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The Fine Line between Collecting and Dealing

You may regard yourself as an art collector.  Occasionally you may sell an artwork or two.  You expect to be taxed on those sales as a collector.  It may come as a surprise that the Revenue should seek to tax you as if you were an art dealer.  A nasty surprise, in fact, because your tax liability as a dealer may be significantly higher than as a collector.

The Swiss Federal Tribunal recently considered the fine line between selling art as a collector and selling as a dealer.  The central issue in the case was whether a Swiss collector should be charged VAT on the sale price of his collection.

The Swiss taxpayer was a partner in Swiss auction house.  Over a period of many years, he had acquired his own, private, art collection.  In 2000, he consigned 42 items in his collection to that auction house.  38 items sold.  He sold further items through that same auction house in 2001, 2002 and 2003.  In total, he made SF 1,349,800 from the sale of those lots.

Prior to the series of auctions, the taxpayer had sought to agree with his local tax office that the sales should be treated as sales of privately-owned chattels, and taxed accordingly.   The local tax office agreed, subject to certain conditions.   There is no suggestion that the taxpayer did not meet these conditions.  The tax ruling did not address liability to VAT.

Subsequently, the Swiss Federal Tax Office registered the taxpayer as liable to pay VAT and demanded payment.  For the year 2000, the tax bill was SF 17,465 plus interest.  There was a separate tax bill for the years 2001 to 2003 but for technical reasons, the Federal Tribunal did not consider the taxpayer’s liability to pay VAT in those years.

The taxpayer argued that as a private collector, he was not liable to register for VAT, to collect or to pay VAT.  He complained to the Federal Tax Office.  His complaint was rejected.  He appealed to the local court.  He lost his appeal.  His next option was to bring his complaint to the Federal Tribunal.

VAT is a tax on consumption, observed the Tribunal.  It must be levied on all transactions with consumers, unless an exemption applies.  The test was whether the supplier carries on, independently, a commercial or professional activity with a view to generating revenues, if such activity generates in Switzerland revenues exceeding SF75,000 a year.  If the test is met, the supplier must collect and pay VAT, irrespective of whether the supplier intends to make a profit.

The Tribunal accepted that the occasional supply of goods or services exceeding SF75,000 a year did not trigger liability to pay VAT.  This was because an occasional supply did not qualify as a commercial or professional activity (e.g. the sale by a collector of a vintage car exceeding SF75,000).

The Tribunal made reference to the jurisprudence of the European Court of Justice (Wellcome Trust and Harnas & Helm).  According to the European Court, neither the number of sales, nor the amount of revenue generated, were deciding factors, although they may play a part in the analysis.  A more relevant test was whether the individual had put in place means of distribution similar to those typically put in place by a producer, a dealer or a supplier of services.

In this case, the Tribunal did not accept that the taxpayer had behaved as any collector would have done.  In the Tribunal’s view, he acted “like an entrepreneur”, in a professional manner and not simply as a manager of his own wealth.  He planned the auctions in 2000 and in subsequent years.  His intention was to generate revenue.

The tax ruling by his local tax office was irrelevant, said the Tribunal.  So was the taxpayer’s argument that he was an “amateur” not looking to make a profit on the sale.

His partnership in the auction house, and the fact that he was an art market professional, undoubtedly influenced the Tribunal.  He selected the items for sale using his own expertise, observed the Tribunal.  The line between his professional activity and his dealings as a collector was particularly fine.  He adopted a careful strategy of annual sales, giving his activity the requisite commercial and/or professional character.

The taxpayer lost his appeal.

This case is a useful reminder that it is a sensible precaution to take tax advice before realising some or all of your art collection.  Each country applies different rules; if you are potentially liable to pay tax in more than one country, take advice in each country.  And don’t forget to consider indirect taxation (e.g. VAT) which may be administered by a different branch of your country’s tax administration.

Pierre Valentin

Articles published on this blog reflect the opinion of the stated author of the article only. The information they contain does not constitute legal advice.