Freeports

As several cities compete for the position of “Asia’s art-market hub,” one of the strategies adopted by the aspirants has been the introduction of freeport areas. These districts offer storage facilities and logistics management for art and other collectibles. Located in a designated area with “bonded” customs status granted by the local authorities, freeports are generally not subject to import duties or sales, value-added and other taxes. While they provide clients with a number of tax and other benefits (including expedited customs clearance), collectors should consider a particular freeport’s legal as well as practical issues to ensure that their interests are protected. 

For customs and tax purposes, a freeport is effectively regarded as “outside” the country in which it is physically located, hence its tax-free status. However, if artworks are transferred into the host country, customs must be cleared and duties and taxes will be payable at that point. Collectors should be aware that these taxes will usually be calculated on the value of the work at the time it is transferred, and they may well be higher than when the work was first imported into the freeport. 

When artworks located within a freeport are bought and sold and remain within the freeport, these transactions will similarly be exempt from sales, value-added or other transaction taxes. Note, however, that the owners of the works may still be subject to capital-gains or income taxes depending on their tax residency and local tax laws.

Collectors should also be aware that obtaining insurance coverage may become problematic, given the concentration of a large amount of highly valuable art in one location. The result may be that premiums for insuring the art become uneconomical.

A closer look at the primary freeports in East Asia reveals their specific characteristics and benefits. Singapore launched its freeport in 2010, adjacent to Changi Airport, with storage areas, showrooms, workshops and offices. It enjoys free-trade-zone status, with artwork stored there exempt from import duties and Goods & Services Tax, which would normally be levied at a rate of seven percent. Collectors may also move works temporarily to local museums in Singapore for exhibition without incurring duties or taxes.

 Meanwhile, the duty-free port of Hong Kong, while lacking purpose-built art facilities, continues to be an attractive trading hub from a tax point of view. Hong Kong does not levy any import or export duties on artwork, and there are no local sales, consumption or value-added taxes.

The latest entrant into the Asian freeport scene is Beijing, which has plans to build an 83,000-square-meter complex adjacent to Beijing Capital International Airport, scheduled for completion in 2013. The “Beijing Freeport of Culture” will feature a logistics center for storage and delivery, an exhibition center and a zone for enterprises. It will also have free-trade-zone status, enabling artworks being imported into the zone to enjoy reductions to or exemptions from Chinese duties and taxes on the importation of artworks, which currently include an import tax of six percent (recently reduced from twelve percent), value-added tax of seventeen percent and an additional consumption tax of five percent.

The Beijing freeport will allow international galleries to import, exhibit and sell art there tax free. This will be a relief for international galleries temporarily importing works to China for display at art fairs, where they currently have to navigate a labyrinthine customs process. It will also be an attractive option for galleries that may wish to be based there permanently.

Another aim of the Beijing freeport is to encourage Chinese collectors to keep their art in Beijing, including—the founders hope—cultural and historical relics repatriated from abroad. Chinese collectors have increasingly been big spenders in international art markets, and the tax benefits of the freeport may encourage them to bring their purchases back to China rather than storing them overseas.

Despite a freeport’s status as a customs-exempt zone, the property is still located in the host country and subject to that country’s laws. Local laws on “bailment,” the law governing the entrusting of property to a third party, will need to be considered, and collectors should seek advice as to what protections local law provides in the event that their property is lost, damaged or misappropriated. Gaps in local law may be covered with appropriate contractual arrangements with the freeport facility.

In addition, any disputes arising in relation to property located in the freeport are likely to be resolved in the local courts unless collectors specify otherwise. Collectors should be certain to include contractual provisions that select a court with which they are comfortable or that provide for arbitration as a dispute resolution mechanism—bearing in mind of course that the physical location of the property and the ability to enforce any court or arbitration order in that location will be the ultimate consideration.

All of this leaves one wondering how the Beijing freeport will compete against locations such as Singapore and Hong Kong, which arguably have a competitive advantage in terms of rule of law. 

This is thrown into sharp relief by the recent actions of the Chinese authorities in investigating an international art-handling company, which have resulted in the arrest of one foreign national and one Chinese employee of the company on charges that they undervalued imported art to avoid customs duties. This case has led to an apparently wide-ranging investigation of logistics companies, collectors, art-investment companies and auction houses. Artworks in the custody of some of the companies involved have also been impounded or effectively “frozen” by the Chinese authorities. Developments of this nature may give pause to collectors who are considering what might be a “safe” location to store their artworks—both in terms of the safety of the artwork and their own personal safety—and may discourage collectors from repatriating or storing work at the Beijing freeport.

Freeports provide a number of advantages to collectors in terms of convenience and flexibility. However, collectors should assess the legal risks carefully and bear in mind that not all freeports are equally free.