Art Fortresses Hold Taxes at Bay

by Sheppard Mullin Richter & Hampton LLP
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The prices fetched by famous artworks continue to astound industry-watchers. In spring 2012, Edvard Munch’s The Scream set the record for a work sold at auction—$120 million. Sales of contemporary and modern art have also been setting records. As the value of famous works climb, many collectors are motivated to warehouse their collections while they appreciate in value. The location of the chosen warehouse can also help reduce the taxes owed on such collections.

Normally, art that is sold has tax ramifications for the buyer and the seller. The seller will pay taxes on the income received for the work, and the buyer will pay taxes based on the sales price, and also customs and import or export taxes if the work is moving internationally. A freeport offers collectors the advantage of temporarily avoiding taxes on a work for as long as the work is stored there. Freeports are secure warehouses located within economic free trade zones in which goods can be stored indefinitely and can be sold there without the imposition of taxes and duties of any sovereign country. Such facilities boast additional benefits, as described below, for the art owner—so long as the buyer of the piece has no desire to view or exhibit the work.

Eager for the discreet storage options, lower insurance premiums and beneficial tax treatment, many art collectors have long stockpiled their collections in freeports, and the use of such repositories appears to be on the rise. While goods are stored in a freeport, owners pay no import taxes or duties, which are normally in the range of 5% to 15% of the work’s value. If the work is also sold at the freeport, the owner pays no transaction tax. Meanwhile, the pieces in a collection may appreciate in value while they are absent from the marketplace.

The tax advantages of freeports are only one part of the draw. Freeports also represent the promise of enhanced security to collectors of all types. One example of the security offered is illustrated by the newly built freeport in Singapore. Self-described as an “art fortress in the heart of Asia,” and “the ultimate safe for the world’s finest collections,” it boasts armed auxiliary police officers, fully furnished offices for the transaction of business, and private viewing suites within its confines. This freeport is also a design gem—the lobby features a large sculpture by Ron Arad; the furnishings and interiors of the building are by Arad and Johanna Grawunder. The hyperbolic marketing of the Singapore freeport aside, the facility is open 24-7 and offers limousine service for patrons to and from the nearby airport. Works stored here can also be displayed at local museums and public exhibitions without being subject to the country’s taxes, according to the facility’s website.

Dozens of countries offer freeports or customs-free zones, and more are being constructed to accommodate demand. The freeport in Geneva is adding a new special wing for art storage. Luxembourg and Beijing also have freeports under construction. The Luxembourg freeport, owned by the same group behind the facility in Singapore, plans to offer the services of onsite photographers, framers, and restorers in addition to the usual amenities. In the United States, there are hundreds of so-called Foreign-Trade Zones (FTZs). Primarily located next to ports of entry, FTZs in the U.S. are generally not used for art storage, but instead for the import of raw materials. Manufacturers will then incorporate these customs-free elements into finished goods and pay export taxes on the finished goods upon their exit from the FTZ, or pay the import tax on the value of the imported foreign raw materials if the goods are to be sold in the U.S.

Freeports located in other countries are useful not just for the warehousing of art. There is great diversity among the objects in freeports, as recent reports in the New York Times about the freeport in Geneva indicate. Stored collections are reported to include: gold bars, taxidermy, rugs, exotic sports cars, cigars, rugs, wine, and fine art.

In the past, freeports like the one in Geneva were associated with trade in grey market and illegal goods. Concerned about aiding and abetting the trade in looted cultural property and other forbidden items, the Geneva freeport has since been placed under Swiss jurisdiction. According to the freeport’s press materials, items stored there, though still handled with confidentiality, can now be inspected by customs officials, and the increased transparency means items are now traceable to their owners. These efforts to ensure compliance with international law enhances the legitimacy of freeports overall, and will no doubt pay dividends in attracting new business. For the strategic super-collector and those who approach art acquisitions as investments, the knowledgeable use of freeports and other customs-free warehousing options can make good sense.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

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