sheet in very rare instances.
2.Why value and report intangible assets?
As developed in depth by the European Commission (‟EC”) in its 2013 final report from the expert group on intellectual property valuation, the UK intellectual property office (‟UKIPO”) in its 2013 ‟Banking on IP?” report and the FRC in its 2019 discussion paper ‟Business reporting of intangibles: realistic proposals”, the time for radical change to the accounting of intangible assets has come upon us.
2.1. Improving the accurateness and reliability of financial communication
Existing accounting standards should be advanced, updated and modernised to take greater account of intangible assets and consequently improve the relevance, objectivity and reliability of financial statements.
Not only that, but informing stakeholders (i.e. management, employees, shareholders, regulators, financiers, investors) appropriately and reliably is paramount today, in a corporate world where companies are expected to accurately, regularly and expertly manage and broadcast their financial communication to medias and regulators.
As highlighted by Janice Denoncourt in her blog post ‟intellectual property, finance and corporate governance”, no stakeholder wants an iteration of the Theranos’ fiasco, during which inventor and managing director Elizabeth Holmes was indicted for fraud in excess of USD700 million, by the United States Securities and Exchange Commission (‟SEC”), for having repeatedly, yet inaccurately, said that Theranos’ patented blood testing technology was both revolutionary and at the last stages of its development. Elizabeth Holmes made those assertions on the basis of the more than 270 patents that her and her team filed with the United States patent and trademark office (‟USPTO”), while making some material omissions and misleading disclosures to the SEC, via Theranos’ financial statements, on the lame justification that ‟Theranos needed to protect its intellectual property” (sic).
Indeed, the stakes of financial communication are so high, in particular for the branding and reputation of any ‟knowledge economy” company, that, back in 2002, LVMH did not hesitate to sue Morgan Stanley, the investment bank advising its nemesis, Kering (at the time, named ‟PPR”), in order to obtain 100 million Euros of damages resulting from Morgan Stanley’s alleged breach of conflicts of interests between its investment banking arm (which advised PPR’s top-selling brand, Gucci) and Morgan Stanley’s financial research division. According to LVMH, Clare Kent, Morgan Stanley’s luxury sector-focused analyst, systematically drafted and then published negative and biased research against LVMH share and financial results, in order to favor Gucci, the top-selling brand of the PPR luxury conglomerate and Morgan Stanley’s top client. While this lawsuit – the first of its kind in relation to alleged biased conduct in a bank’s financial analysis – looked far-fetched when it was lodged in 2002, LVMH actually won, both in first instance and on appeal.
Having more streamlined and accurate accounting, reporting and valuation of intangible assets – which are, today, the main and most valuable assets of any 21st century corporation – is therefore paramount for efficient and reliable financial communication.
2.2. Improving and diversifying access to finance
Not only that, but recognising the worth and inherent value of intangible assets, on balance sheet, would greatly improve the chances of any company – in particular, SMEs – to successfully apply for financing.
Debt finance is notoriously famous for shying away from using intangible assets as main collateral against lending because it is too risky.
For example, taking appropriate security controls over a company’s registered IPRs in a lending scenario would involve taking a fixed charge, and recording it properly on the Companies Registry at Companies House (in the UK) and on the appropriate IPRs’ registers. However, this hardly ever happens. Typically, at best, lenders are reliant on a floating charge over IPRs, which will crystallise in case of an event of default being triggered – by which time, important IPRs may have disappeared into thin air, or been disposed of; hence limiting the lender’s recovery prospects.
Alternatively, it is now possible for a lender to take an assignment of an IPR by way of security (generally with a licence back to the assignor to permit his or her continued use of the IPR) by an assignment in writing signed by the assignor. However, this is rarely done in practice. The reason is to avoid ‟maintenance”, i.e. to prevent the multiplicity of actions. Indeed, because intangibles are incapable of being possessed, and rights over them are therefore ultimately enforced by action, it has been considered that the ability to assign such rights would increase the number of actions.
Whilst there are improvements needed to the practicalities and easiness of registering a security interest over intangible assets, the basic step that is missing is a clear inventory of IPRs and other intangible assets, on balance sheet and/or on yearly financial statements, without which lenders can never be certain that these assets are in fact to hand.
Cases of intangible asset- backed lending (‟IABL”) have occurred, whereby a bank provided a loan to a pension fund against tangible assets, and the pension fund then provided a sale and leaseback arrangement against intangible assets. Therefore, IABL from pension funds (on a sale and leaseback arrangement), rather than banks, provides a route for SMEs to obtain loans.
There have also been instances where specialist lenders have entered into sale and licence-back agreements, or sale and leaseback agreements, secured against intangible assets, including trademarks and software copyright.
Some other types of funders than lenders, however, are already making the ‟intangible assets” link, such as equity investors (business angels, venture capital companies and private equity funds). They know that IPRs and other intangibles represent part of the ‟skin in the game” for SMEs owners and managers, who have often expended significant time and money in their creation, development and protection. Therefore, when equity investors assess the quality and attractiveness of investment opportunities, they invariably include consideration of the underlying intangible assets, and IPRs in particular. They want to understand the extent to which intangible assets owned by one of the companies they are potentially interested investing in, represent a barrier to entry, create freedom to operate and meet a real market need.
Accordingly, many private equity funds, in particular, have delved into investing in luxury companies, attracted by their high gross margins and net profit rates, as I explained in my 2013 article ‟Financing luxury companies: the quest of the Holy Grail (not!)”. Today, some of the most active venture capital firms investing in the European creative industries are Accel, Advent Venture Partners, Index Ventures, Experienced Capital, to name a few.
2.3. Adopting a systematic, consistent and streamlined approach to the valuation of intangible assets, which levels the playing field
If intangible assets are to be recognised in financial statements, in order to adopt a systematic and streamlined approach to their valuation, then fair value is the most obvious alternative to cost, as explained in paragraph 1.3. above.
How could we use fair value more widely, in order to capitalise intangible assets in financial statements?
IFRS 13 ‟Fair Value Measurements” identifies three widely-used valuation techniques: the market approach, the cost approach and the income approach.
The market approach ‟uses prices and other relevant information generated by market transactions involving identical or comparable” assets. However, this approach is difficult in practice, since when transactions in intangibles occur, the prices are rarely made public. Publicly traded data usually represents a market capitalisation of the enterprise, not singular intangible assets. Market data from market participants is often used in income based models such as determining reasonable royalty rates and discount rates. Direct market evidence is usually available in the valuation of internet domain names, carbon emission rights and national licences (for radio stations, for example). Other relevant market data include sale/licence transactional data, price multiples and royalty rates.
The cost approach ‟reflects the amount that would be required currently to replace the service capacity of an asset”. Deriving fair value under this approach therefore requires estimating the costs of developing an equivalent intangible asset. In practice, it is often difficult to estimate in advance the costs of developing an intangible. In most cases, replacement cost new is the most direct and meaningful cost based means of estimating the value of an intangible asset. Once replacement cost new is estimated, various forms of obsolescence must be considered, such as functional, technological and economic. Cost based models are best used for valuing an assembled workforce, engineering drawings or designs and internally developed software where no direct cash flow is generated.
The income approach essentially converts future cash flows (or income and expenses) to a single, discounted present value, usually as a result of increased turnover of cost savings. Income based models are best used when the intangible asset is income producing or when it allows an asset to generate cash flow. The calculation may be similar to that of value in use. However, to arrive at fair value, the future income must be estimated from the perspective of market participants rather than that of the entity. Therefore, applying the income approach requires an insight into how market participants would assess the benefits (cash flows) that will be obtained uniquely from an intangible asset (where such cash flows are different from the cash flows related to the whole company). Income based methods are usually employed to value customer related intangibles, trade names, patents, technology, copyrights, and covenants not to compete.
An example of IPRs’ valuation by way of fair value, using the cost and income approaches in particular, is given in the excellent presentation by Austin Jacobs, made during ialci’s latest law of luxury goods and fashion seminar on intellectual property rights in the fashion and luxury sectors.
In order to make these three above-mentioned valuation techniques more effective, with regards to intangible assets, and because many intangibles will not be recognised in financial statements as they fail to meet the definition of an asset or the recognition criteria, a reconsideration to the ‟Conceptual Framework to Financial Reporting” needs being implemented by the IASB.
These amendments to the Conceptual Framework would permit more intangibles to be recognised within financial statements, in a systematic, consistent, uniform and streamlined manner, therefore levelling the playing field among companies from the knowledge economy.
Let’s not forget that one of the reasons WeWork co founder, Adam Neumann, was violently criticised, during WeWork’s failed IPO attempt, and then finally ousted, in 2019, was the fact that he was paid nearly USD6 million for granting the right to use his registered word trademark ‟We”, to his own company WeWork. In its IPO filing prospectus, which provided the first in-depth look at WeWork’s financial results, WeWork characterised the nearly USD6 million payment as ‟fair market value”. Many analysts, among which Scott Galloway, begged to differ, outraged by the lack of rigour and realism in the valuation of the WeWork brand, and the clearly opportunistic attitude adopted by Adam Neumann to get even richer, faster.
2.4. Creating a liquid, established and free secondary market of intangible assets
IAS 38 currently permits intangible assets to be recognised at fair value, as discussed above in paragraphs 1.3. and 2.3., measured by reference to an active market.
While acknowledging that such markets may exist for assets such as ‟freely transferable taxi licences, fishing licences or production quotas”, IAS 38 states that ‟it is uncommon for an active market to exist for an intangible asset”. It is even set out, in paragraph 78 of IAS 38 that ‟an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique”.
Markets for resale of intangible assets and IPRs do exist, but are presently less formalised and offer less certainty on realisable values. There is no firmly established secondary transaction market for intangible assets (even though some assets are being sold out of insolvency) where value can be realised. In addition, in the case of forced liquidation, intangible assets’ value can be eroded, as highlighted in paragraph 2.2. above.
Therefore, markets for intangible assets are currently imperfect, in particular because there is an absence of mature marketplaces in which intangible assets may be sold in the event of default, insolvency or liquidation. There is not yet the same tradition of disposal, or the same volume of transaction data, as that which has historically existed with tangible fixed assets.
Be that as it may, the rise of liquid secondary markets of intangible assets is unstoppable. In the last 15 years, the USA have been at the forefront of IPRs auctions, mainly with patent auctions managed by specialist auctioneers such as ICAP Ocean Tomo and Racebrook. For example, in 2006, ICAP Ocean Tomo sold 78 patent lots at auction for USD8.5 million, while 6,000 patents were sold at auction by Canadian company Nortel Networks for USD4.5 billion in 2011.
However, auctions are not limited to patents, as demonstrated by the New York auction, successfully organised by ICAP Ocean Tomo in 2006, on lots composed of patents, trademarks, copyrights, musical rights and domain names, where the sellers were IBM, Motorola, Siemens AG, Kimberly Clark, etc. In 2010, Racebrook auctioned 150 American famous brands from the retail and consumer goods’ sectors.
In Europe, in 2012, Vogica successfully sold its trademarks and domain names at auction to competitor Parisot Group, upon its liquidation.
In addition, global licensing activity leaves not doubt that intangible assets, in particular IPRs, are, in fact, very valuable, highly tradable and a very portable asset class.
It is high time to remove all market’s imperfections, make trading more transparent and offer options to the demand side, to get properly tested.
3. Next steps to improve the valuation and reporting of intangible assets
3.1. Adjust IAS 38 and the Conceptual Framework to Financial Reporting to the realities of intangible assets’ reporting
Mainstream lenders, as well as other stakeholders, need cost-effective, standardised approaches in order to capture and process information on intangibles and IPRs (which is not currently being presented by SMEs).
This can be achieved by reforming IAS 38 and the ‟Conceptual Framework to Financial Reporting”, at the earliest convenience, in order to make most intangible assets capitalised on financial statements at realistic and consistent valuations.
In particular, the reintroduction of amortisation of goodwill may be a pragmatic way to reduce the impact of different accounting treatment for acquired and internally generated intangibles.
In addition, narrative reporting (i.e. reports with titles such as ‟Management Commentary” or ‟Strategic Report”, which generally form part of the annual report, and other financial communication documents such as ‟Preliminary Earnings Announcements” that a company provides primarily for the information of investors) must set out detailed information on unrecognised intangibles, as well as amplify what is reported within the financial statements.
3.2. Use standardised and consistent metrics within financial statements and other financial communication documents
The usefulness and credibility of narrative information would be greatly enhanced by the inclusion of metrics (i.e. numerical measures that are relevant to an assessment of the company’s intangibles) standardised by industry. The following are examples of objective and verifiable metrics that may be disclosed through narrative reporting:
- a company that identifies customer loyalty as critical to the success of its business model might disclose measures of customer satisfaction, such as the percentage of customers that make repeat purchases;
- if the ability to innovate is a key competitive advantage, the proportion of sales from new products may be a relevant metric;
- where the skill of employees is a key driver of value, employee turnover may be disclosed, together with information about their training.
3.3. Make companies’ boards accountable for intangibles’ reporting
Within a company, at least one appropriately qualified person should be appointed and publicly reported as having oversight and responsibility for intangibles’ auditing, valuation, due diligence and reporting (for example a director, specialist advisory board or an external professional adviser).
This would enhance the importance of corporate governance and board oversight, in addition to reporting, with respect to intangible assets.
In particular, some impairment tests could be introduced, to ensure that businesses are well informed and motivated to adopt appropriate intangibles’ management practices, which should be overseen by the above-mentioned appointed board member.
3.4. Create a body that trains about, and regulates, the field of intangible assets’ valuation and reporting
The creation of a professional organisation for the intangible assets’ valuation profession would increase transparency of intangibles’ valuations and trust towards valuation professionals (i.e. lawyers, IP attorneys, accountants, economists, etc).
This valuation professional organisation would set some key objectives that will protect the public interest in all matters that pertain to the profession, establish professional standards (especially standards of professional conduct) and represent professional valuers.
This organisation would, in addition, offer training and education on intangibles’ valuations. Therefore, the creation of informative material and the development of intangible assets’ training programmes would be a priority, and would guarantee the high quality valuation of IPRs and other intangibles as a way of boosting confidence for the field.
Company board members who are going to be appointed as having accountability and responsibility for intangibles’ valuation within the business, as mentioned above in paragraph 3.3., could greatly benefit from regular training sessions offered by this future valuation professional organisation, in particular for continuing professional development purposes.
3.5. Create a powerful register of expert intangible assets’ valuers
In order to build trust, the creation of a register of expert intangibles’ valuers, whose ability must first be certified by passing relevant knowledge tests, is key.
Inclusion on this list would involve having to pass certain aptitudes tests and, to remain on it, valuers would have to maintain a standard of quality in the valuations carried out, whereby the body that manages this registry would be authorised to expel members whose reports are not up to standard. This is essential in order to maintain confidence in the quality and skill of the valuers included on the register.
The entity that manages this body of valuers would have the power to review the valuations conducted by the valuers certified by this institution as a ‟second instance”. The body would need to have the power to re-examine the assessments made by these valuers (inspection programme), and even eliminate them if it is considered that the assessment is overtly incorrect (fair disciplinary mechanism).
3.6. Establish an intangible assets’ marketplace and data-source
The development most likely to transform IPRs and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded.
In particular, as IPRs and intangible assets become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the cooperation of official registries and the establishment of administrative protocols.
Indeed, the credibility of intangibles’ valuations would be greatly enhanced by improving valuation information, especially by collecting information and data on actual and real intangibles’ transactions in a suitable form, so that it can be used, for example, to support IPRs asset-based lending decisions. If this information is made available, lenders and expert valuers will be able to base their estimates on more widely accepted and verified assumptions, and consequently, their valuation results – and valuation reports – would gain greater acceptance and reliability from the market at large.
The wide accessibility of complete, quality information which is based on real negotiations and transactions, via this open data-source, would help to boost confidence in the validity and accuracy of valuations, which will have a very positive effect on transactions involving IPRs and other intangibles.
3.7. Introduce a risk sharing loan guarantee scheme for banks to facilitate intangibles’ secured lending
A dedicated loan guarantee scheme needs being introduced, to facilitate intangible assets’ secured lending to innovative and creative SMEs.
Asia is currently setting the pace in intangibles-backed lending. In 2014, the intellectual property office of Singapore (‟IPOS”) launched a USD100 million ‟IP financing scheme” designed to support local SMEs to use their granted IPRs as collateral for bank loans. A panel of IPOS-appointed valuers assess the applicant’s IPR portfolio using standard guidelines to provide lenders with a basis on which to determine the amount of funds to be advanced. The development of a national valuation model is a noteworthy aspect of the scheme and could lead to an accepted valuation methodology in the future.
The Chinese intellectual property office (‟CIPO”) has developed some patent-backed debt finance initiatives. Only 6 years after the ‟IP pledge financing” programme was launched by CIPO in 2008, CIPO reported that Chinese companies had secured over GBP6 billion in IPRs-backed loans since the programme launched. The Chinese government having way more direct control and input into commercial bank lending policy and capital adequacy requirements, it can vigorously and potently implement its strategic goal of increasing IPRs-backed lending.
It is high time Europe follows suit, at least by putting in place some loan guarantees that would increase lender’s confidence in making investments by sharing the risks related to the investment. A guarantor assumes a debt obligation if the borrower defaults. Most loan guarantee schemes are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers. Loan guarantee schemes level the playing field.
The proposed risk sharing loan guarantee scheme set up by the European Commission or by a national government fund (in particular in the UK, who is brexiting) would be specifically targeted at commercial banks in order to stimulate intangibles-secured lending to innovative SMEs. The guarantor would fully guarantee the intangibles-secured loan and share the risk of lending to SMEs (which have suitable IPRs and intangibles) with the commercial bank.
The professional valuer serves an important purpose, in this future loan guarantee scheme, since he or she will fill the knowledge gap relating to the IPRs and intangibles, as well as their value, in the bank’s loan procedure. If required, the expert intangibles’ valuer provides intangibles’ valuation expertise and technology transfer to the bank, until such bank has built the relevant capacity to perform intangible assets’ valuations. Such valuations would be performed, either by valuers and/or banks, according to agreed, consistent, homogenised and accepted methods/standards and a standardised intangible asset’s valuation methodology.
To conclude, in this era of ultra-competitiveness and hyper-globalisation, France and the UK, and Europe in general, must immediately jump on the saddle of progress, by reforming outdated and obsolete accounting and reporting standards, as well as by implementing all the above-mentioned new measures and strategies, to realistically and consistently value, report and leverage intangible assets in the 21st century economy.
 ‟Lingard’s bank security documents”, Timothy N. Parsons, 4th edition, LexisNexis, page 450 and seq.
 ‟Taking security – law and practice”, Richard Calnan, Jordans, page 74 and seq.
How to defend yourself in case the artwork bought at auction does not match its pre-sale description?Crefovi : 28/10/2019 3:06 pm : Art law, Articles, Consumer goods & retail, Law of luxury goods, Litigation & dispute resolution, Product liability
While collecting art works is becoming an increasingly popular & sexy hobby for affluent individuals, the financial & legal risks involved in such activities are very high, especially when such art pieces are bought at auction. Indeed, it is in the interest of auction houses to depict a rosy & partial portrait of any artwork on sale, which often does not reflect the exact provenance and/or condition of such work of art. How can a collector prevent such partial disclosures and inaccurate embellishments relating to the condition or provenance of a coveted artwork on sale, at auction?
1. A real risk
Our art law firm Crefovi currently advises several individuals – all art collectors – who have fallen into the following trap: they all based themselves on the (proven, later, to be incorrect) information provided by the auction house responsible for the sale of an artwork, to enthusiastically and successfully bid at auction for such work of art. When, or shortly after, they went to collect the artwork, deception ensued, as they found out that they had been the subject of deceit, as far as the condition and/or provenance of the artwork were concerned. Therefore, the artwork you bought at auction does not match its pre-sale description.
For example, one of our clients is a keen collector of Chinese antics who resides in the United Kingdom, on his Chinese passport and work visa. In an auction sale organised by the French auction house Tajan, he mostly relied on the condition report provided by such auctioneer, which set out that the Chinese vase was in ‟good aged-related condition (and had) normal age-related traces of wear”, to successfully bid for that lot. When he came to Tajan’s offices in Paris to view this Chinese vase for which he was now the successful bidder, further to obtaining a travel visa to France, he was floored to discover that this vase was not as described in the condition report. The state of the vase is, indeed, poor, since it is damaged by several marks and traces of wear and tear, in many places; there is a large crack at the base of such vase, which means that no water stays in the vase because it escapes from that crack; several enamel parts are missing; certains parts, such as the panels on the inferior part of the vase and the enamels on the neck of the vase, seem to have been added after the manufacturing stage of the vase, etc.
Another example is the successful bid made by another client of our firm, for a painting ‟attributed to Alighiero e Boetti” as per the catalogue and website of the auction house Bellmans. While our client took the time to view and inspect the painting prior to its auction at Bellmans’ Sussex Room, he was in great turmoil when he was turned down by the Archivio Alighiero Boetti (a cultural association based in Rome, founded by the heirs of the artist Alighiero Boetti, in order to authenticate works of art which are alleged to have been made by Alighiero Boetti) to which he had asked for a certificate of authenticity for that art work. Indeed, when he spoke to Matteo Boetti, son of Alighiero Boetti and president of Archivio Alighiero Boetti, he was told that this painting had already been unsuccessfully submitted to the authentication committee three times before, in order to obtain a certificate of authenticity! Archivio Alighiero Boetti declined to provide such certificate of authenticity to the previous owners of the artwork because, according to Matteo Boetti, it was a fake, a forgery, a counterfeit, and therefore not of the hand of Alighiero Boetti.
This risk of falling prey to the deceit of auction houses (and of their anonymous sellers of such flawed artworks) is definitely not mitigated by the terms and conditions of sale of such auction houses. Indeed, these T&Cs are riddled with liability waivers, such as this one extracted from Bellmans’ T&Cs: ‟Please note that Lots (in particular second-hand Lots) are unlikely to be in perfect condition. Lots are sold ‟as is” (i.e. as you see them at the time of the auction). Neither we nor the Seller accept any liability for the condition of second-hand Lots or for any condition issues affecting a Lot if such issues are included in the description of a Lot in the auction catalogue (or in any saleroom notice) and/ or which the inspection of a Lot by the Buyer ought to have revealed” or these gems set out in Tajan’s T&Cs: ‟If no information on restoration, an accident, retouching or any other incident is provided in the catalogue, the condition reports or labels or during a verbal announcement, this does not mean that the item is void of defects. The condition of the frames is not guaranteed” and ‟Buyers may obtain a condition report on items included in the catalogue that are estimated at more than €1 000 upon request. Information contained in such reports is provided free of charge and solely to serve as an indication. It shall by no means incur the liability of Tajan”. Of course it is very likely that such liability waivers, which remove any liability from the shoulders of a deceitful auctioneer, are unlawful. But it will take a protracted, expensive and painful lawsuit to demonstrate that such liability waivers are in severe breach of English or French contractual law. Which art collector has the time or appetite for that?
2. To pay or not to pay the hammer price?
In the two above-mentioned examples, our clients faced several scenarios: our fervent Chinese art collector refused to pay for the price of the Chinese vase, immediately rescinding his successful bid by way of a formal email to Tajan, sent on the same day that he discovered that the Chinese vase was not as per the description made of it in the condition report and Tajan’s catalogue. However, our Italian modern art enthusiast client dutifully paid the price of GBP25,912 by credit card to Bellmans, on the day of his successful bid for the painting ‟attributed to Alighiero e Boetti” (sic).
While not settling the price and not collecting the deceitful lot was the right move to make, for the Chinese art collector who immediately spotted the fraud upon close inspection of the Chinese vase post-auction, it opened the way to court litigation since Tajan and its anonymous seller contested, of course, that their condition report and catalogue had hidden the truth about the poor condition of such lot. Indeed, further to an unsuccessful attempt to mediate this dispute with the (rather useless) ‟commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), Tajan lodged a lawsuit against our client with the Paris Tribunal de grande instance in early 2017 which is still ongoing, to this day.
Meanwhile, our UK-based collector also did the right thing, by settling the hammer price and buyer’s premium including VAT, and by collecting the painting ‟attributed to Alighiero e Boetti” since he was still convinced that this was a genuine painting made by the hand of Alighiero Boetti; until he was proved otherwise by the authentication committee of Archivio Alighiero Boetti, a few weeks later.
To conclude on this point, the logical rule is that, as soon as you discover the deceit or forgery, you should let the auction house know that you rescind the successful bid by way of a formal communication with them; be it before you have paid the hammer price and buyer’s premium, or after. Ideally, you want to make such formal disclosure of the deceit or counterfeit to the auction house as soon as possible, since most auctioneers set out, in their T&Cs, that they will not consider claims of forgery by the successful bidder, if these claims are made after a short period following the successful bid. Here is, for example, Bellmans’ liability waiver on this topic: ‟You may return any Lot which is found to be a Deliberate Forgery to us within 21 days of the auction provided that you return the Lot to us in the same condition as when it was released to you, accompanied by a written statement identifying the Lot from the relevant catalogue description and a written statement of defects”.
3. Preemptive measures to avoid being the unhappy successful bidder of a deceitful lot
Buyers of art works have no mandatory obligations to conduct any due diligence, under French or English law or case law.
However, the principle of caveat emptor (i.e. ‟buyer beware”, in Latin) applies, by which the onus is on the buyer to investigate the property or object he is acquiring. Since such burden of due diligence rests with buyers, they typically search the stolen art database of the Art Loss Register and conduct enquiries on ownership, authenticity, condition, provenance and lawful export of art. Due diligence depends on the type of asset, its value, and the information volunteered by the seller.
As a rule of thumb, any buyer should, at the minimum, conduct the following searches:
- attend the auction’s location in person and inspect the coveted art work before taking part into a bid for it;
- research the coveted art work on price databases, such as ArtNet, in order to find some historical data about past sales of such art work;
- research lost or stolen art databases, such as the Art Loss Register and Interpol, since such databases include data about art works which authenticity is challenged, and therefore report authenticity issues. The database of the Art Loss Register is not publicly available but it can be searched on request. Some data on the Interpol database can be searched by members of the public, and
- if in existence, read the ‟catalogue raisonné” of the artist who the artwork is attributed to, in order to assess whether such artwork has been indeed recognised by the field as being of the hand of such artist.
If you, buyer, conduct such above-mentioned searches and due diligence steps, and provided that you are a consumer (and not acting as a professional, such as an art dealer or trader), the courts would probably find that you have complied with the principle of caveat emptor (buyer beware).
4. What are your options, after the successful bid and unhappy discovery that the artwork is unlike its description set out in the auctioneer’s documents?
As set out above in paragraph 2. above, you should send an official letter to the auction house, denouncing the forgery and/or poor condition (or any other undisclosed defect) of the art work, very soon after you have discovered it, rescinding the successful bid and requesting to return the disputed lot to the auctioneer, against the full refund of the hammer price, the buyer’s premium including VAT, any other costs associated with the bid (such as transport costs) and the costs relating to the authentication and/or inspection of the artwork.
While it is unlikely that the auction house, recipient of such formal letter of complaint, will accept to cover the authentication and/or inspection costs, any auctioneer who wants to keep his reputation intact would accept to take back the litigious lot and refund the rests of the requested costs; especially if you sent your official communication as close as possible to the date of the successful bid, and if you have gathered much strong evidence that the artwork is indisputably a forgery or not at all like it was described in the condition report and/or the catalogue.
If the French auction house and you, unhappy bidder, cannot see eye to eye, you can lodge a formal complaint and request for mediation with the ‟commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), bearing in mind, though, that the ‟Conseil des ventes volontaires de meubles aux enchères” may come across as biased, since it is not in its best interest to annoy its members, the French auction houses.
In the UK, there is no regulatory body in charge of watching and regulating UK auction houses. However, most UK auction houses belong to trade federations, such as the Society of Fine Art Auctioneers and Valuers, which have issued some guidance notes for good practice and often have complaint handling schemes in place, and even mediation services, when one of their members is the subject of a dispute with one of its buyers. Indeed, the strategy of ‟naming and shaming” is particularly effective in the UK, much less so in France where French auction houses act as if they were in contempt of any regulations or complaints handling schemes that may limit their ability to waive their liability vis-a-vis their buyers.
If the dispute between the auction house and the buyer escalates into a fully-fledged lawsuit, your defense, as a buyer, should be based around proving that the work of art was deceitfully sold at auction, because of gross misrepresentation and negligence committed by the auctioneer and, accessorily, the seller. As much evidence of the forgery, counterfeit and/or poor condition, as possible, should be provided to the court, even by way of requesting an expertise of the deceitful artwork, executed by an art expert, under supervision of the court.
Meanwhile, you, as a buyer and defendant in the lawsuit, should request and attempt mediation all the way, during the lawsuit, in order to demonstrate that you are ready to compromise and find a constructive, time-efficient and cost-effective resolution to this dispute. The other side, however, may not agree to such alternative dispute resolution, out of cheer stupidity or because their legal fees may not be covered by their legal insurance policy, should a mediation or any other alternative dispute resolution process be put in place between the parties.
To conclude, you really want to avoid finding yourself in the situation of an unhappy successful bidder who discovers, post-auction, that he has overpaid for an artwork which is not at all what it seemed, or was presented to be, by the auctioneer and its anonymous seller. Our guidelines, above, should save you from that headache and situation. However, if that is not the case, don’t worry and call us, since we are here, at Crefovi, to service you to find a solution to your bad auction experience and deceitful transaction, in the most cost-efficient and time-efficient way.
There is much room for improvement in securing art sales and transactions, and arbitration can do a lot to make this change happen. What is the state of play? What improvements do art buyers want to see in the future, to adequately resolve art disputes?
There is much room for improvement in securing art sales and transactions, and mediation can do a lot to make this change happen. What is the state of play? What improvements do art buyers want to see in the future, to adequately resolve art disputes?
Annabelle Gauberti featured in documentary ‟The man who stole Banksy”, which première will take place at the Tribeca Film FestivalCrefovi : 01/04/2018 8:00 am : Art law, Copyright litigation, Entertainment & media, Events, Gaming, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Media coverage, Webcasts & Podcasts
Annabelle Gauberti, founding partner of Crefovi and street art law specialist, is featured in the upcoming documentary, written, directed and produced by Crefovi client Marco Proserpio, ‟The man who stole Banksy”. Go watch this documentary at the Tribeca film festival in New York!
Taxation of acquisition & sale of artworks: auctions & private sales. Annabelle Gauberti, founding and managing partner of Crefovi, devises on this complex aspect of art tax law, in the Revue fiscale du patrimoine.
1. General overview
1.1. Key elements
In order to study in details taxation of acquisition & sale of artworks, we need to clarify how these transactions take place, under French law. Indeed, the acquisition and sale of artworks, 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 artwork 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 artworks raise many questions under tax law, and have moreover a wide tax effect, notably in terms of value added tax (‟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 artworks.
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, and
- French intellectual property code (‟IPC”), 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”, and
- 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), and
- 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”, and
- JCl. Propriété littéraire et artistique, Booklet 1262: ‟Droits des auteurs. – Droits patrimoniaux. Droit de suite” (art. L. 122-8 IPC).
- Annabelle Gauberti, ‟Fiscalité des œuvres d’art: une arme à double tranchant”: RFP 2013, study 13, and
- 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 artworks, antiques and cultural assets, but also and especially in relation to the tax consequences of such transaction. It is therefore the role of the counsel to advise the client on taxation of acquisition & sale of artworks.
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 artwork?
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 artwork? 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 artwork?
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 artwork(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.
184.108.40.206. 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 percent, 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 percent.
220.127.116.11. 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 artworks, 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, and
- 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 artworks, 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 percent on the beneficiary margin.
The same article provides that the intra-community acquisitions of artworks, 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 percent 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 artworks, collecting items or antiques are subject to the standard VAT rate of 20 percent on the beneficiary margin.
Of course, intra-community acquisitions of artworks which are delivered with no beneficiary margin are exempt from VAT.
18.104.22.168. 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 artwork may become subject to the French wealth tax (‟impôt sur la fortune”), following such purchase.
To date, and despite many aborted bills leaning in this direction, artworks are not included in the basis of the wealth tax. Article 885 I of the French tax code provides that antiques, artworks or collecting items are not included in the basis of the wealth tax.
Therefore, a recent buyer of an artwork, tax resident in France, does not have to disclose such work of art or the sums of money used to pay for such artwork, 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 IPC, 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 percent to 4 percent of the sale price of an artwork (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 percent up to 50,000 Euros;
- 3 percent between 50,000.01 and 200,000 Euros;
- 1 percent between 200,000.01 and 350,000 Euros;
- 0,5 percent between 350,000.01 and 500,000 Euros, and
- 0,25 percent 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 IPC.
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 artworks 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 percent (inclusive of social security deductions) with a 5 percent 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 artworks and collecting items are subject to a flat-rate tax.
This flat-rate tax is 6 percent 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 artwork. 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 artworks or collecting items are exempted from capital gain tax when the sale price of the artwork is not above 5,000 Euros or when the seller of a work of art 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 percent, with a first ladder of 15 percent 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 percent 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 percent.
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 artworks 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 percent 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, and
- the legal entity exhibits in a location accessible to the public or its employees, but not in its offices, the acquired artwork 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 percent 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 percent 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. Regime of taxation of acquisition & sale of artworks
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 percent 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 percent. 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 EU 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 percent 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 percent (including social security payments) with a 5 percent 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 artwork to its earnings. The first ladder, up to the cap of 38,120 Euros, will be subject to 15 percent tax for legal entities having a turnover below 7,630,000 Euros. Above 38,120 Euros, the tax rate of 33.33 percent 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 percent 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 artworks, 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 percent on the beneficiary margin.
If a beneficiary margin is realised, and that the intra-community acquisition of artworks, 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 percent.
All other intra-community acquisitions of artworks, collecting items and antiques during which a beneficiary margin is realised, will be taxed at the standard VAT rate of 20 percent on the beneficiary margin.
Article R. 122-2 of the IPC provides that the sale, in any case, triggers the payment of artist resale right pursuant to article L. 122-8 of the IPC 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 artwork. 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
Within the scope of taxation of acquisition & sale of artworks, VAT is paid during the occurrence of the sale of the artwork, 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 IPC 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 IPC 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
22.214.171.124. French tax resident subject to income tax
The seller of an artwork, 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.
126.96.36.199. French tax resident subject to corporation tax
The seller of an artwork, 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.
188.8.131.52. 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 artworks 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.
Checklist in relation to taxation of acquisition & sale of artworks
- 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, and
- 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.