Can anyone explain how this works from a tax perspective? As far as I know, goods in free ports are basically "in transit between two countries" for tax purposes. I.e. they left their origin, but have not entered their destination yet. I can see how that temporarily avoids sales tax (or VAT). That's also the tax mentioned in the newspaper. However, as soon as you bring that artwork to its destination, you have to pay that tax. And by that time, it will probably be much higher than now. First, the tax will most likely have increased (VAT rates never seem to go down). Second, the art will have appreciated in value, increasing the taxes due on import even more. All that considered, this does not seem like a very good strategy to me, at least tax-wise.
Someone who buys a $50 million painting at auction in New York, for example, is staring at a $4.4 million sales tax bill. Ship it to a free port, and the bill disappears, at least until you decide to bring it back to New York.
and
Despite enhanced Swiss efforts to track inventory and ownership, the free ports there remain an opaque preserve (though more transparent these days than counterparts in places like Singapore), filled with objects whose ownership can be confoundingly convoluted.
You keep it there until the value appreciates substantially, the item can stay there are long as you need it to. As the article mentions, the problem with these warehouses has been that there's been very little visibility of what is actually being stored as they become black holes into which these treasures disappear. I suspect many of these objects aren't directly owned by the super-rich individuals themselves, but are owned by offshore companies with hugely obfuscated paper trails that detach any tax liability from their human owners.
Also:
Collectors and dealers choose to store art in the free ports for more pedestrian reasons than tax avoidance. Some simply have no more room in their homes, said Georgina Hepburne Scott, who advises collectors. And in a free port, their property is protected in climate-controlled environments, often under video surveillance and behind fire-resistant walls.
Much (most?) of this art is being purchased without any direct intent to ever exhibit it anywhere (even privately). If the purchaser sells the art in the future, the entire transaction can take place within the freeport and no transaction tax applies.
"Temporarily" in this case can mean decades, by the end of which inflation and time value of money can considerably erode your multi million dollar sales tax bill. As an added bonus you can get a loan on your painting while it's in the warehouse because lenders can limit your access, thereby ensuring that you neither damage the collateral nor move it beyond their reach.
> inflation and time value of money can considerably erode your multi million dollar sales tax bill
No, when importing the piece of art to its destination, VAT tax apply on its current value at the current VAT rate. So the opposite happens. Instead of eroding over time, the tax bill gets larger as tax rates are likely to climb and the value increase.
However, a good reason to do so is if your liquidity is limited. For example, if you e.g. as a German inherited a 100 million EUR piece of art stored in a free port today, bringing it to Germany would cost you 19 million in VAT. Assuming that you don't have that much cash laying around, you would face the choice of selling it or just keeping it there for a few more years.
1. Tax only applies when it leaves the freeport / is imported somewhere. Import duties can sometimes also be avoided by holding assets through offshore vehicles. Also, certain countries exempt museums from paying import duties. Many wealthy people actually have part of their home classified as a museum.
2. These items are often held as an investment, i.e. buy for $20mm and sell five years later for $25mm.
3. If you only care about the capital gain on the art (and not about what is actually on the canvas), you don't want to pay the VAT rate, because that's (often) not recoverable.
4. You can probably get a $10-15mm loan against a $20mm painting. If you can sell that $20mm painting for $25mm in five years, with $5m equity down, you will have doubled your money. That's an 18-20% annual return (after deducting interest expenses).
