17 September 2019 - Article
Hong Kong has developed as a global art hub for a number of reasons. Easily reached from Beijing, Shanghai, Singapore, Seoul and Tokyo, it has become the destination of choice for most foreign companies wishing to access the Chinese art market, for tax, trade restrictions and currency reasons (with the Hong Kong dollar being freely convertible). Foreign auction houses were excluded from setting up in mainland China until 2004 and the mainland remains one of the most expensive and complex markets to ship art and antiques to and from, due to local regulations.
As a special administrative region of China, Hong Kong has a unique political and legal infrastructure. It has a common law legal system, with litigation and contract law similar to that in other common law jurisdictions (such as the United Kingdom, United States and Canada). Its laws are enforced by relatively modern, sophisticated and efficient courts.
Apart from being a low tax jurisdiction, Hong Kong functions like a “free port” because there are no tariffs on art imported and exported from the territory and no sales taxes on art. Certain taxes and customs duties only become due on final delivery to a destination outside of a free port. Many private art sales are conducted in free ports because of their status as tax suspension zones.
Free ports in Switzerland have long been used to facilitate art transactions between art collectors from the US and Europe because of convenient access to Switzerland from both the US and European countries. Now, with increased buying interest from collectors in Asia, the location of international art transactions is beginning to shift to Asia.
As has been the case in Switzerland, selecting Hong Kong as the site for an international art transaction eliminates the burden of collecting tax from others involved in the transaction and shifts responsibility to each individual to comply with his or her own tax requirements. This is crucial for art transactions, as they are typically extremely private. Sometimes sellers may not know who they are selling art to and buyers may not know who they are buying from. Eliminating any tax collection requirements on behalf of other parties in an art transaction is essential to maintain the privacy wall separating sellers and buyers.
Hong Kong’s free port status also makes it an attractive location for international art transactions because sellers,buyers and art dealers do not have to worry about a delay in moving art into and out of Hong Kong due to customs regulations. And, unlike in Swiss free ports, art in Hong Kong does not have to be kept in a warehouse but can be hung or stored in private property and still benefit from the tax suspension. This gives collectors the option of hanging art in Hong Kong apartments so they can enjoy it.
Art in a free society
Hong Kong law continues to offer broad free speech and expression protections. Article 27 of the Basic Law provides that: “Hong Kong residents shall have freedom of speech, of the press and of publication …”. The city’s freedoms and protections have emboldened local artists and attracted regional artists who may otherwise face persecution or prosecution in their home jurisdiction when exhibiting their work. For example, unlike in other jurisdictions, there is no requirement for submission of artwork content prior to public display. Controversial Chinese artists often exhibit in Hong Kong (although they may be less likely to receive Hong Kong government support).
There are, however, some restrictions. Hong Kong has defamation laws intended to protect national security and public morals. The “Control of Obscene and Indecent Articles Ordinance” is occasionally applied to art: one famous incident involved a nude male statue by Elisabeth Frink exhibited publically in 1995, which was given a cardboard fig leaf after it was branded indecent.
Some exhibitors are believed to have self-censored recently out of deference to mainland authorities. Galleries have been known to ask for the removal of Taiwan flags and have refused to display sculptures commemorating the Tiananmen Square protests. But these instances are rare and efforts at political censorship invite local media controversy. Chinese artist and political activist Ai Weiwei has had exhibitions in Hong Kong with no interference of note.
The Hong Kong government actively promotes the arts in the city, having invested a significant amount of money on the West Kowloon Cultural District (which will include museums and exhibition spaces) and recently supported the transformation of the former police married quarters in Central (PMQ) into a heritage and arts space for galleries, exhibitions and designer shops.
Using art as collateral
Most art collectors plan to hold works of art as long-term investments, letting them appreciate for years before they consider selling. As a result, they hold high-value illiquid assets. To utilise such assets, they can use their artworks as collateral for bank loans. Collectors can then use the cash to invest in other assets while they wait for their art to appreciate.
Using art as collateral for bank loans has become a global trend, and art loans are becoming more common in Asia. The preferred choice of law and jurisdiction is often Hong Kong, given its status as a global financial centre. The art industry also has access to sophisticated professionals with diverse financing experience in the city. The lender will have a right to sell the art at times of default and normally insists upon delivery of possession of the artwork to itself or a third party storage company. Letting the artwork hang on the borrower’s walls is generally not an option for art lending under Hong Kong law (although it is more common in the US).
Hong Kong, which has traditionally been a crossroad and trading city full of entrepreneurs, financiers, lawyers and excess private capital, has been utilising its infrastructure to support the growing art industry. A combination of Asia’s growing private wealth plus the likelihood of China continuing to compete with the US and the UK for a substantial share of global art market sales means that Hong Kong is well-positioned to remain an important art market.
The article is originally published on the March 2016 issue of The Peak (Hong Kong edition)