Works of art without justification of acquisition. Tax implications of their sale

These lines are intended to clarify the tax repercussions in the event of the sale of works of art that have come into our possession without any justification for their acquisition, works of art that we have never declared as part of our assets, and for which we have no purchase contract or invoice, making it impossible to demonstrate how or when we came to own them or what their value was at the time.

Any sale of these works of art will be subject to Property Transfer Tax, like any other sale.

However, in relation to Personal Income Tax (IRPF), two different taxable events must be distinguished:

1.- As we are dealing with a series of works of art whose ownership does not correspond to the declared income or wealth, the sale will be considered as an unjustified capital gain in the tax period in which the tax authorities discover the ownership of the works of art, which will occur at the time of the sale.

The problem with unjustified capital gains is that they are included in the taxable base for personal income tax, the maximum rate of which is around 50%.

The only way to avoid the sale of a work of art being considered as an unjustified capital gain with a tax of up to 50% is to demonstrate sufficiently and by any means of proof admitted in law, that the ownership of the paintings is more than four years old - prescription period - with respect to the time of the sale.

This means that in order to avoid the consideration of an unjustified capital gain more than four years before the time of the sale, it is necessary to try to document and pre-constitute proof of ownership of the works of art, either by means of a Notarial Deed, an Expert's Report, or better still, both options together, and thus achieve not a justification of the acquisition of the works of art, nor their value at the time of acquisition or at the time of the Notarial Deed, but rather a proof of ownership and possession of the works of art, at least four years in advance of the time of the sale.

2.-Furthermore, the sale of the works of art will produce a change in assets, as a consequence of the transfer of an asset, so that the possible gain obtained (determined by the difference between the transfer value and the acquisition value) will be included in the taxable base of Savings, and will be taxed at a rate of between 19% and 26% (depending on the amount).

And here, we find that, clearly, when these works of art are sold, there is no acquisition value as such,so there would be a full capital gain for the amount of the sale value.

However, the Central Economic-Administrative Court has ruled that the Tax Authorities cannot determine an acquisition value of €0.00 for an asset, so that, if the difference between the price obtained and an appraisal value reliably obtained more than four years before the sale is declared as a gain, the Tax Authorities could determine a different acquisition value to that declared, although they could not consider an acquisition value of €0.00.

Olatz Uriarte
Illeslex Abogados