Issue #263  10/26/2023
  • Issue #263
  • Article
EU Changes to VAT System Could Bring Down Art and Photography Business in France, but Possible, But Only Partial, Reprieve Looks to Be in the Works

By Michael Diemar

Martijn van Pieterson, AIPAD's new president, notes "This clearly has a significant impact on the art market inside and outside of Europe. Due to the increased import duties, anything imported from outside of the EU will become even more expensive, impacting the bottom line of US and other non-EU galleries.
Martijn van Pieterson, AIPAD's new president, notes "This clearly has a significant impact on the art market inside and outside of Europe. Due to the increased import duties, anything imported from outside of the EU will become even more expensive, impacting the bottom line of US and other non-EU galleries.

It slipped by with barely anyone noticing it. On April 5, 2022, the EU commission adopted a new directive, Council Directive (EU) 2022/542, to go into effect in 2025, its purpose, to erase special VAT schemes and to harmonize VAT in order to reduce competition between the 27 member states. This would of course have serious repercussions for the EU art market, especially in France, which currently has the lowest import tax on works of art in the EU, 5.5%. And not only that. The directive also did away with the margin scheme, used by most players in the French art market, where VAT is applied to the profit margin, not the wholesale price.

The low tax rates have made it possible for France to increase its share of the global art market from 3% in 2001 to 7% in 2021, giving rise to the moniker The French Art Market Renaissance, with leading international galleries, such as Hauser & Wirth and David Zwirner, opening galleries in Paris.

Until Brexit, the UK had the lowest rate 5% on imported art works in the EU. After Brexit, with all its complications, it seemed pretty much a done deal that Paris, not London, would be the undisputed capital of the European art market.

That "done deal" could now unravel. It took almost a year for the French media to take notice of the new EU directive, and it only did so on February 22nd, when the French financial daily Les Echos published an article by Martine Robert. As the article made clear, not only was the VAT on works of art now in danger of nearly quadrupling in France, the directive would also do away with the margin scheme, where the tax only applies to the profit.

Martine Robert's article was quickly picked up by the leading French newspapers, as well as international media. In an article published in The Art Newspaper, gallerist Thaddaeus Ropac stated that the dramatically rising costs would be fatal for the country's art market. The French dealer Emmanuel Perrotin made his feelings known on Instagram, asking, "Should we really let the French art market be killed in silence?" Because as far as the French art market was concerned, the directive had been passed in silence, with leading players complaining that there had been no consultation with industry professionals, and that no impact study had been produced.

And the worry quickly spread. On March 1st, the French newspaper Le Monde published an op-ed, signed by around 120 French artists, decrying the directive and its ramifications for their livelihoods, among them: Orlan, Daniel Buren, Fabrice Hyber and Ugo Rondinone. In it, they stated, "Some will no doubt be surprised to see artists take up the pen on the occasion of such a measure. It is because this directive, if it is transcribed into French law, is a threat to the French artistic scene."

The letter continued, "It is indeed an entire ecosystem that is in danger, in which the institutions, the market and we, the artists, participate. For what? In a globalized system where our works are sold at the same price in Paris, Brussels, London, Hong Kong or New York, the multiplication of this VAT by four would discourage any purchase of works in France, and thereby their presence in Europe and France." Then adding, "Culture needs to circulate, to be shared in order to shine in France, in Europe and in the world. At a time when all the great powers are implementing powerful strategies of cultural soft power, how is it that Europe and our country, the one that invented cultural exception, are giving up their wealth?"

And as for that ecosystem, it has players other than buyers and sellers, fair promoters for instance. A near quadrupling of the VAT would most likely also lead to drastically higher bonding fees for fair promoters, costs which would be passed on to the exhibitors, many of whom would find the cost prohibitive, especially with lower sales due to much higher costs after applying the VAT. Which begs the question, would those big fairs then even be viable in France or the EU? And the auction houses in France would also suffer with little to no consignments or purchases of art/photography from outside the EU. This situation does not look to change under any potential alterations proposed.

The French trade organization Comité Professionel des Galeries d'Art (CPGA) had started its lobbying activities already in September 2022. A few days prior to the op-ed in Le Monde, CPGA sent out a press release, explaining that it was lobbying the French government for an exception from the VAT change and "alerting the Ministry of Culture to obtain an exception for works of art from Bercy (the French Ministry of Finance) or for France to negotiate a moratorium at European level." Adding that the directive would inordinately benefit France's direct art market competitors, the United States, Switzerland, Hong Kong and the UK.

But the news wasn't received with complete dismay everywhere. While players in France were up in arms about the new directive, in other countries, players in the art sector saw an opportunity and started lobbying their own governments to reduce value-added tax for art. While the directive aims to even out the rates on imports of art, it does give the 27 member states the ability to set their own internal rates, but no lower than 5% of the retail price.

In Germany, which has just 2% of the global market share, dealers and galleries, and the trade organization Bundesverband Deutscher Galerien, have long been frustrated by what they perceive is an uneven playing field. Up until 2014, a reduced sales tax of 7% was applied to works of art, but it fell foul of the European Commission, as art was excluded in the specified goods and services in the 2006 EU directive. It forced the German government to increase the value-added tax rate on works of art to 19%, the only exception being artists themselves, who could continue to apply the 7% rate. Bundesverband Deutscher Galerien is now actively lobbying for a reduction of the rate for dealers and galleries to 7%.

VAT rates on art imports vary between EU member states. It's 5.5% in France, 7% in Germany, 6% in Belgium. In June, it was announced that the Italian Ministry of Culture had put forward a proposal to Ministry of Economy and Finance, to reduce VAT on art imports from 10% to 5.5%, aligning it with the French rate, though no decision has been made yet. (Editor's Note: These percentages have not been our experience. In fact the customs import duties into Germany and Italy have exceeded 20% for dealers outside the EU selling to clients in those countries. European Customs officials often do not follow guidelines, often charging more on incoming duties than supposedly allowed.)

In the 2006 EU directive, art was excluded from the products and services that were eligible for reduced rates of VAT. But in France, sales tax law applied. It has a 'cultural exception' meaning that artworks being imported or sold by an artist for the first time are taxed at the reduced rate of 5.5%, with full VAT of 20% applying only on the commercial margin when the works of art are resold. The new directive includes works of art, collectors' items and antiques as eligible items for increased rates of VAT.

To some, it seemed that the French government had sleepwalked into signing the new directive without realizing the consequences for the country's sector. And time will tell what exactly they are.

In early September, I spoke to Gaëlle de Saint-Pierre, Managing Director at Comité Professionnel des Galeries d'Art (CPGA), the organization that has been particularly vocal in this issue.

I started our conversation by saying that it had puzzled me, as it had many others, why the French government had signed the directive without any consultation whatsoever with the arts sector.

"It's a puzzle for us too! We had great difficulties in understanding why France took this position, especially as the European Council was presided over by a French minister, Bruno Le Maire. He later told us that it hadn't been possible for him at that time to negotiate each and every article in the directive, that France was in an isolated position, and that he therefore had no power to oppose.

"This directive is very hard on our market, it gives birth to a lot of difficulties, because if applied, we would have to completely change the national system in France to comply with the directive. Everything would have to be rethought, so we are trying to lobby the French Minister of Finance and also the a French Minister of Culture about the many different issues. The ministries asked us to produce a study of the impacts of different solutions of VAT changes on our market. It showed that when Brexit happened, there was big effect on sales of art in France.

"The directive would also have serious negative and disastrous consequences for employers and employees in the French art world, and this hasn't been discussed much in the media. We were able to show that raising the VAT from 5.5% to 20% will have a huge negative effect on the sales and the salaries in the arts sector. Because of the impact on taxes, on salaries, employers' taxes and social service credits. Dr. Clare McAndrew, a renowned economist and specialist on the art market, produces The Art Basel and UBS Global Art Market Report. It's available online and this year's report also has a chapter about the French art market." (It can be accessed here, https://www.theartmarket.artbasel.com)

What's the state of play now in terms of CPGA lobbying the French government?

"We are still waiting for confirmation of which solution will be decided upon. During these months, there is a political arbitrage, that is, political decision-making at the higher level, Prime Ministerial and Presidency level. We are hoping for the right solution for the cultural sector. As I said, we are lobbying the French Ministry of Finance and the Ministry of Culture, and they all agree with us that in relation to the art market, it would be wrong to raise the VAT to 20%. It would not only kill the French art market, but could kill the art market in the EU, with business being easily transferred to UK instead. It would be a real hit as 50% of all art sales in the EU are made in France. It shows that since Brexit, France has become 'the open window', the gateway to the EU for art sales, because of the 5.5% VAT rate. Raising it to 20% would be fatal.

"At this point in time, the governments in Germany, Belgium and Italy, are waiting for the French government to make a decision. They will probably make their own decisions afterwards, because the directive states that the member states have until the first of January 2025 to make their decisions."

But this is where it gets confusing. Bruno Le Maire signed the agreement on April 5, 2022 on behalf of the French government. Is there any way of going back on the 20% on imports of works of art?

"It's impossible to renegotiate the European directive retroactively. The decision has been taken by the member states and you cannot go backwards Inside the EU, decisions on tax are taken in unanimously."

The other part of the directive is that each member state can set their internal sales tax, with, in relation to art, more freedom than before. This has been welcomed in Germany where sales tax on art is 19%. And some countries feel that France has had an unfair advantage because of their low VAT rates. Has that sort of complicated the issue for you and your members or?

"Yes, because I think there are two visions that are completely opposed to each other.
The vision of the European Union is to erase the competition between the member states, to guarantee equality for consumers, to guarantee uniformity inside Europe. Opposing that, we have the situation where every member state is focused on its own art market and wants to support it. There is therefore a dichotomy between the EU and the individual nation states' visions."

Another important thing is that the directive will do away with the French margin scheme altogether. Is there no way of hanging on to the margin scheme?

"It's a bit complicated but that's the idea. The directive does away with the margin scheme but--and this is important--based on the text in the directive, we understand that the margin scheme can continue, as some of the text opposes various French laws. The margin scheme will remain but professionals in the art market won't be able to use it, or it won't have interests to use it, because the text in the directive forbids them to use it. So yes, it's complicated!"

The margin scheme is not that well understood in all quarters. Can you explain it?

"The majority of professionals in the French art market use the margin scheme, from the auction houses to the galleries but the condition is that they buy the artwork from the artist or from a collector and can apply a rate of 5.5%. The margin scheme uses a normal 20% rate, imposed on the margin, that is, it's calculated on 30% of the total price of the artwork. It means that we already have normal rates, but applied to a small part of the price, the commercial value-added part. At the end, the rate which is applied is 20%, on 30%, which makes a lower rate around 5.5 or 6%. Now if the rate is changed to 20% on the total price of an art work, it will be an increase of roughly four times the amount of VAT. Artists would have to sell their artworks at higher prices and so would galleries. To be competitive they would have to slash their profits. For most, this would simply not be economically feasible so it would be a catastrophe for the French art market: sales would simply not be made."

I assume the lobbying will intensify this autumn?

"Yes, but in a different way. Earlier in the year, our lobbying and awareness raising efforts were concentrated on the French ministries but now we have to increase and diversify and also include members of the French parliament. Because whatever is decided will be written into the French finance laws. The negotiations begin in the senate; they then continue and then return to the senate. We have to lobby and raise awareness, to make clear to them that this would have a real and direct impact on artists who have very low incomes. As do many others who work in the art market. We, of course, know the figures, but they're not easy to find and we need to put them in front of the decision makers."

What do you hope from that decision now? And are you hopeful?

"I really hope that a good decision be made for the artist and their ecosystem. Because the government does not have a lot of choice. The wrong solution is not solution at all for the French art market. Otherwise, business would disappear and be quickly transferred to other countries. They really need to keep it here. The art market and the culture in general attracts millions of people to Paris and France. It's part of city's culture as well as the rest of France. There is only one good solution. Still, we can see that members of Parliament's have started putting forward questions to ministries and government officials. They're very concerned and understand perfectly the issue concerning French culture and art. The other difficulty we have had is that there was a reshuffle in the government, and new members came to parliament at the end of September."

There was the letter that Le Monde published on March 1st, signed by some 120 artists. Have artists been more active since then, do you feel?

"Yes, they have; and for our part, we have mobilized other organizations in the art sector, artists organizations, antique dealers' organizations, auction houses and so forth. We are all very active together. But at this time, we are waiting for the political decision which will be finalized in December."

After my conversation with Gaëlle de Saint-Pierre, I contacted Martijn van Pieterson, AIPAD's new president. I started out by asking him about his views on the situation, the consequences of the new directive and the abolishment of the margin scheme.

"This clearly has a significant impact on the art market inside and outside of Europe. Due to the increased import duties, anything imported from outside of the EU will become more expensive, impacting the bottom line of US and other non-EU galleries. The abolishment of the margin scheme, which is used across Europe, not just in France, will mean that those galleries using the scheme will have to increase their rates. If artists also have to charge a higher VAT on their sales to galleries and collectors, this will also impact markets, such as the Netherlands, where galleries often sell on behalf of the artist and apply a lower rate."

You're based in Belgium. How will the new directive affect your own business, IBASHO Gallery?

"We also apply the margin scheme, and as the VAT on art in Belgium is 21%, this will impact us significantly. The fact that import duties have gone up is not really an issue for us, as these can be deducted again." (Editor's note: Increasing import duties further will clearly have a major impact on the overall art and photography markets on those outside the EU trying to sell to clients there. It has long been a matter of contention for non-EU dealers' clients to be charged as much as 22% more in customs duties/taxes, while EU dealers sell to clients in the U.S. market without being charged any customs duties at all.)

In various member states, organizations representing galleries, auction houses, antique dealers, etc. have joined forces to try to overturn the directive and to have a say in determining the VAT rate on internal rates. Do you see any signs of activity in the photography sector? Do you sense that the organizations are now working internationally as well?

"Given the political proximity and relationships on a national level, the national organizations of galleries, such as CPGA, are best positioned to effectively lobby. We are a Belgian gallery and are part of an organization called BUP, which is part of FEAGA (The Federation of European Art Galleries Association). They are keeping us abreast of their lobbying efforts."

AIPAD has many European members. In the past, AIPAD has not sought to join other art organizations in lobbying efforts. The new directive has serious implications for the photography market in the EU and even outside the EU. Will AIPAD join the lobbying activities? If so, what organizations is AIPAD joining forces with?

"AIPAD has reached out to Paris Photo and discussed ways on how to cooperate on this front. We are looking into how best to support the local gallery organizations in this lobbying."

On the 10th of August, you sent an email to the members of AIPAD, "I would love to hear if any of the (European) members know of any lobbying efforts with the EU or local governments to ensure the photography business is not as negatively impacted as the situation seems it might, or any ways AIPAD could involve itself to do its own lobbying". What was the response?

"There has not been much response, but this might have something to do with the fact that I sent that mail in the middle of the holidays. With your permission I would like to share this article with our membership to increase awareness."

Since my conversations with Gaëlle de Saint-Pierre and Martijn van Pieterson in early September, things have moved along. The hard choice for the French government is either the lower 5.5 percent tax on the price of imported artworks, primary sales and secondary sales; or maintain the 20 percent tax on profit margins for secondary sales, but extend it onto imported works, and primary sales as well, which would do away with the 'cultural exception'. On October 18th, Artnet News quoted Fabienne Colboc, a centrist National Assembly member, that the newly standardized 5.5% tax "will allow Paris to remain the most attractive European capital for the art market and will favor the effervescence of the French art scene."

Colboc spent months working to convince colleagues of the benefits of a lower tax, and was optimistic about how parliament would vote. Short of making predictions, she expressed hope that the amendment "will be adopted by a large majority."

In early October, France's minister of economics, Bruno Le Maire, told French journalists that the government stands firmly behind the proposal for a lower levy. "After several months of consultations, we have decided with [culture minister] Rima Abdul-Malak to opt for the only, truly viable option, which will allow France to remain at the center of the global art market," he said.

While it is likely that the proposal will pass, there is no guarantee and the French art world is anxiously waiting for a decision, which could take a week, two weeks or more. Art News quoted Gaëlle de Saint-Pierre, "There's a risk that the measure is misunderstood." She continued. "The art market suffers from the image that it's a luxury sector, only for the rich, which is not true. That's why we are showing how it also supports the livelihoods of some 30,000 artists, small galleries and businesses." This is especially true of the photography market with its usually much lower pricing.

But any current possible adjustments do not seem to fix the international problem with the EU. Raising the customs duties and taxes may prompt a new trade war, which may see similar high taxes and duties on EU art to other countries. And it doesn't resolve the issue for French art and photography fairs, who will lose most non-EU exhibitors over the matter. It will still have major impacts across the art world unless the EU parliament changes its mind--not a likely scenario.

Michael Diemar is a London-based collector and consultant. He is also editor-in-chief of The Classic, a new free magazine about classic photography. He is a long-time writer about the photography scene, writing extensively for several Scandinavian photography publications, as well as for the E-Photo Newsletter and I Photo Central.