Freeports – Warehouses of wealth

Freeports are areas where goods may be handled with less intervention from taxing and customs authorities, and are usually located in seaports and airports worldwide to smooth the process of international trade.

In the past, freeports were used for storage of goods in temporary transit. Until the goods reached their final destination, they were free of taxes and customs duties, it led to quicker turnaround times for different stages of international trade.

Nowadays, freeports have the same function and are still being used to facilitate international trade. However, they are used not only by big international companies with significant volumes of international sales, but also by individuals for personal trading. Most of the clients of freeports purchased goods for investment purposes and want to keep those goods in a safe location, and also benefit from the tax suspension.

In a freeport, clients can avoid paying only certain taxes, but not all.  Taxes such as sales taxes, value-added tax (VAT) and custom duties are only paid when the goods arrive at the final destination, so the longer that art is stored in a freeport, the longer the obligation to pay such taxes and customs duties is delayed, and if the art never leaves a freeport, such taxes and customs duties will never be due.

Legally, there is no difference in treatment of goods in the freeports, so all kinds of goods can benefit from the tax suspension and there is no restriction on who may use the freeports.

For their clients, freeports provide highly sophisticated and secure storage facilities for long-term or even permanent storage of luxury goods. Freeports today offer world-class state-of-the-art facilities and white-glove, museum-standard art amenities, so these areas become one of the safest places in the world to store art.  The list of luxury items that are often stored in freeports includes fine art, gold, classical musical instruments, classic cars, historical artifacts etc.

If a luxury good was purchased with no desire for personal use, only for investment purposes, there is no reason to move the good to a final destination outside of a freeport because it is often more secure inside a freeport than at any other facility. Any future sales can take place at the warehouse where the good is located and if the good requires any kind of servicing, specialty companies are at a user’s disposal.

Available options

There are many different freeports to choose from around the world. The main distinction among the freeports is their disclosure policies, which are more troublesome in some locations than others. For example, the Luxembourg freeport requires the trustees of a trust storing art inside the freeport to disclose the identity of the trust’s beneficiaries, while other freeports may not necessarily require that additional layer of disclosure.

One of the world’s most unique freeports is Hong Kong, because its entire territory is essentially a “freeport”. Consequently, artwork can be stored in private settings, outside of a warehouse, and still have many of the benefits that traditional freeports offer. Most European countries have some form of freeports within their borders; these countries include France, Germany, Luxembourg and the United Kingdom and Switzerland.

It is important to remember that first of all, freeports suspend taxes but do not eliminate all of them. Secondly, the tax suspension only applies to the taxes and duties mentioned above. Thirdly, the buyer may be required to pay such taxes and duties when moving art to a location outside a freeport. For example, if a buyer purchases art in a freeport and afterwards ships it to the United States, the state where the art is delivered may impose a use tax at the time of delivery. Other taxes, such as income taxes, may still be applicable even though art is held in a freeport, and this tax is based on the country where the seller is domiciled or resides. For example. U.S. residents are taxed on their worldwide income, which includes any gains realized on the sale of art that takes place in a foreign freeport. Therefore, such gains must be reported to the Internal Revenue Service. Additionally, if an individual dies with art located in a freeport, estate tax may still be owed on the value of such art. For example, if a nonresident alien dies with art located in Delaware, the decedent’s estate may owe estate tax in the United States on the value of the art.

Endnotes

1. WealthManagement.com: “Freeports for the art world”, Diana Wierbicki, Amanda A. Rottermund, 2016, < http://wealthmanageme nt.com/art-auctions-antiques-report/freeports-art-world>;
2. Campden FB: “Hidden Treasure: a look into the world of freeports”, Jessica Tasman-Jones, 2016, < http://www. campdenfb.com /article/hidden-treasure-look-world-freeports>;
3. Icefat: “Freeports: How do they work?”, 2016, < http://www.icefat.org/newsletter2-13/newsletter2-13.pdf>.