Freeports, tax and risk: what’s changing in the art market

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Where it can go wrong: regulation, tax exposure and execution risk

Lauren Cramer, Chair, Tax-Exempt Organizations, McLaughlin & Stern who has extensive experience advising public charities said. “One of the most common questions from collectors is how ‘bulletproof’ the art freeport strategy really is of purchasing artwork and shipping it to a Delaware freeport, all with the intent to later donate to a nonprofit institution. The short answer is that the risks are often underestimated – not that Delaware freeports are unusable, but that they are unforgiving. Without careful structuring at acquisition, disciplined handling during storage, and clear charitable-use planning well before donation, the strategy can fail at exactly the moment the collector expects it to work.”

“The enforcement trends in New York and the IRS’s approach to art donations make the traps very real: If the collector takes possession of, or even briefly inspects, the artwork in New York, the Delaware strategy can unravel or If the artwork sits in a freeport for years with no clear charitable-use planning, the fair market value (FMV) deduction may be at risk or If documentation is thin, a common issue with freeport storage, museums may decline the gift, and the IRS may challenge valuation or related use.”

“The initial trap in a Delaware freeport–to–donation strategy is the assumption that Delaware’s lack of sales tax and its secure storage facilities provide broad protection. They do not. Neither New York use tax exposure nor IRS scrutiny disappears simply because the artwork ends up in a freeport. The most common problems arise at the point of purchase: where title passes, where the work is first delivered, and whether the collector inadvertently exercises ‘constructive possession’ in New York.”

“A short inspection in Manhattan, an invoice listing a New York address, or instructions that give the collector control over the work in New York can be enough to trigger tax liability, even if the artwork is later shipped to Delaware. New York has repeatedly pursued galleries and collectors who routed works through tax-advantaged jurisdictions while taking delivery or exercising control in New York. These cases illustrate just how fragile a ‘ship it to a freeport’ strategy can be if it is not structured precisely from the outset.”

“A second set of risks tends to surface years down the line, when the collector seeks an FMV (Fair Market Value) deduction for a charitable donation. Artwork that has sat in a freeport for an extended period with no exhibition planning, no charitable-use intent, and no related-use alignment can be recharacterized by the IRS as an investment asset. In that case, the deduction may be limited to cost basis rather than fair market value. Documentation problems only compound the issue. Freeport secrecy often results in thin or inconsistent records: incomplete provenance updates, spotty condition reports, and unclear chains of title. These gaps can make museums reluctant to accept a gift and give the IRS leverage to challenge valuation or related use.”

Taken together, state-law ‘use’ triggers, valuation scrutiny, and related-use limitations, Delaware freeports are only effective when the entire pathway from purchase to donation is planned with precision from day one.”

“Delaware’s freeport ecosystem is intentionally quiet and far smaller than Geneva, Singapore, or Luxembourg. Still, enforcement actions and public controversies highlight the same vulnerabilities collectors worry about – sales tax exposure, misuse of resale certificates, and challenged donation deductions.”

Alongside these structures, there are also concerns around how freeports are used in practice.

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