Participation in the China art market is increasingly seen as a desirable and even necessary move for art industry players, both foreigners and PRC citizens alike. This article focuses on the means by which foreigners can set up businesses to operate in the art industry, and also touches upon a number of issues applicable to both foreign and local PRC investors alike.
While there are a number of ways to operate an art business in China, perhaps the most straightforward model, and the one that most resembles the way business is typically conducted outside of China, is to set up a company – a legal entity -- under PRC law that is qualified to engage in the art business. The basic corporate options are few:
- A wholly-foreign-owned enterprise (popularly referred to as a "WFOE")
- A joint venture with a local PRC co-venturer
- A partnership (a new and potentially exciting option)
Unlike many other industries in China, foreigners are permitted to own and operate art-related businesses without any governmentally-imposed restriction on the percentage of equity that can be owned by the foreign investor.
By way of background, the extent to which foreign investment is permitted in any sector in China is determined by reference to the State-issued Catalogue Guiding Foreign Investment in Industry, which divides industries into three broad categories. The first category is industries in which foreign investment is encouraged. This includes mostly manufacturing industries and also includes high-tech industries. The second category covers industries in which foreign investment is permitted but restricted, in some cases quite narrowly. This category, referred to as the “restricted” category, includes primarily service industries, and virtually all media, publishing, telecommunications, transportation, postal and financial businesses fall within this category. The third category lists industries in which foreign investment is prohibited completely. This category includes industries that are deemed to be of strategic importance to China’s national economy and/or national security.
The art industry does not fall into any of the three categories set forth in the Catalogue, which means that the PRC government places no restriction on the percentage of equity that can be owned by a foreign investor in a company in the art industry (nor does it particularly encourage such investment!). Accordingly, foreign investors can set up 100% wholly-owned companies, WFOEs, to operate in the art field, and can also own majority shares in joint ventures.
Setting up a WFOE
Establishing a WFOE in China is not terribly complex in most cases, but it does entail more than the simple registration of a company, and probably presents the first-time investor with a number of unique Chinese characteristics. Certain concepts, such as registered capital and total investment, may be completely new to a foreign investor, and certain procedures such as administrative pre-approval and tax incentive applications may also be unexpected.
A brief overview of the procedures for a foreign investor to establish a WFOE in Beijing is as follows:
- The foreign investor must prepare and submit a feasibility study report, a draft articles of association, a lease agreement for office or other commercial property space, and various other documents to the government agency in charge of foreign investment.
- The feasibility study report will include critical terms such as total investment amount and the even more critical registered capital amount
- The feasibility study report also must include a description of the scope of the business to be operated by the WFOE, which description can have far-reaching repercussions for everything from the name the WFOE is allowed to use to permissible future expansion of the business -- for instance, an art business which plans on importing and exporting art as part of its business operations must include that in the scope of business in order to be able to apply for the requisite import-export license after the WFOE has been set up
- The feasibility study report will include critical terms such as total investment amount and the even more critical registered capital amount
- The identity of “the government agency in charge of foreign investment” will depend on the scale of the investment, and may be the district-level, provincial level, or central-government level authority. Currently, WFOEs engaging in encouraged or permitted industries for which the total investment is less than US$30 million are approved at the municipal or lower level. This approval stage will take approximately one to two months at the local level.
- Within one month after the application to set up the WFOE has been approved, the foreign investor must register with the local bureau of the State Administration of Industry and Commerce (“SAIC”) to obtain a business license. (The timing of this registration is crucial: failure to obtain the business license within one month of MofCOM’s approval will result in the approval being invalidated.) The SAIC will typically issue the business license within 10 business days of the registration. The WFOE is deemed established on the date of issuance of the business license. The investor, on behalf of the now-existent WFOE, must complete various other registrations in connection with taxes, corporate seals, customs, foreign exchange, banking and statistics, within the first month following the issuance of the business license.
- Art galleries are additionally required to record their business license by filing an Art Enterprise Registration form with the local branch of the Ministry of Culture, usually referred to at the local level as the cultural administration agency, after obtaining the license.
Previous Legal Framework and the Resultant Actual Practices
Prior to 2004, establishing, owning and operating an enterprise in the art field was governed by the 1994 Measures for the Administration of the Art Business (the "Old Measures"). The Old Measure required pre-approval from the Ministry of Cultural (“MofCul”) or its branches at the provincial level for the establishment of any enterprise engaging in art-related businesses such as art shops, art galleries and auction houses. Matters ranging from minimum registered capital, to the number of professional staff, to the size of the operating premises were subject to strict regulation. The requirements differed for different types of enterprises. Such pre-approval requirements were applicable to both domestic and foreign-invested enterprises.
The director of the Cultural Markets Division of MofCul acknowledged during an interview in Culture Industry Weekly a few years ago following the implementation of the 2004 Measures, that, because most participants in the art market in China are relatively small and underfunded, the majority of commercial art enterprises were unable to satisfy the demanding criteria set forth in the Old Measures.
In order to avoid the numerous and often onerous regulatory procedures, various creative approaches wereutilized, such as working in de facto but non-formalized cooperative arrangements with a local party; relying on a representative office to play a role in the operation of an art business; and importing and exporting art work through a third-party domestic company possessing a license to import and export art. The result was that, while much art business was operated efficiently outside the cumbersome restrictions of the legal system, it was also operated without the protections afforded by the legal system, a situation that is becoming increasingly unacceptable to the participants in the art industry as the industry itself matures and grows ever more sophisticated. Our experience indicates that the number of disputes arising out of arrangements that were never documented is on the rise – there is a growing, if reluctant, acknowledgment within the Chinese art world that written contracts and formal agreements can be beneficial to everyone involved.
Current Regulatory Framework
The Old Measures were superseded in 2004 by the Measures for the Administration of the Art Business (the "2004 Measures"), which dispensed with the pre-approval requirement for the establishment of commercial art enterprises. Both domestic and foreign enterprises are no longer required to obtain such approval from MoCul. The 2004 Measures contain four main requirements for the establishment of an art enterprise:
- Although pre-approval from MofCul is no longer required for the establishment of an art enterprise, all art enterprises are required to record their business certificates with MofCul at the provincial level after incorporation
- Additional requirements are imposed on art import-export enterprises. For example, the registered capital of an art import-export company must be at least RMB 3 million
- MoCul pre-approval is still required for import and export of art works
- MoCul pre-approval is required for foreign commercial art exhibitions
Despite the existence of such provisions in the 2004 Measures, the PRC government did not strictly enforce the last two provisions, and it appears that, in practice, very few art businesses sought to obtain pre-approval from MofCul for the import and export of art works, in great part due to lack of coordination with the Customs authorities. (Responsibility for import and export control ultimately rests with the Customs Bureau, and the fact that the Old Measures were promulgated by MofCul alone, rather than in conjunction with the Customs Bureau, and did not contain any specific Customs guidelines, left a gap in the actual implementation of the Measures.) It is characteristic of an evolving legal system that at times full compliance with existing laws or regulations is impossible due to the lack of detailed regulations as to how to comply.
The recent Interim Provisions on the Management of the Import and Export of Fine Art (the "2009 Interim Provisions") address this issue, at least in principle. The 2009 Interim Provisions were promulgated by MofCul and the PRC General Customs Bureau together and have already come into effect. This development signifies a shift in the focus of the legal regulation of the art market, from one of general market entry restriction to a content-based regulation of art. Two concerns may lie behind this shift. First, the Chinese government may be drawing a lesson from, or at least an analogy to, the cultural relics field. PRC central government policy on cultural relics has become front-page news in the past few years, with a combination of high-profile repatriations (or not, in the case of the Yves St Laurent heads) and the ever-tightening restrictions on exports of cultural relics. In recent years, many State-owned enterprises and wealthy individuals have paid astonishingly high prices for Chinese antiques overseas, usually at auction. The monetary value of much contemporary Chinese art is miniscule compared to that of the auction house prizes, and in general there is not yet a broad and deep domestic market for contemporary art in China. However, the high prices paid for certain contemporary Chinese art by foreign buyers, and the (until recently) dynamic market for Chinese contemporary art abroad have not gone unmarked by the government, and indeed, this situation was described as “when flowers bloom inside, outside becomes fragrant” (墙内开花，墙外香) by Sun Qiuxia, the director of the Cultural Markets Division of MofCul, who observed, “the PRC government is realizing that fine contemporary art works may be regarded as cultural relics in years to come.” Such a view would underlie the burgeoning interest on the part of the PRC government in keeping some, if not all, Chinese contemporary art inside China through strengthening export controls over such pieces, an extension of the policies already in place with respect to antiques. The second concern, which is not itself a new policy, is the desire on the part of the PRC government to eliminate exhibitions of art which it deems politically sensitive.
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