How do you store lots of art?
Art freeports are storage facilities located in free-economic zones.
Free economic zones were created to facilitate commerce by simplifying customs rules in such zones. Which commonly include the ability not to pay any taxes while the goods are in that zone. The purpose of free economic zones is to encourage trade by suspending levies during the transit of goods, thus simplifying the regulation of global trade.
Art freeports are an outgrowth of free economic zones. Currently, the largest freeports in the world are located in Geneva, Luxembourg, and Singapore, locations with high levels of trade located near international airports for the ease of transporting artwork. Freeports have existed for a long time; in particular, the Geneva Freeport opened in 1888 (Knight). One can store art pieces in a freeport without having to pay taxes on their purchase or sale. The proposition of no taxes is enticing, but art freeports are expensive to access.
The cost of rental space in the facility varies.
But estimates range from approximately $1,000 a year for a medium-sized painting and $5,000–$12,000 for a small room that can accommodate multiple objects (“Über-warehouses”). Hence, the cost of storage precludes low-value paintings from being stored in freeports in the long term. The price ensures that only highly-valued art pieces are worth storing in a freeport.
In an article “Über-warehouses for the ultra-rich,” The Economist describes “freeports [as] something of a fiscal no-man’s-land” where customs duties and taxes do not need to be paid.
In art freeports, goods become effectively stored for decades without incurring any taxes. The Economist article emphasizes: “better still, sales of goods in freeports generally incur no value-added or capital-gains taxes. These are (technically) payable in the destination country when an item leaves this parallel fiscal universe, but by then, it may have changed hands several times.” In effect, art freeports become a permanent storage facility for art.
To understand art freeports as a phenomenon, it is also essential to understand the distribution of the global art market.
The art market is an international, highly-unregulated market. The Art Basel and UBS Global Art Market Report states that the largest art markets in the world are China, the UK, and the US. The three markets combined account for a majority (82%) of global sales value in 2020. The US is in the leading position, with a share of 42% of global sales values, with China and the UK on par at 20% (Art Basel).
When one thinks of art, one imagines it supposedly derives value from bringing enjoyment to the human eye. When it sits in a freeport, the owner forgoes the art’s use-value by letting it sit in a closed space that does not get regularly accessed by anyone for the purpose of enjoying art.
In a 2020 article “Freeports and the Hidden Value of Art.” John Zarobell of the University of San Francisco argues that:
“the burgeoning of freeports globally suggests that speculation has become a more prominent pattern of art investment, but it also demonstrates that tax avoidance is a goal of such speculators and the result is that more artworks are being taken out of circulation and deposited in vaults beyond the view of regulatory authorities” (1).
Zarobell continues to say that the world is experiencing a “shift in which the economic value of art works predominates over their cultural value” (1).
The focus of this paper will be examining and questioning the stakeholder model of profit-maximizing the return on investment into art in lieu of enjoying art for its aesthetic value.
To understand the existence of freeports, it is essential to examine why stakeholders want to store their art in freeports by modeling their preferences.
The art market differs from a typical production market in the fact that while in traditional markets one typically expects to have a producer or an intermediary on one end of the trade, and a consumer on the other, in the art market, the same individuals play the role of buyers and sellers, just at different times. This essay will refer to those individuals as traders.
How do you store lots of art?
A typical trader in the art market is a high-net-worth individual. The art pieces they buy do not represent their most valuable investments; instead, art is part of a diversified portfolio of investments, including public and private equities, real estate, and other investments. When one thinks of investing in art, a potential downside is art’s relative illiquidity and continuous storage and maintenance costs, such as restoration and preservation services.
However, when art represents a relatively small portion of total investments. The trader is willing to disregard the liquidity of their investment and prioritize other goals. Such as long-term profits and the overall goals of the investment portfolio. The traders in the market care most about the art as an investment. Not as something that has a potential use-value of being displayed in either a home or a public gallery.
The sellers in the market are usually the same high-net-worth individuals that bought the art in the first place.
At first, the idea of buying an asset that is challenging to price seems risky. However, art has low volatility and a low correlation with other asset classes, which provides counter-cyclical protection from stock market downturns for diversified portfolios (Mei and Moses, 1666). In particular, in an analysis of a large dataset of art sales, Jiangping Mei and Michael Moses found that art has a 0.04 correlation among real returns to the S&P 500 Index, an index of 500 large US companies that is commonly used as a benchmark for stock market returns (1662).
Moreover, by having art in the portfolio of high-net-worth individuals. The value of their portfolio becomes protected from immense losses in times of stock market downturns.
Furthermore, in comparing art storage in freeports versus a public display of art. It is essential to think of four factors that make art valuable as an asset:
aesthetic value, conspicuous consumption, cultural capital, and return on investment
The aesthetic value represents the value one derives from the aesthetics of an art piece, i.e., art provides enjoyment by being seen. Conspicuous consumption is the purchase of an art piece for the purpose of publicly displaying one’s wealth, such as having a fancy, highly publicized ceremony for the opening of a museum display. Cultural capital is a concept first introduced by Pierre Bourdieu, and it “emphasizes the importance of distinctive aesthetic tastes and knowledge in reinforcing class boundaries” (Ostrower, 43).
Ownership of art can be considered one such social factor, be it through specialized artistic knowledge or membership on philanthropic boards.
By publicly owning art, high new worth individuals increase their cultural capital. The last factor, return on investment, deals solely with expected financial returns on art. When an individual chooses to store art in a freeport, they forgo art’s aesthetic value, conspicuous consumption, and the associated cultural capital; instead, an individual purchases art solely as a speculative investment that elevates the economic value of the art above other factors that make art valuable.
In thinking about why individuals buy art and let it sit inside a storage locker. One should consider how to maximize the appreciation of art as an asset and anonymity associated with freeports.
In a logical sense, when one buys an art piece for the sole potential of its appreciation in dollarized value, one utilizes all ways to maximize their return on investment. Letting art sit in a freeport ensures that it is located in optimal conditions for storage; art sits in a secure location with restricted access, so insuring the art is cheaper than dealing with the hassle of arranging transportation of the art out of the freeport and the associated increase in insurance premiums.
Nevertheless, the discretion and anonymity art freeports provide play an essential role in the decision of individuals to store art in a freeport.
Suppose one does not want to reveal their identity as the owner of an art piece. In that case, it is possible to create offshore corporations. In jurisdictions that protect the identity of their ultimate owners and have minimal taxes, such as Panama. The Panama Papers leak in 2016 highlighted the use of offshore entities for the holding of expensive art. In particular, the documents uncovered that an offshore entity officially owned art that Russian billionaire Dmitry Rybolovlev ultimately owned. (Reyburn).
In addition, the Nahmad family of art uses a Panama-based entity to buy art. A fact highly publicized during a court trial between the Nahmad family and Philipp Maestracci. A French resident. Who claims the ownership of a $25 million painting officially owned by a Panama entity. If David Nahmad, a member of the Nahmad family. And an owner of 300 Picasso’s with a net worth estimated at $2 billion. Moreover, uses offshore entities to own his art. That practice should be common among high net worth individuals who invest in art (“David Nahmad”).
Offshore entities reasonably effectively (barring potential leaks) conceal the identity of their owners.
Offshore entities can significantly increase the return on investment into art. For the ultimate beneficial owner of an offshore entity. If one puts money into an offshore shore and uses that entity to buy a painting to store it in a freeport. One gains access to potentially immense tax benefits. It is not viable to assume that the country’s tax authorities where the ultimate beneficial owner resides will know all information about the offshore corporation.
Hence, after buying a painting and storing it in a freeport, the offshore entity can easily sell it inside a freeport and buy a new one while evading tax reporting requirements and not paying any taxes on capital gains from the sale of art. Currently, physical assets do not have the same reporting requirements as financial assets, such as bank and brokerage accounts. In that case, the real return on art investments becomes magnified compared to other taxable investments.
A potential downside of the identity protection provided by freeports. Is that those protections invite those who cannot use traditional banks.
Such as terrorists or organized crime rings, to use freeports as storage for their wealth. Daniel Brazier, a special agent with Homeland Security Investigations, an arm of the U.S. Department of Homeland Security, in discussing freeports. Commented that “authorities really don’t know what’s being stored there and who really owns things” (Letzing and Colchester). The potential for the abetting of freeports in the “financing of terrorism, money laundering and organized crime“. Has led to a recent European Union clamp down on freeports. Which include measures to “identify and report suspicious activities at the ports and zones. As a result of the high incidence of corruption, tax evasion, criminal activity” (“EU Clamps down”).
The governments are interested in collecting taxes on the sale of profitable assets. And the possible import of artwork into a country from abroad.
The government’s benefit from transactions in the art market only insofar as accrued taxes are paid to the government. The taxes exist in the first place to collect money either for funding the government or redistributing money into sectors of the economy where governments find it most useful. It is possible to think of taxes as a purely punitive instrument that discourages domestic and international trade.
In the case of domestic trade, the sale of an asset incurs taxes which depending on the country, could include capital gains taxes or value-added taxes. In the case of international trade, most countries and all global countries in the global art market have import duties that need to be paid when a piece of art enters the country from abroad. Because freeports create a parallel fiscal universe in which no government has jurisdiction over market transactions, they allow traders to bypass all levies placed on art-related transactions and get access to a global market.
Artists are interested in having their artworks displayed in public, but the current system fails in that regard.
When an artist creates an art piece, the artist puts a lot of emotions and creativity into creating the piece. It is reasonable to assume that the artist wants others to enjoy the aesthetic pleasure of the piece. When that piece ends up sitting in a freeport, others do not derive aesthetic pleasure. What is worse, artists have no leverage over where their art is going to be located. After an artist sells an art piece to the first buyer, that artist relinquishes all rights to that piece and cannot prevent the art from being stored in a freeport.
The current market equilibrium is inefficient on the social level; art is not generating its full use-value, and society cannot appreciate art stored in freeports. Nevertheless, the incentives of profit-seeking traders align with tax benefits provided by art freeports in such a way that if one wants to maximize their profits and get access to the global art market, one’s best strategy is to store art in a freeport.
Economics as a social science is not merely interested in exploring economic phenomena, such as why art freeports exist; the creation of economic models allows economics to design remedies that cure market inefficiencies. In the case of art freeports, it is a worthwhile endeavor to reduce the use of freeports through potential government regulation to increase government revenue through additional taxes and ensure that art is displayed in public instead of being stored in closed storage.
One possible approach is to increase regulatory oversight of freeports, such as in the current case of the European Union discussed previously in the essay. The issue with this approach is that if one jurisdiction makes it more challenging to utilize freeports on its land, another jurisdiction will attempt to attract more artwork to come to a freeport located within its jurisdiction as a form of competitive advantage.
Then, a coordinate game emerges.
Freeports support local jobs in the sector and attract capital into the country by highlighting how business-friendly a country’s laws are. If one country tightens the regulation of its freeports, another country will advertise its attractiveness by not changing its policies. Unless all countries move to regulate the industry more tightly, it is unlikely that the use of freeports will significantly decrease as a result of more stringent government regulation.
Another possible solution to decreasing the use of art freeports is to decrease or potentially stop the taxation of art sales and imports.
If that occurs, freeports will lose their competitive advantage, and individuals will buy and sell art through more transparent channels. However, that solution sounds incredibly politically unpopular. Imagine a New York Times headline: “The US Government Decreases Taxes on the Ultra-Wealthy.” Voting for a tax decrease that explicitly targets the wealthy would severely undermine public support for a politician that votes for that policy. Similarly, it is unlikely that such a decrease in taxes will pass in other countries regardless of its potential to bring more artwork outside of closed storage and into art galleries.
A third possibility is that anti-money laundering considerations may bring an end to the freeport industry. The recent regulatory moves undertaken by the European Union highlight the importance of preventing access to capital to terrorist organizations, money laundering, and organized crime. A crackdown on freeports is a logical next step in keeping track of assets of the ultra-rich after recently increased financial reporting requirements on bank accounts. It is the case that individuals who benefit from freeports have significant influence over many political decisions due to their wealth.
However, when something that provides significant benefits to the rich is also used by terrorists and organized crime, it becomes more challenging to sustain the status quo in the long term.
In a world with art freeports. The aesthetic value of the art becomes subordinated to the art piece’s potential as a financial investment. The art owners are not collectors who appreciate the aesthetics of art and want to share that value with the world; they are wealthy financial speculators who aim to protect their portfolio from market downturns and profit from the appreciation of assets in a market that is only accessible to other wealthy individuals. The system of art freeports encourages ownership of artworks by high net worth individuals. In tax-free storage hidden from public view. The system of offshores reinforces the attractiveness of that possibility by enhancing the privacy of high net worth individuals and lowering taxes on their financial returns from art investments.
Is it possible that there will be a reduction in the use of freeports in the future? Yes, it is possible; however, freeports have existed for almost 150 years since the inception of the Geneva Freeport. It seems unlikely that possible crime and terrorism links will lead to a systemic change in how high net worth individuals use freeports. There may be more stringent reporting requirements on the ownership of assets stored in freeports. However, the ultra-wealthy have consistently found ways to take advantage of financial frameworks that disproportionately benefit their wealth.
From the art market, we learn that if a good has the potential to appreciate in value, a financial system that systematizes profit-seeking behavior is likely to exist alongside that good regardless of how absurd the reality of that system sounds, such as the reality in which art sits in a closed storage room in an art freeport instead of a museum where the public can enjoy it.
Written by Maksym Sherman
How do you store lots of art?
How do you store lots of art? Works Cited
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Letzing, John, and Max Colchester. “Oligarchs and Orchestras: Inside Luxembourg’s Secretive Low-Tax ‘Fortress of Art’ Warehouse.” The Wall Street Journal, Dow Jones & Company, 23 Sept. 2015,
How do you store lots of art?
Mei, Jianping, and Michael Moses. “Art as an Investment and the Underperformance of Masterpieces.” American Economic Review, vol. 92, no. 5, Dec. 2002, pp. 1656–68, https://doi.org/10.1257/000282802762024719.
Ostrower, Francie. “The Arts as Cultural Capital among Elites: Bourdieu’s Theory Reconsidered.” Poetics, vol. 26, no. 1, 1998, pp. 43–53.,
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