Investment in works of art through Free Investment Companies (SILs)
Why are wealthy individuals starting to use SILs (Free Investment Companies) to manage their wealth?
It is not surprising that more and more families with extensive wealth are opting to structure their investments through figures such as the Free Investment Company or SIL. The strict control that the tax administration is carrying out with the Sicavs is producing a migration towards this type of collective investment figure.
Investment diversification with SILs and works of art
Works of art are not excluded from possible management through SILs. These collective investment vehicles offer an alternative that allows investors to diversify their portfolio with broad investment strategies and by including alternative assets, such as works of art. The particularity offered by SILs is to be able to choose, as their name suggests, the assets of the portfolio freely, giving it a flexible character. In Spain, they are regulated by Law 35/2003, of 4 November, on Collective Investment Institutions and its regulations approved by Royal Decree 1082/2012, of 13 July.
Tax benefits of SILs
One of the main attractions of SILs is their taxation. However, only professional investors or other investors whose investment exceeds 100,000 euros or who act on the personalised recommendation of an advisor may be shareholders. Likewise, the shares of the SIL must be distributed among at least 25 shareholders, as opposed to the 100 shareholders required for SICAVs.
Ownership and management of works of art in a SIL
Focusing this article on art law, the ownership of the acquired work of art will therefore belong to the SIL as it has its own legal personality, i.e. it is not acquired directly by the members of the SIL. The investors may receive profits or, where appropriate, share losses, but the assets belong to the company. Regarding investment in works of art through a SIL, one of the greatest advantages is that leverage can be used to acquire works of great value without the need to have all the capital immediately. Art as an asset can create sustained asset growth and in times of financial crisis or inflation, investment in art can diversify portfolios by dampening volatility. Traditionally, works of art have been considered safe haven assets, since as tangible assets ‘art is safer than stocks, it will always be there and there will always be a value for it’ (Abdini, 2007). Currently, according to data published by UBS, in 2023, investment in works of art by family offices will represent between 5 and 20% of their total investment. On the other hand, the latest ArtPrice art market report confirms a growth in art transactions, but a slowdown in the market due to the lower number of record auctions. Generations X and Y are having a strong impact on the online market and in markets such as India and Hong Kong contemporary art sales are growing strongly. Traditionally, the highest investment returns were found in works above $500,000. However, we should not underestimate the potential of emerging artists who, with good advice, can give us great surprises and will shape the contemporary art of the future.
Importance of advice in the purchase and sale of art
While it is true that the art market is much more transparent than it was a few years ago, it is important to have professional support to interpret the data well, keep abreast of trends, decide which works to acquire, look for artists with growth potential, study the provenance of the work and authenticity. In this regard, we would like to emphasise the importance of giving legal security to art transactions by carrying out a due diligence carried out by professionals prior to the purchase to determine the degree of risk of the operation. It will also be necessary to carry out a correct appraisal, which should be reviewed periodically in order to know, on the one hand, the profitability of the SIL and, on the other, to confirm that the works are correctly insured.
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