Dr Alessandro Stradi
The sentence saw an art collector acting as applicant, and, on the other hand, the Italian Tax Agency acting as counter-applicant.
In Italy, the legal recourse to the Supreme Court happens if the taxpayer (in the example of our lawsuit case, the applicant) or the tax agency has lost in the first two levels of judgment (provincial tax court and regional tax court).
Other sensitive information about our lawsuit: the litigation was not only fiscal but criminal because the amount of taxes evaded exceeded the threshold for criminal incrimination in Italy. This amount had been exceeded, specifically, because the tax authority recalculated the applicant’s tax income in relation to his professional trading in artworks. Having bought and sold artworks earning a profit, this activity was reclassified as a business activity and taxed accordingly.
The applicant, on the other hand, declared himself innocent, operating as a mere collector who only occasionally sold artworks.
This is the crucial distinction in the Italian tax system – to understand whether the activity is occasional or professional.
Let's quickly retrace the first degrees of judgments.
The first tax courts rejected the appeal, considering that the plurality of elements provided by the tax office were suitable to qualify the taxpayer as an art dealer.
In particular, the tax court confirmed the correct qualification of the applicant as an entrepreneur, taking note of the regular frequency with which over the years his transactions of works of art for considerable amounts took place, in addition to the other elements provided by the tax office (interviews, participation in meetings, auctions, art exhibitions), suitable to exclude the recurrence of the figure of the collector.
That said, the tax examination of the mutual reasons must be preceded by the classification of the taxpayer as an art dealer and therefore as an entrepreneur, as claimed by the tax agency, or as a collector as alleged by the applicant – a private person who occasionally carried out transactions concerning artworks. As I explained earlier, in Italy the tax implications derive from the attribution of the first or second qualification being different.
In the first hypothesis, the activity is qualified as business income or as income coming from an exercise by habitual profession, although not exclusive of business activities (in Italy indicated in the civil code). In the second case, if an occasional speculator is identified in the subject, according to Italian tax law the income coming from non-habitual commercial activities represents “different” incomes. If, on the other hand, there is an occasional transaction by a private collector, there is no obligation to declare in Italy.
Precisely with reference to the art dealer, the Supreme Court had already recognised in the past the qualification of commercial entrepreneur in the presence of a company organisation. If there is an organisation, the activity is a business activity; without an organisation we are not in the field of business.
The expression “habitual occupation” of the activity must be understood as the exercise of the activity on a habitual basis, not merely occasional. In other words, it is necessary that the activity be carried out with characteristics of stability and regularity and that it continues for an appreciable period of time.
Furthermore, the status of entrepreneur cannot be excluded in a person who performs a single business of not negligible economic importance, following the performance of an activity that has required a plurality of transactions.
This is the most sensitive activity for a tax adviser, the most difficult to analyse and classify.
The concept of “enterprise”, in fact, covers any entity engaged in an economic activity, independently of the legal status of that entity and the way in which it is financed, in which the activity consists of offering goods or services in a given market.
That said, and having noted that the Consolidated Law on Income Taxes in Italy does not provide for specific legislation on the taxation of sales of artworks carried out by private individuals, a dealer of artworks must be defined as one who professionally and habitually exercises the trade – even in a non-organised manner entrepreneurially – with the ultimate aim of profiting from the increase in value of the same works; as an occasional speculator, who occasionally buys works of art to resell them for the purpose of making a profit.
Finally, the collector is someone who buys art works for cultural purposes, with the aim of increasing their collection and owning the work, without the intention of reselling it and generating a capital gain. The interest of the collector is therefore directed not so much to the economic value of the artwork as to the aesthetic-cultural value, for the pleasure that owning the work generates, for an interest in art, getting to know the artists, and to appreciating the exhibition of said works.
So, in Italy we have three different qualifications on which depend different fiscal effects.
With regard to our case, the Italian tax system provided, as anticipated, different consequences: for the first (the art dealer) there was a business income and the merchant was also subject to the VAT Rule. The occasional speculator would be able to generate different incomes, but was not subject to VAT purposes for lack of the habituality requirement. The collector, on the other hand, would not be subject to any taxation (direct or indirect).
The tax advisor must carefully analyse the elements on which to base the correct qualification, such as: the purpose of the purchase, the frequency and number of transactions, the duration of ownership, the activities aimed at facilitating the sale, and finally, examination of the reasons that led to the sale.
Previous tax disputes, in line with the principles indicated, qualified the taxpayer as a merchant and not as a collector on the basis of a univocal series of elements demonstrated by the office, such as: the alienation of works by important artists (Morandi, Severini, Paladino, Botero, Lichtenstein, Carrà); the regular cadence over the years and for considerable amounts; the interviews where the taxpayer himself qualified as an art dealer; and where the tax office considered untrue the statements of the taxpayer who qualified himself as a simple collector.
The game is therefore played here, on these elements.
The tax advisers therefore must collect information not only on the single transaction but on the entire activity carried out by the client for the purpose of his/her correct qualification, at the end of which it will be possible to establish, on the basis of solid reasons, whether we are dealing with a collector or a trader. This is the fundamental distinction in Italy.
XLNC MAGAZINE | No. 11 | Spring 2023