Art: an attractive and rapidly evolving market
Investment in art is becoming increasingly attractive. Whilst interest in the art world and cultural assets is certainly a key reason, the desire to diversify investments and potential returns are also decisive factors. Works by “Blue Chip” artists1 are therefore considered stable, secure and profitable investments. This financialisation of the art market, already well established in Anglo-Saxon countries, has been expanding rapidly in continental Europe in recent years. particularly with the emergence of certain collective investment vehicles such as investment funds specialising in art. While this form of investment is already familiar in Luxembourg, it is still at an early stage of development in France.
Art works may be acquired either directly or through an investment vehicle, which offers the same benefits as those mentioned above while entrusting a specialised third party with the investment strategy, selection, storage and management of the works of art, and enabling the reinvestment of proceeds from sales made by the investment vehicle. In Luxembourg, funds specialising in art can be established in various legal forms, e.g., a partnership limited by shares (société en commandite par actions - SCA), and benefit from different applicable regimes such as the regime for reserved alternative investment funds (fonds d’investissement alternatif réservé - FIAR) with favourable tax treatment. In France, the possibility of setting up a specialised professional fund (fonds professionnel spécialisé - FPS) in the form of a free partnership (société de libre partenariat - SLP), with the creation of dedicated sub-funds, could be explored.
Acquisitions of artworks: tax incentives for investment
For several decades in France, private investment in art was encouraged by the exemption of artworks from wealth tax (impôt de solidarité sur la fortune - ISF). The replacement of French ISF with the real estate wealth tax (impôt sur la fortune immobilière - IFI), effective from 1 January 2018, rendered the exemption unnecessary as movable property fell outside of IFI scope. Nevertheless, it is possible for IFI taxpayers to pay this tax in kind by transferring their artworks to the State, subject to approval to ensure their heritage value and under certain conditions (French mechanism of the dation en paiement).
Direct investment in artwork by companies is encouraged by the art patronage scheme (mécénat). This scheme, within certain limits and subject to certain conditions (a sum equivalent to the purchase price must be recorded in a special reserve account as a liability on the company’s balance sheet), allows companies that acquire original artworks by living artists to deduct acquisition costs, provided the art remains on public display or in a location accessible to employees during the deduction period. Companies that contribute to the State’s purchase of certain cultural assets classified as national treasures or of major interest to the national heritage also benefit from a tax reduction equal to 90% of their payment, up to a limit of 50% of corporate income tax. Lastly, companies may, of course, without directly acquiring works of art, demonstrate their support for the art world through eligible patronage or sponsorship schemes or even by establishing a corporate foundation.
In Luxembourg, however, whilst the absence of wealth tax on individuals (although a corporate wealth tax exists but does not apply to certain collective investment vehicles) may make Luxembourg particularly attractive to wealthy individuals investing in art.
Under certain conditions, the VAT rate on the acquisition of artworks from 17% to 8%, thereby offering additional benefits to investors. In France too, a major reform came into force on 1 January 20252. The reduced 5.5% VAT rate now applies across the entire distribution chain for artworks, replacing the standard 20% rate that had previously been applicable in principle, albeit with certain reduced-rate exceptions. The generalisation of the reduced rate, together with the resulting simplification, has been welcomed by the art market and should further enhance its attractiveness.
Tax consequences of the transfer of artworks
In France, the sale of artworks owned by private individuals is subject3 to a flat-rate tax of 6% (plus 0.5% CRDS4), with no need to provide proof of origin or purchase price. Alternatively, it is possible to opt for the capital gain tax regime for movable assets, taxed at an overall rate of 36.2%5, with a 5% rebate per year of ownership beyond the second year, resulting in full exemption after 22 years. These rules apply if the individual is not considered a professional art dealer, as the latter are subject to the regime for industrial and commercial profits. For companies, no specific provisions exist, with the standard rate of 25% applying to capital gains.
In Luxembourg, the regime applicable to individuals investing directly in works of art is particularly advantageous, as occasional sales, regarded as part of private wealth management, are generally not taxable unless they are deemed speculative, i.e. carried out within six months of acquiring the asset. Thus, a work of art that the taxpayer has held for more than six months does not give rise to taxation of any capital gain realised on its disposal. Conversely, sales made as part of a professional activity by art dealers or artists are subject to income tax. Similarly, capital gains realised by taxable companies are subject to corporate income taxes at the standard aggregate rate (i.e. maximum 23,87% in Luxembourg City).
In both countries, the use of investment vehicles offers significant tax advantages. In Luxembourg for instance, FIARs are not subject to income tax or wealth tax, allowing investors to maximise their returns. Furthermore, distributions are not subject to any withholding tax but only to income tax at the investor level. In France, a fund established as an SLP could benefit from the tax regime for professional private equity funds (fonds professionnels de capital investissement- FPCI), i.e. be exempt from corporate income tax, provided the SLP undertakes to comply with the legal and tax requirements, in particular by investing at least 50% of its capital in eligible unlisted company securities, with the remainder eligible to be invested in art. Shareholders residing in France could then benefit, for individuals, from an exemption from income tax on capital gains from the sale of shares and distributed income6, and, for companies, from an exemption or a reduced corporate income tax rate of 15%.
With respect to transfers without consideration, in estates consisting primarily of works of art, the main issues often concern both the valuation of the artworks and the payment of inheritance tax. In France, this is why the dation en paiement mechanism referred to above also allows heirs or beneficiaries to settle inheritance tax by transferring artworks to the State, thereby facilitating the administration and financing of artists’ or collectors’ estates.
Overall, the art market presents attractive investment opportunities in both France and Luxembourg. The combination of suitable investment vehicles and favourable tax regimes allows investors to diversify their assets whilst optimising their tax position.
1 “Blue Chip” art refers to recognised works of art created by major 20th-century artists, whose value is considered stable and secure, and which have had a profound impact on the history of art.
2 Resulting from the transposition of Directive 2022/542/EC of 5 April 2022.
3 Where the sale price exceeds €5,000.
4 Contribution towards the repayment of social security debt.
5 19% income tax and 17.2% social security contributions.
6 Provided the FCPI shares were held for 5 years before being sold, subject to reinvestment conditions of income received by the FCPI, and the holding thresholds.
