Rule Or An Exception?
Recently, there have been several interesting stories from various sources on the topic of art galleries. As usual, in this case, too, one cannot do without dealing with taxes.
Cash transactions?
Shortly before Christmas, I purchased this wonderful work by artist Krista Dzidzulo, made with charcoal, at an auction organized by the Kim? gallery. When I shared this happy moment with a friend, he winked and said that you should be careful, because this industry does not have a good reputation, because works are often paid for in cash. Thus, there are even conflicts between parties to transactions that can be measured in millions. I decided to delve deeper - what is the story about? The respective article mentions that around 2000 different works of art were purchased.. also in cash, supposedly in millions. (Cash - supposedly obtained in dividends?) OMG!
If the cash limit is violated
In the conditions of modern AML supervision and restrictions on cash circulation, such transactions seem almost impossible at the moment. What are the sanctions for not observing the limit? The law provides for 15% fine of the transaction amount. The involved person himself told Re:Baltica that he understands that he broke the law that year, and, “as I already pointed out during the legal proceedings, I am ready to take responsibility for it.” However, no one has demanded responsibility from him so far. So, supposedly it is forbidden, but can it be done here? The Re:Baltica article mentions that it is unlikely - the SRS added this information to an existing case, in which the transactions of another art collector are still being investigated. “The SRS has informed that since 2017, 72 private individuals have been fined for cash transactions over 7,200 euros, who have paid an average of 5,000 euros in fines.”
Consequences of the transaction
Another obvious problem also appears in the media - how to prove ownership rights, the transaction price, etc. in transactions without papers (agreements, etc) and paid in cash? The relevant 2021 De Facto's TV report states that the essence of the dispute in court is the 'return of art objects'.
At the end of the article, there is a sense of doom
“The SRS investigation will most likely end without a result, because the only evidence is word for word. Works of art do not have to be registered anywhere, so these transactions are more difficult to control than, for example, the purchase of a house or car, which appear in state registers. Similarly with cash: it is more difficult to trace its origin, especially if the transactions do not have proof - a contract.”
What about taxes?
The history is also silent on whether the SRS has also inquired about the seller's capital gains tax in this case. After all, the SRS should be interested not only in discrepancies in the accounts of apartment and car sellers..
Donations
In 2019 the business of the said art lover involved in the scandal allegedly donated a large amount to an association led by another art lover. Donations usually allow you to receive tax breaks and create a positive company image.
48 Laws of Power
In Robert Greene's bestseller 48 Laws Of Power, one of the 48 laws of power is: Hide your intentions. The book, by the way, is excellent - it highlights various interesting historical events. It was also recommended by Eco Baltia boss Māris Simanovičs in a Tax Stories podcast conversation.
Everything has happened once..
The relevant section of the book mentions an art dealer Joseph Duveen who faced a problem (in fact, two) that millionaires no longer had a place to put the paintings they had purchased, and the inheritance tax was becoming increasingly high. This negatively affected his business. As a result, he helped to establish the National Gallery of Art in Washington in 1937. One of the millionaires donated his collection to it. Thus, his client killed at least 4 birds with one stone:
freed up space (walls) for new purchases,
reduced the number of paintings available on the market, increasing pressure on prices,
they were not subject to inheritance tax,
improved the reputation as a patron.
With 1.1.2025. amendments to the VAT law
In September news alert we already reported regarding all the new amendments to the VAT law. By the way, they also apply to the special procedure for applying VAT to works of art. Thus, one of the criteria for a person to be considered a seller of used property, works of art, etc. has been clarified.
Resume
I predict that the Wild West in the industry of paying with cash will end here very soon. As the procedures for dealing with galleries involved become normalized (and as they become more educated), the parties will increasingly conclude written contracts for transactions, issue invoices, and pay capital gains tax and VAT. Donations, on the other hand, have long been a normal practice.