Freeports play a sizable role in the global art trade, yet many collectors and even industry insiders still don’t fully grasp their utility. Simply put, a freeport is a designated area within a country where goods can be imported, stored, sold and re-exported without being subject to a sales tax or customs duty. The most important freeports in the art world are in Geneva, Luxembourg, Singapore and Delaware, where they are used regularly because, in addition to the aforementioned benefits, they allow transactions to remain anonymous: the managers of a freeport can arrange art viewings and shipments while keeping the identities of the seller and buyer undisclosed, even to each other. Many people who put artworks into freeports are looking to sell, and it’s worth knowing that the buyer of the art is responsible for paying the taxes, not the person who rented the freeport space. And even then, not immediately. If, for example, you buy a painting in Paris and the gallery ships it to the Geneva freeport in Switzerland, or you buy an artwork in New York and the gallery ships it to a freeport in Delaware, you won’t have to pay customs, import or value-added taxes (in Europe) or state sales or use taxes (in the U.S.) until the art leaves the freeport and you bring it to a state that has a sales or use tax.
While selling an artwork from a Delaware freeport does not exempt the seller from reporting the sale on their income tax return or paying federal and state income taxes, it does reduce transaction costs. Sales tax in New York State, for instance, is 8.75 percent, so a $1 million painting purchased in Manhattan would run the buyer an additional $87,500. If that buyer plans to sell the work later, perhaps believing it will be worth $2 million in a few years, shipping it immediately, that is, without taking personal possession, to a freeport in Delaware until it sells will relieve the buyer of paying that New York State sales tax. If the owner holds the painting for one year, however, a federal capital gains tax of between 28 and 31.8 percent will have to be paid regardless of where the sale takes place.
Thomas Danziger, a lawyer who represents art collectors, told Observer that some of his clients use freeports to “time the payment” of the taxes owed. A collector may purchase a $10 million painting because it’s available now, but have other uses for the $875,000 that would otherwise go to New York State. “I can invest that $875,000 now, perhaps paying it in three years or whenever I choose to take the painting out of the freeport.”
There’s nothing inherently shady about it. “I think everyone thinks of the freeport as a bad word,” said lawyer Judd Grossman, in part “because there’s a cloak of secrecy and confidentiality surrounding the freeports” and because they have been associated with instances of art smuggling, tax evasion, cultural artifact looting and money laundering, as exposed in 2016 by the so-called Panama Papers investigation, which linked wealthy individuals and government officials around the world to misconduct involving the use of freeports. Grossman insisted, however, that very legitimate activities take place at freeports. “Say I’m a New York dealer and I buy a painting from someone in Paris. And though I’m here, a lot of the business I do is with collectors and other dealers throughout the world, including maybe also in Paris. And so when the work comes in here, if I’m buying it with the goal of reselling it, and potentially to someone outside of this country where those duties and taxes won’t need to be paid, while it’s in the freeport, it’s exempt, and then once it leaves, it’s never subject to those taxes.”
Lawyer William Pearlstein tempered his enthusiasm for freeports with caveats. “Savvy art buyers can take advantage of the benefits that freeports provide,” he argued, “but care must be taken to avoid blurring the distinction between legal tax avoidance and illegal tax evasion.”
Still, there is confusion about where the line should be drawn, and there are bad operators. The CEO of a fine art storage facility who asked not to be identified spoke of a New York client who had a just-purchased artwork shipped to the Delaware freeport and then, the next day, shipped back to his New York home. (Staff from the storage facility came to his home to help uncrate and install the work.) When the crate was opened, the work was found to be damaged. The owner didn’t want to file a claim on his fine art insurance policy, fearing it would somehow reveal to the government that the artwork had come to his home without a sales or use tax being paid. He ultimately chose to hire a conservator to repair the damage, avoiding the complications an insurance claim might create.
In another instance, a New York lawyer, who also asked for anonymity, described a client who “unbeknownst to me, bought a painting and sent it to a Delaware freeport.” That client believed that after a year, the painting could be sent back to New York without owing sales tax. The artwork was shipped to his New York residence, but the New York State Sales Tax Department learned of it when auditing the Delaware freeport. The client was charged with a violation of the law and had to pay the use tax along with financial penalties and interest. It was, they said, “a very costly mistake.”
Freeports, which are more often than not located outside of the U.S., are similar in look and function to fine art storage facilities. Caroline Page-Katz, president and chief operating officer at UOVO, the fine art storage company with locations in California, Colorado, Delaware, Florida, Michigan, New York and Texas, asserted that “because the United States lacks a VAT system and fine art is generally imported duty-free, there is no direct equivalent to the traditional European freeport model in the U.S.” What differentiates freeports and fine art storage facilities, she added, is “not whether a facility operates under a particular customs or tax structure, but whether it is purpose-built to care for and manage fine art and collectibles.”
From the outside, they are all just large warehouses with dozens or hundreds of storage units filled with crates. Freeports and fine art storage facilities both promote their physical security and museum-level climate control, along with staff who can pack, crate, transport and install priceless art and artifacts, as well as display them to prospective buyers in specially designed showrooms. The cost of freeport space may be a bit higher, perhaps by five or 10 percent, but the principal difference is the tax advantage of a freeport relative to a fine art storage facility, since a freeport is “extraterritorial,” a free-trade zone, rather than part of a specific state or nation.
The only time artwork stored in a freeport becomes fully tax-free is if the collector who rented the space dies before taking possession, in which case the art becomes part of the estate tax-free. (But death typically isn’t the preferred way to avoid taxes.)
Art advisor Todd Levin mentioned that some of his art-collecting clients use freeports because they own several homes and don’t know, at the time of purchase, where they plan to install specific artworks. In the New York penthouse? Or the condo in Denver? Perhaps the house in Darien? Or somewhere else? Each jurisdiction has its own sales and use tax rates—Connecticut’s is 6.3 percent while Colorado’s is 2.9 percent—and while sorting out the logistics of where to bring the art, and whether sales or use tax applies, “buyers can just keep it stored at a freeport, not paying any tax until a decision is made. And there’s no rush. Some clients keep artworks in freeports for years.”
