ABOUT THE AUTHOR: Dr Sibilla G Cretti TEP is
attorney at law, partner, SGC law office, law office of Dr Sibilla
G Cretti, Neuchâtel (Switzerland)
‘Big rush on rare art mushrooms’ 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.
Private collector or professional art
dealer?
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.
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.
Tax free capital gain v taxable income
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.
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.
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.
Third party transactions
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 case, 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.
Conclusion
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.