Taking on the Art Tax

From September 1999 to mid-January 2000 a sense of foreboding hung over the art world in the Netherlands. The secretary of state for financial affairs, Willem Vermeend, had proposed a tax on private art collections at 1.2 per cent per annum starting in 2001. The catastrophic effects this would have had are easy to imagine.

Example

In 1970 a young woman starts buying work by Henk Helmantel for a few thousand guilders a year over a period of ten years. Today, those paintings by this contemporary master sell for more than 100,000 guilders each. Her Helmantels have risen in value to over a million. This has no effect either way on her enjoyment of them, but it certainly has a down side. Because according to secretary of state for financial affairs Willem Vermeend's plan, she would be liable to pay an annual capital gains tax of 12,000 guilders. Naturally, she would hope to live to a ripe old age, so that over the coming thirty years she would expect to have to pay 360,000 guilders just to be able to enjoy her collection of Helmantels.

For connoisseurs with large private collections the proposed tax would soon destroy any enjoyment they might obtain from the works they have assembled. Major collectors who have amassed important collections - whether or not this has cost large sums of money (museum directors know them well) - would have to pay 12,000 guilders on each million per year. A collection valued at twenty-five million guilders (25 modern classics or 25 old masters or 25 nineteenth-century paintings) would cost the owner 300,000 guilders annually. In the course of nine years this would come to nine million guilders. These collectors will never pay that sort of amount. Probably, they would either leave the Netherlands or sell their collections. Whatever they decided, Holland would lose them as collectors. And where private collections disappear, works can no longer be given to museums on loan, let alone donated. So museums would also suffer seriously as a result of this tax.

These are just a few examples that Stichting NedArt outlined in an official objection submitted to the parliamentary committee on financial affairs in protest against the legislative proposal for the 2001 income tax reform presented by the ministers of finance Gerrit Zalm and Vermeend in mid-September 1999.

Innovation

It was a surprising innovation, since owning art has been exempt from income and property tax since 1894. Few actually noticed this proposal in the legislation. The planned text stated that works of art and scientific objects would be exempt from the new annual capital gains tax in Box III at 1.2 per cent of the total value, unless the works of art are held also and principally (i.e. first and foremost) as investments.

In fact private individuals buy art to enjoy it and to display in their homes. They do not consider art principally as an investment. Vermeend felt differently, however, because in an explanatory statement he noted that if a private individual buys expensive antique furniture and actually uses it in the home, it is nevertheless intended as a (tax-free) bonus for a rainy day. With this nonchalant remark the secretary of state declared all works of art free game. After all, how can an art lover possibly prove that a work was bought from a passion for art? What proof is there that a person really does prefer antique furniture to contemporary design? Indeed, perhaps design furniture is also considered art. A tyranny loomed over the art world that threatened to leave the private citizen impotent. Although of course individuals are mobile: they can leave the country. Art is also mobile and easy to keep out of sight of tax officials. Capital gains tax, originally instituted to retrieve capital that had left the country, would in fact result in art finding its way abroad, underground or into the black economy.

The Dutch art world was taken totally by surprise with this unwholesome plan. It seemed was incredible that anyone could devise such a scheme. As already mentioned, Stichting NedArt - which represents the interests of art dealers, gallery owners, art fairs, auction houses, art insurers and art transporters - submitted an extensive, substantiated objection to the permanent parliamentary committee on financial affairs. Among those who recognised the seriousness of the situation and supported these objections were the Nederlandse Museum Vereniging and Vereniging Rembrandt.

Those who ask ...

Following the objection, the main political parties began asking the secretary of state questions. All that Vermeend was prepared to concede in the debate was that the burden of proof would rest with the tax inspector. His position was therefore that private individual would have to pay tax on art, but that it was up to the inspector to prove that a person owned works of art also and principally (i.e. first and foremost) as investments. Moreover, each item would be assessed separately. And inherited pieces would also be included. All this despite the clear advice of the culture and tax committee set up by the ministries of finance and of culture, which had called for an unambiguous tax exemption for art. Apparently the secretaries of state had filed the committee's report Hoog aanslaan, laag belasten and forgotten it, as committee chairman Cox Habbema had predicted when presenting the document.

Those who write ...

Astonished by the blatant obstinacy of the two ministers, Stichting NedArt resolved to issue a press release on the evening that the final cabinet approval for the tax reform plan was to be given, under the heading Vermeend threatens Dutch art ownership. On the morning of Thursday, 13 January, Dutch newspaper De Telegraaf shook the country awake with an article under the headline Looming exodus of art. Almost all the press followed suit, as did TV and radio. Collectors threatened publicly to leave the country, museum directors explained the danger to loans and donations from private collectors, the whole Dutch art world was up in arms.

That Friday evening, the secretary of state for finance responded in a press release stating that there was nothing to worry about. Following the subsequent debate in the Second Chamber, the government has indicated that the proposed tax reform is not intended to raise the level of tax on art. On the contrary, it is with an eye to the importance of art collecting in the Netherlands and government policies to stimulate the arts that an exemption has been incorporated in the capital gains tax for works of art and scientific objects. In the aforementioned legislation, moreover, the government has underscored that the proposed exemption is fundamentally in line with the existing property tax exemption. Fine words, but these were not in the proposed legislation.

Legislative proposals

Soon after Zalm's reassurances to the art world at the Hofstad lecture on 18 January, a legislative proposal was submitted to the Dutch parliament. All the main parties demanded that the interpretation of the text given by the secretary of state be incorporated more accurately in the text. Finally, Vermeend adjusted the wording in an official memorandum as follows:

Article 5.2.2.
1. Property shall not include works of art or scientific objects, unless these are intended principally as investments.
2. Works of art and scientific objects include works of art or scientific objects made available to third parties for cultural or scientific purposes.
3. Works of art and scientific objects that form part of a collection are not thereby considered an investment.

In the accompanying explanation, moreover, it is clear that the purpose of this legislation is to ensure that certain situations are covered by capital gains tax. This refers, for example, to construction-like situations in which art is bought with a view, among other things, to avoiding assessment dates relevant to the calculation of profit levels or the purchase of 'shares in warehouse art' as a new tax-free investment product. In this kind of situation, whereby persons liable to pay tax are clearly not buying art for art's sake, exemption would not be suitable. This will limit the attraction of the exemption for works of art and scientific objects and the resultant reduction of profit levels.

All's well that ends well

According to Vermeend we can now rest easy, everything remains as it was. And indeed, the threat of income tax on art seems to have been averted.

Nevertheless, we would like to make the following clear. If Vermeend's purpose was simply to combat abuse of tax exemptions for art, he did not need legislation to achieve this. The tax inspector can always counter abuse using the fraus legis principle. This way, art held by a private individual to avoid capital gains tax is simply calculated under Box III and taxed at 1.2 per cent. Had the secretary of state considered the fraus legis principle insufficiently effective or too indirect, a simple directive accompanying the legislative article would have sufficed.
But as they say, all's well that ends well.

LW/WJH