Part II: the VAT treatment of art operations
Stefano Loconte and Irene Barbieri- Loconte & Partners Studio Legale e Tributario
Although the Art market has sharply grown, especially that of modern and contemporary art, its VAT treatment could negatively affect art operations, influencing the different phases of art collecting. As a matter of fact, apart from the sale of art works by private individuals outside a business activity- which are not subject to VAT- Italian Law submits all other art purchases to VAT. Specifically, with regards to acquisitions performed in the secondary market, where art galleries and auction houses are the protagonists. In order to provide insight into the real VAT impact on the art trade, it is necessary to consider two different case scenario: domestic art transactions and cross-border ones.
For domestic acquisitions, the point of departure in the analysis of VAT treatment is the Decree Law n. 41/1995, which introduced specific regulations regarding art, antiques and collectors’ items, such as paintings, sculptures, stamps, tapestries and other objects which are at least a century old.
Depending on the situation, the acquisition of the art object can be subjected to the ordinary tax regime or, under the right conditions, to the special one called «margin tax regime». Although in both cases the rate is fixed at 22%, in the former the VAT is applied on the amount which represents the purchase price. In the latter regime, the VAT is not applied on the whole payment but only on the gross profit earned, that’s to say, the difference between the sale price and the purchase price (potentially increased by addition costs and emendation costs. In case of a negative margin, VAT need not to be paid.
Therefore, the margin regime avoids a double taxation on objects where the retailer paid a price which included VAT that could not be written off.
The same regime can be used for art transactions carried out by auction houses, ex art. 40-bis of Decree Law n. 41/1995; however, in this case, VAT is applied on the payment which is the difference between the auction price and the price applied by the auction house to the client.
Nevertheless, if the art collector buys the art objects indicated in Decree Law n. 41/1995 directly from the artist or from his heirs, the ordinary regime applies in a reduce form and fixed at 10%, instead of the traditional one (22%).
With regards to cross-border acquisitions, it is necessary to distinguish between the event in which the Italian collector buys an art object from an EU State and the one in which the art work comes from a non EU State. In the former situation, if the seller has used the margin regime in the origin State, taxation will follow the rules of the State of origin. As a result, the VAT will be the one used in that State, without any additional charge in Italy, ex art. 37 of Decree Law n. 41/1995. Instead, if the margin regime was not used in the State of origin, the purchase made by an Italian art collector subjected to VAT will be considered an EU operation, under art. 38 of Decree Law n. 331/1993. In the latter case, when the art acquisition is made outside EU, the import into Italy of art objects is taxed with customs VAT, but is reduced to 10% which is, in any case, higher than the one applied in other EU States. As a consequence, the Italian art trade could be negatively affected by VAT taxation.
This short overview outlines the complexity of the issue, which requires an in-depth knowledge of the art taxation essentials, especially considering the strong impact that VAT can have on the total cost of an art deal. This is why art collectors should always ask tax experts for advice.