Freeport for artworks, a tool to avoid tax duties might come to an end

February 11, 2020

In many cases collecting art is about money and not about the appreciation of the artwork itself. Freeports are the secrecy jurisdictions of the art world, where art collectors and art dealers can park their speculative art purchases in complete anonymity, while being invisible to tax authorities and foreign governments.

Most of the countries have similar legal frameworks for regulating the import and export of works of art, which in most cases involves paying customs duties.

However, art collectors and art dealers can always find a way to avoid it and gain temporary exemption of tax duties. This is true especially when art market speculations are going on.

One could assume that in general, art collectors are enjoying their beloved collections, seeing them on the walls of their homes or yachts. The truth is that a major part of art collectors are buying artworks only as part of their investment portfolios.

When art is purchased for investment, one automatically creates an art speculation, where the aim is to keep costs and tax duties low.

Switzerland was among the very first countries coming up with the idea of “freeports”, a no-man’s land, which is a perfect place to park speculative art purchases. Originally created in 1888, for many decades the Geneva Freeport was officially not even part of Switzerland.

The purpose of a freeport warehouse is to make it possible to store works of art, items from collections, antiques and jewellery without incurring duties and taxes. In short, a freeport is a storage facility that exists formally outside of the territorial jurisdiction of any country.

In general, we can say that in their dynamic cultural contexts, countries offering freeports aim to promote and develop their art market. The freeport warehouse makes it possible to store or sell works of arts without incurring duties and taxes. Most of the freeports are located in a strategical place, close to important international airports, helping the transportation of the assets between the other freeports.

What makes a freeport truly exceptional and attractive to the art collectors is the fact that the contents of freeports are invisible to tax authorities and foreign governments. Complete anonymity is guaranteed and art collections in freeports cannot be traced to the original owners and no government can tax these assets.

Utilising this massive advantage, the number of freeports is expanding. Freeports exist all around the world in major cities, such as Geneva, Zurich, Monte-Carlo, Beijing, Luxembourg, Delaware and many other locations around the globe.

According to Deloitte and ArtTactic, “28% of both the art collectors and art professionals surveyed said they had already used or had a relationship with a Freeport provider, and 43% of the art professionals said that their clients were likely to use a Freeport facility in the future, versus 42% of the art collectors, who said they were likely to use such a facility”.

However, the story has a negative side as well, since freeports reflect a dark side to the art world. The majority of the cases in the global art trading involves the crossing of borders of old masters and contemporary masterpieces.

By offering complete anonymity and not disclosing the owners of the artworks, freeports make it an increasingly harder process to prove and complete the provenance of the artworks. Because of this, the concept of freeports forms the main reason why art is among the most unregulated industries in the world.

Another dark side of freeports, is that the hidden artworks slow down the recovery of stolen and looted assets.

The legal loophole that many make use of is simple. In legal terms, if one stores an artwork in a freeport it is not considered as export, therefore no duties are needed to be paid and no laws are actually broken.

Put in a clear way, tax evasion is a crime in many countries, however tax avoidance is not.

Talking about numbers, the Geneva Freeport itself has an estimated art collection value of $100 billion.

Tax avoidance means that it is within ones rights to pay only the amounts required by law and nothing more, and this is where freeports excel. In the world of freeports, art is not about appreciation anymore.

On the other hand, the wind of change is coming on its way. During the past 20 years more than 4,000 stolen artworks and historic facts were recovered only from the Geneva Freeport.

Led by international police raids, legal cases and criminal probe by Geneva prosecutors, the Swiss authorities also started taking an interest in the art trade for the first time, because of the risk of money laundering and tax evasion or avoidance.

Subsequently, customs agents in Geneva now require customers to submit a list of artworks stored in the freeport, and they perform random checks as well. As a result of this, art collectors began to pull their collections from the Geneva Freeport facility.

Governments and law enforcement are searching for the best strategies to address money laundering and terrorism financing vulnerabilities when dealing with cultural goods.

In Luxembourg, the licensed operators of the Luxembourg Freeport already are subject to anti-money laundering provisions since the law of 24 July, 2015.

In Switzerland, the responsible art market initiative and the appointment of service providers to monitor antiquities entering the Geneva Freeport from September 2016, are part of the response.

Learning from these steps, on 26 March 2019, the European Parliament adopted the final report of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3), which the committee had adopted on 27 February 2019.

The report stressed that freeports provide "a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership be concealed”, which has led to the call for freeports to be scrapped across the European Union in order to fight tax evasion and money laundering.

Looking from the perspective of protecting the cultural heritage of humanity, freeports make it possible that artworks remain hidden for hundreds of years in hidden storages, vaults, instead of being shown and displayed.

The original purpose of the artworks, to bring inspiration, awe, magic, artistic values to as many people as possible is thus overshadowed by self centered and manipulative reasons of a few.

Artworks disappear every year in these secret storages and so do their purposes and values for the future generations. With more focus and talking about this issue, it is most likely that there will be more changes and enforcements in all parts of the world, that will look foremost at the protection of artworks as symbols of the journey of humanity.