Jochem Hendricks

Fiscal alchemy, 2012
Harald Schif and Jochem Hendricks

Jochem Hendricks in conversation with the tax consultant Harald Schif

JH
Harald, you are an experienced tax advisor and auditor, look after companies and private assets, but you are equally interested in art, are a long-time collector and have many artists among your clients. What did you think when I first approached you with my fiscal reflections? When I had the idea to buy gold bars from my profits from this year to use as material for a new sculpture, in other words to transform my tax payment into art?

HS
Back then you came and asked me: Can I invest this year’s profits in the creation of a new work of art in such a way that I pay little or no income tax? The answer is: Yes. As a freelance artist you must calculate your profit according to the principle income minus expenditure. If for example you plan a sculpture requiring a lot of material you can procure and pay for all the materials you need this year; this then reduces your profit and you pay less tax. This is called profit shifting.

JH
Does it not make any difference to the tax office what kind of tax-deductible work material it is that is transformed into art? Let’s take for example the Luxus Avatar (Luxury Avatar), who is to lead a parallel life of luxury for my entire lifetime using my tax savings – providing I earn enough. How should we envision the stance tax authorities take on this matter? The officials are not idiots, after all, and will naturally see through my method. Is the sole reason for their accepting it that the state cannot conduct an aesthetic discussion?

HS
I understand your question as follows: With the part of your profits you do not need to live on you buy some or all of the valuable precious metals and/or precious stones you need as basic materials for creating, let’s say, a sculpture, and you deduct this from your profits to reduce your tax burden. If the work of art you are creating is a major life’s work to be produced over a long time, then naturally profits can be reinvested over a number of years. As an artist cannot be measured by business principles and such yardsticks, the question does not arise from aesthetics but rather from the fantastic objective of a total artwork. However, this total artwork must not be an object of everyday use, but must according to Epicurus “be a work created by a person for another and for his pleasure” which can satisfy intellectual and emotional taste and refine our existence.

JH
What happens if a collector decides to buy Luxus Avatar, which is, after all, designed to continue for the duration of my life? Will the collector have to buy all the objects I add to it? Would that not produce a snowball effect?

HS
Let us assume that your Avatar is a work of art encompassing several years, several objects, is conceived as a total artwork and that a collector or a museum decides to buy this work before its completion. In that case, first of all you receive an income for what has been created to date, and simultaneously you generate income for what will be created. The previously deferred profit is then realized the year the work is sold. From your perspective this point of time is referred to as the “end of the tax deferral”; in other words, the deferred taxes are now due.

JH
I need a bit more detail here. Does the purchase of the Avatar have tax implications for the collector? And what tax implications does it have for the artist?

HS
Generally speaking, you can say that collecting art is a “hobby”. That means you cannot write off anything because the tax authorities assume that a work of art gains in value. As long as there is no wealth tax in Germany there are no tax implications for the collector.
Not so for the artist. If he intends to create a work that is open-ended he can invest at least part of the surplus earned from the first state in the next work phase and accordingly reduce the surplus. However, in such a case the tax authorities can demand documentation of the materials used and their “further processing”, especially as according to you these are luxury items. In this instance it must be ruled out that the items are or can be used for other purposes than installation purposes, even only temporarily. In such a case the tax authorities could see the abuse of creative forms under civil law for the purpose of making a tax saving and bring down the entire project.

JH
Then I am intrigued as to what will happen.