On 16 March 2023, the Italian Cabinet approved a Draft Law of the reform of the tax system (Bill 1038 presented to the Parliament on 23 March 2023) aimed at relaunching Italy economically and socially.
The incoming measure will completely rewrite the current Italian tax system enacted in the 1970s, introducing, among other changes, important changes in the taxation of capital gains from the sale of works of art. The incoming changes relating to the world of art may also represent an important opportunity for the development of this market, thanks to overcoming uncertain situations that hitherto existed even within the jurisprudence of merit and legitimacy.
The reform is to be implemented within twenty-four months from the date of entry into force of the enabling act for tax reform, scheduled for 1 January 2024. One or more legislative decrees will have to be issued.
Current Italian legislation considers an art dealer to be anyone who professionally and regularly trades in works of art in order to make a profit. This person is taxed for direct tax purposes as an entrepreneur and for VAT purposes pursuant to Article 4 of Presidential Decree 633/72 (rate of 22%; art galleries may adopt the margin scheme, i.e. apply the ordinary VAT only on the share of the capital gain from the sale and the reduced rate of 10% - a rate that should fall to 5% - on imports and direct sales by the artist or their heirs or legatees). The art dealer's case therefore has a clearly identified taxation.
Things get more complicated when an individual, an occasional dealer or collector, resells works of art as the current legislation does not identify in detail the boundaries between occasional dealing and pure collecting.
In practice, it also happens that the collector, who resells works to improve his collection, is challenged by the tax authorities as carrying out an occasional business activity, which is taxable for income tax purposes as it generates miscellaneous income.
Sundry income is determined on the basis of the difference between revenues and costs; in the case of works of art, the costs consist of charges for the conservation of works (such as, but not limited to: restoration, storage in a protected environment, appraisal reports), insurance charges, charges for the valorisation of works (inclusion in catalogues, publications, participation in exhibitions with related transport and insurance costs).
The jurisprudence (Supreme Court, Order No. 6874, filed on 8 March 2023), referring to Article 55 of the current Italian Income Tax Code (TUIR), has identified regularity as the crux of the matter, regularity that would bring the work within the scope of business income.
According to the Supreme Court, the following significant elements must be examined in order to determine whether habituality exists:
number of transactions carried out on a regular basis;
sale of works by prominent artists;
high amounts of transactions;
quantity of subjects with whom relations are maintained;
variety of the type of assets disposed of.
The absence of habituality excludes taxation as business income.
A private individual who sells works of art on an irregular basis may be considered an occasional dealer or a collector, depending on the purpose of the purchase and the length of time they have owned the work before reselling it. The distinction between an occasional dealer, who is taxed, and a collector, who is not taxed, depends on various factual elements and circumstances; it seems, but is not very clear, that according to the Court of Cassation there is no taxation if the work of art was not purchased, but received by gift or inheritance.
Art. 5 of the draft enabling act for the reform of the tax system provides, with regard to miscellaneous income, 'The introduction of regulations on capital gains obtained by collectors for the sale, outside the exercise of business activity, of works of art, antiques or collectibles, and, more generally, of creative works belonging to the figurative arts, excluding from taxation those cases in which the speculative intent is absent because, for example, the capital gains realised relate to assets acquired as a result of inheritance or donation, an exchange has been made with other objects or works, or the consideration obtained is reinvested within a reasonable period of time in other assets falling within the scope of the discipline under review. This is without prejudice to the possibility for the tax authorities to challenge the simulation of donations of the said objects and works to family members if within a short period of time the latter transfer them to third parties. Outside these last cases, the capital gain obtained will fall within the income deriving from commercial activities not habitually exercised under Article 67(1)(i) of the TUIR'.
Therefore, it will finally be clear that the private individual, who inherits works of art, will be able to resell them without fear of being taxed for direct tax purposes on the capital gains realised.
An individual who receives works of art as a result of a donation may also realise untaxed capital gains as long as it is not a simulated gift between family members.
Other cases will also be identified, in addition to the sale of works resulting from inheritance and/or donations, where there is no speculative intent, such as the exchange of works for other objects or works or the obtaining of a consideration that is then reinvested within a reasonable period of time in other assets covered by the discipline under review.
The Bill in question acknowledges the current existence of uncertainties and doubts as to interpretation; in fact, the relative illustrative report states that: "The purpose of the intervention is to remedy the situation of uncertainty that currently exists in this regard, also within the jurisprudence of merit and legitimacy; therefore, a specific transitional discipline must be introduced".
This assertion makes it possible to request and obtain the annulment of penalties with regard to pending litigation. In fact, Article 10(3) of the Statute of Taxpayers’ Right (Law No. 212/2000) states: "Penalties shall not be imposed in any case when the violation depends on objective conditions of uncertainty as to the scope and application of the tax rule or when it results in a mere formal violation without any tax liability; in any case, the pending litigation on the legitimacy of the tax rule does not determine objective conditions of uncertainty (omission)"
The transitional rules should, most likely, as has been the case in the past for other legislative amendments, provide for the possibility of franking capital gains by paying a substitute income tax, hopefully at a low rate.
This tax reform will finally allow art to be enjoyed within a situation of legal certainty.