Announcing the closure of its 10-year-old Beijing branch last week, Pace Gallery founder Arne Glimcher said, “It's impossible to do business in mainland China right now”. The longtime supporter of Chinese contemporary art pulling out of the market is viewed by many as an ominous sign of what’s ahead. According to artnet news, the exceedingly high tax rate directly contributed to Glimcher’s decision, who also described the potential new tariff boost which might be incurred by Sino-US trade war as the “last straw”.

▲Pace Beijing. Courtesy of Pace Gallery.

However, when many worried that other western galleries would follow suit and abandon the Chinese market, the thrilling news came on July 12 that another blue-chip international gallery, Almine Rech, had a debut show in its new Shanghai space. Other two high-profile European galleries, Perrotin and Lisson, which inhabited the same architecture, the Amber Building, had their Shanghai branches open for less than a year as well.

To come or to walk away, who is making the wise decision? To answer the question, first we have to figure out:

Is the tax rate in mainland China really that high? Yes.

One thing needs to be clarified. “The 38 percent luxury tax on purchases of art on the mainland” has been a widespread industry rumor recently, which, actually lacks solid legal basis in Chinese laws. The really painstaking parts are value added tax and income tax.

Art market expert Yishu demonstrates how much money a gallery owner could earn after tax by selling art in the USA, Hong Kong and mainland China with the following hypothesis:

Assume there are three galleries respectively ran by a sole shareholder in the three regions, all taking the form of liability limited company; each of them is selling a painting at $100,000 with a total cost of $70,000. After VAT (if applies) and income tax, the net income received by gallery owners are: USA $15,600-19,500, Hong Kong $25,050, and mainland China $0-9,300. The results are presented as ranges instead of fixed numbers because enterprises or individuals with low annual turnover or engaging in philanthropy are eligible to enjoy certain tax benefits.

The graphs distinctly show the comparatively high tax rate in mainland China. Furthermore, tariff is not included in the calculation, which means, if a European art is sold to China, the gallery owner may even lose money instead of earning anything.

Should international galleries all stay away from mainland China considering the high tax rate? No.

Despite the hostile financial policies, foreign art dealers still insist to enter the marketplace, mainly thanks to the rapid growth of local collecting scene.

The China Private Wealth Report by Bain Company and China Merchants Bank suggests that by the end of 2018, 1.97 million Chinese own the equivalent of at least $1.5 million, increased by 400,000 compared with that in 2016. Among the high-net-wealth-individuals, the percentage of first-generation business owners dropped from 70% in 2009 to 36% in 2018; while the percentage of second-generation business owners (from under 1% to 9%) and corporate executives (from 11% to 36%) both saw significant growth since 2009. As the community of wealthy individuals continues to grow in size and diversity, art collecting has emerged as its own lifestyle and as an increasingly desirable form of alternative investment, particularly among the younger generation.

▲Source: China Private Wealth Report by Bain Company and China Merchants Bank

▲Translated from Chinese by Art Market Journal

Among the increasing number of people who start to engage in collection, some have already built their own private museums in the past 3-8 years, such as Today Art Museum in the capital city and How Art Museum in Shanghai. These collectors have, not only the economic strength, but also the solid idea and far-sight vision to support art. In the long run, mainland China is a rising market, a coveted hot spot.

Therefore, maintaining a relationship with these clients and institutions remain an essential strategic move, even though it’s not necessarily profitable at current stage. At her new space opening, Almine Rech-Picasso said, “The decision to expand to Asia was a natural one for us, as we’ve long been interested in the Asian market and engaged with collectors in the region through our participation in art fairs, as well as institutional outreach, collaboration, and regular visits to the region. With the opening of our new gallery space, we look forward to deepening our engagement with the region in ways only a physical, year-round presence could allow.”

In simpler words, doing business here is tough yet indispensable for big international galleries, so the question remains:

How could they legally save costs when selling art to Chinese buyers?

Domestic exhibition with overseas transaction is a reasonable choice. A majority of China’s HNWIs live in the first-tier cities like Beijing, Shanghai and Guangzhou. Showcasing arts in these places is vital in promoting visibility among potential buyers. Artworks entering China for exhibition, no matter in non-profit organization or commercial space, all apply to ATA Carnet which allow them to be declared tax-free at the customs, as long as they are shipped out of the country before the validity period expires.

But are Chinese collectors willing to go through hardships to buy art outside mainland after seeing them in their own cities?

“Since Xi has come to power, people are afraid to conspicuously show their wealth and the mainland Chinese are not buying in China,” Glimcher revealed to artnet news. And “if they are, they [are] buying for their apartments in other places in the world and they come to Hong Kong anyway.” Indeed, many of the mainland-based art collectors visit Hong Kong on a regular basis.

And now another convenient choice is the tax-protected zone. A famous example of this is Shanghainese collector Liu Yixian, founder of Long Art Museum, who saved over $6 million VAT costs by storing his $36.3 million Meiyintang chicken cup bought at Sotheby’s Hong Kong in a warehouse in the Shanghai Bonded Area. In case of exhibition, the antique can be transported within one hour to his Long Art Museum outside the Bonded Area for a 6-month tax-free period. Like Shanghai, other major east coastal cities have Bonded Areas as well. Therefore, buying art overseas actually isn’t that inconvenient for Chinese collectors now.

▲The Meiyintang Chicken Cup, Chinese porcelain, Ming Dynasty, hammered at $36.3 million in Hong Kong in April 2014. Courtesy of Sotheby’s.

Besides that, small spaces and frequent cooperation with local institutions are becoming trendy among the newly opened international galleries too. Pace Beijing occupied over 2,500 square meters in 798 Art District, almost the size of a museum. However, these days, western blue-chip galleries opt for more economical choice - delicate small spaces in the city center with rich historical and cultural deposits.

The newly-launched Almine Rech occupies around 370 square meters indoor space at the Bund, its neighbor Lisson, less than 300 square meters. For large-scale exhibitions, they only have to rent space from or partner with local organizations. The popular “sharing economy” concept in China permits foreign art dealers to not only save costs, but also enhance external communication.

▲Lisson Gallery in the Amber Building, the Bund, Shanghai. Courtesy of Lisson Gallery.

Leading brands, who entered this market when there wasn’t much to see in the Chinese contemporary art scene, had made a name for themselves and built strong local network by dedicating to support artists and art projects. Now they can leave to concentrate on the expansion of other markets such as the tax-free business heaven, Hong Kong. However, for others, mainland China remains a blue ocean, awaiting new explorers.