‘Big rush on rare art mushrooms’¹ was the title of an article by Philipp Meier in the Neue Zürcher Zeitung, 19 June 2010. The journalist notes that the public audience at Art Basel 2010 was very large. Numerous works of art changed owners in the hours following the opening of the art exhibition. The rush on modern and contemporary art reflects, says the journalist, the present tendency to invest in tangible assets.²

Swiss residents and resident taxpayers entering into the art market should not ignore the fact that there is a thin line between private art collectors and professional art dealers. Once the line is crossed, onerous tax and social security consequences can be incurred.³

Therefore great care has to be paid to this specific issue, which often arises when it is too late, i.e. at the time when the tax authorities, in the course of the tax assessment procedure, and on the basis of the specific factual circumstances, requalify any capital gain in a taxable income and the tax payer in a professional art dealer.

As is commonly known among tax practitioners, Switzerland’s tax legislation exempts from tax capital gains realised when selling private (non business) tangible assets such as works of art (art 16 (3) Federal Tax Law and art 7(4) lit. b Federal Tax Harmonisation Law). This rule extends to the purchase and sale of artworks as long as collecting art is part of the collector’s personal hobbies.

Switzerland’s tax legislation exempts from tax capital gains realised when selling private (non business) tangible assets such as works of art

This principle being set, the competent tax authorities and the tax judge may recharacterise any gain resulting from a sale in taxable income, depending on the factual circumstances.

Tax authorities and judges will look to the tax practice and jurisprudence developed in the field of real estate trade (taxable as a matter of law) through to portfolio traders via collectors of tangible assets such as wine collectors.⁴

Carsten Holler, Giant Triple Mushroom (2010) © Pro Litteris

Briefly, where circumstances of the specific case show that the taxpayer’s activity is oriented in its entirety towards the achievement of a gain/profit, then the competent tax authority and the judge will conclude that it is a business-oriented activity and requalify any gain realised in the course of a sale as taxable income and qualify the collector as a professional dealer whose net profits are not only subject to income tax but, in addition, subject to Swiss social security.⁵

Criteria that qualify the collector’s activity as business rather than hobby include among others:

• systematic and planned activities of purchases and sales;
• frequent transactions and short holding periods;
• the recourse or use of specialised knowledge;
• the recourse to credit (specifically bank credit) in order to finance the transactions; and
• the reinvestment of the proceeds in the collection.

The list of the abovementioned criteria is illustrative and not exhaustive. In addition, the criteria do not apply cumulatively, it is sufficient that one or several of the criteria are fulfilled to lead authorities to conclude it is a business-oriented activity.

Would the situation be different where, instead of appearing directly on the market, the collector mandates a third party (art gallery) to proceed the purchases and sales?

In the field of portfolio management, the Federal Supreme Court has stated that the intervention of a bank or professional portfolio manager has to be regarded as the mere intervention of an auxiliary of the portfolio owner and consequently any transactions were to be imputed to the owner of the portfolio personally, also in presence of discretionary powers granted to the portfolio manager. However, in a recent Zurich case⁶, the cantonal Court maintained that the non appearance of the owner of the portfolio on the market would protect him from a requalification of his transactions into taxable operations. It has to be noted here that this Zurich case presented additional specific elements that would have led the judge, most probably, not to retain the business character of the activity of purchase and sale of value titles.

Nevertheless, the author is inclined to recognise that the intervention of a professional third party (art gallery) would give sufficient shelter and not be regarded as the mere intervention of an auxiliary of the owner of the works of art. A more differentiated approach would be required where the sale takes place through the intermediary of an auction house, in Switzerland or abroad. Frequent purchases and sales or even a major sale at a particular auction may lead the Swiss competent tax authority to consider the sale as professional and tax the gain in the hands of the Swiss resident art collector as taxable income. Professional caution recommends the careful examination of the specificities of each particular case.⁷

The preceding considerations lead to reflections on how to best structure the holding of works of art. In this respect, due care and diligence have also to be given to other tax jurisdictions than the tax jurisdiction of the State of residence of the art collector and tax payer. Special attention should be devoted to the jurisdiction where works of art are located. As mentioned above this is a separate issue and topic for a further article.