Investment in Art – Tax Aspects

Pick & Weiss Legal Offices
February 27, 2013
January 10, 2019

Lior Pick, Adv, CPA (Isr.), TEP

In recent years, in an attempt to diversity portfolios, investments in art have become much more common. It has been custom for years to invest in art privately, and not as a means to maximize profits. On the other hand, in recent years, investors discovered the option to maximize profits through investment in art, such as: paintings, sculptures, old furniture, etc.

It is noteworthy that these investments raise questions that involve various tax aspects that influence the deal’s profitability: will the investment be taxable? What is the tax rate that shall apply to the investment? And so on.

Sometimes, the uniqueness of investments in art is the combination of the private and the business aspects. For example: an individual buying a painting, expensive as it may be, for private purposes and hangs it in his living room, when he will sell the painting, even if the deal with be very profitable, it is likely that the said profit will not be taxable at all because this is a private investment.

On the other hand, when a business company frequently buys art, based on knowledge and professionalism in the field, and frequently sells it for a profit, while the activity is financed via bank credit, this activity may be presumed to be classified as business activity and thus it will be taxed.

For income tax purposes, the distinction between two types of income is custom: yield revenue and capital revenue. Capital revenue stems from selling the actual means of production whereas yield revenue stems from selling the “yield” produced by the said means of production. The distinction for the purpose of capital gains and business income is relevant, both for income tax purposes and for VAT purposes, insofar as the following shall apply:

Charge With a Tax on Yield Revenue

Section 2 of the Income Tax Ordinance (hereinafter: “the Ordinance”) includes 10 types of yield income (including “income from a business”, section 2(1), and more). To decide if a certain activity mounts to a “business” or not, a number of tests that concern the nature of the deal, the frequency of deals, expertise, the nature of financing, the holding period and deal circumstances were determined in adjudication. The more terms are fulfilled and the more clearly they are fulfilled – the more they will support the conclusion that the revenues in question are business (yield) revenues.

In the example above, the answer to the profit taxation question depends on the case’s specific circumstances – if the person is not an art expert, if he performed only a few deals in the area, financed the purchase of the painting with equity and held it for a long time – this is clearly not income from a “business” and thus the profit from the sale of the painting need not be taxed, according to section 2(1) of the Ordinance.

The tests determined in adjudication regarding activity that amounts to a business (as opposed to passive income)

The frequency of deals test – the more frequent the deals, the more we will tend to view them as commercial-business deals. In general, a high frequency of deals, considering the property’s nature, indicates the existence of business activity. However, it was determined in the Bareli Judgment that even a single deal may be a business-commercial deal.

Thus, regarding a person who frequently sells and buys art – we may classify this activity as business-commercial activity.

The proficiency and expertise test – this test is essential, and it relates to the existence of potential for deals. Proficiency may be considered a type of “fixed asset” that may be used to make deals . It was determined that expertise, knowledge and a professional connection to the field the deal concerns usually indicate its business-commercial nature . On the other hand, let it be stated that vicarious expertise, of a bank clerk in securities, for example, or of a gallery owner – might fulfill this test.

The entrepreneurship test and the organization test – the more essential the activities entrepreneurship phase is to the nature of the activities and the more robust the activity mechanism, clearly we will tend to consider the activity a commercial activity.

The financial risk test – an activity whose nature is business-commercial is characterized by financial risk. Meaning, a more speculative nature and purchase of art for shorter periods might tip the scale in favor of a business-commercial deal. Investment in young artists, that is more speculative, as opposed to known artists, might affect the results of this test.

The activity financing test – financing activity with foreign capital (as opposed to equity) usually indicates the business-commercial nature of the activity . Also, financing the activity with savings, as opposed to business credit, might detract from the activity’s business-commercial nature and vice versa .

The organization test – in the Brenner case it was determined that the existence of a mechanism, a staff, an organized registration and documentation system – might indicate the existence of commercial activity, and rule out the existence of amateur activity, as well as private attempts to gamble on accidental profits.

Tax liability due to capital gains

The Income Tax Ordinance may impose tax liability on capital gains from selling an asset after the existence of a business as said was ruled out. Clearly, art objects according to their literal definition are considered assets; however, the reductive interpretation of the order in section 88 of the term “asset” does not include movables used for private purposes, not intended for profit. Thus, if the picture in question was hanging permanently in the seller’s living room then it appears that the use thereof is private, and thus it is not income from sale of an “asset” that is taxable according to the capital gains tax, or any other tax.

VAT liability

The VAT law imposes VAT on deals in Israel, among other things if the sale was performed “in the course of business”. It appears from case law that the tests to determine the existence of a business for tax liability also apply to determining the existence of a sale “in the course of business” for VAT purposes .

As for the VAT rate, section 5 of the VAT law delegates the minister of finance to determine, regarding art objects and certain used assets sold by those who engaged in this that the VAT due to the sale thereof shall only apply to the deal’s profit. It is noteworthy that as the minister exercised his authority as said only regarding used cars and furniture, coins and medals, the relief granted by the section is said is not felt in practice.

In conclusion, we have seen that investments in art provide diversification of the investments portfolio, while on the other hand it might result in significant tax liabilities (and at times tax advantages). Thus, it is advisable to do so cautiously, while counseling with experts, both on the quality of the investments and certainly regarding the applicable tax aspects.

Our firm specializes in legal and tax counseling for companies and individuals in the fields of taxation, hi-tech and investments, in Israel and abroad.

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This circular is general. Do not use that said in the circular in any way without receiving an opinion and/or particular professional legal counseling according to the specific circumstances.


Lior Pick and Co., Law Firm.


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