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  1. Wealth
January 5, 2015updated 29 Jan 2016 5:25pm

Luxembourg's new freeport unlikely to dispel tax haven image

By Spear's

As governments crack down on secrecy across the world, the arrival of the Luxembourg Freeport at the heart of Europe is a provocative challenge. So is it anything more than a warehouse where HNWs can squirrel away their valuables? Alex Matchett investigates

‘It’s like the headquarters of an evil boss,’ says Johanna Grawunder of the building we’ve just been standing inside. The contemporary concrete lobby space, illuminated by Grawunder’s designer lighting, indeed suggests a certain corporate malevolence, and the state-of-the-art security systems and strongrooms don’t make it any friendlier. Not that you want a freeport to be too cosy: a glorified warehouse for the tax-free housing of precious assets in Luxembourg should only attract so much attention.

The world’s latest freeport — a sleek fortress caged in a fa’ade of pebbles — today has a celebratory demeanour: it is its official opening, and government ministers and business leaders have come to the 20,000 sq m building across the tarmac from the airport to praise the good work it’s going to do. This work is providing secure and tax-efficient storage in an already sympathetic tax regime: if you use the freeport, there is no customs duty payable when bringing the item in and no VAT payable when selling it inside. From January 2015 only 8 per cent VAT is applicable on the departure of an item, although it will be 17 per cent within the EU. The aim is to establish this building in Luxembourg as one of the world’s most prominent freeports, alongside Geneva’s and Singapore’s.

These spaces hold the gamut of luxury goods. The wine rooms can take an estimated 700,000 bottles, and other rooms are set aside for chattels such as furniture, paintings and jewellery as well as important documents, precious metals and hard cash. Everything is climate-controlled, so your cash stays crisp: the temperature is set at 21’C with humidity at 55 per cent, except for wine rooms, which have a range of between 12’C (for white) and 18’C (for red). In the event of a fire, oxygen is reduced to only 8 per cent while nitrogen is pumped in at 40psi.

On the other side of the building is the bay that accommodates air deliveries straight from the apron and those coming in by armoured vehicles. There’s a built-in customs office to oversee everything so that the authorities are always aware of what enters and leaves the freeport. They have ‘unfettered access’, David Arendt, CEO of Le Freeport, tells us, and will note the details, ownership and value of each item being stored ‘so there is complete traceability’.

’Le Freeport thus makes good on its promise to offer a one-stop shop to end customers, collectors and investors,’ says Arendt at the official opening. He claims clients will be able to source customs declarations, tax advice, insurance, expert art advice, monetisation of artworks and estate planning on site. He’s eager to play down the worn-warehouse image: ‘This is not a dull, ugly shoebox located in an equally dull and ugly city suburb. This is not a reconverted, retrofitted warehouse with a new lease of life used for storage of art and valuables. Le Freeport Luxembourg is a work of art in its own right.’

Arendt is clearly passionate that the freeport is a success, but his addresses earlier on the suitability of the space are against the backdrop of whirring drills and saws finalising the construction, and he quickly had to move the tour on when it transpired the airport-side loading bay doors weren’t yet ready to be opened. Once they do work they will be able to take in twelve-tonne pallets from plane to bay in two minutes. ‘It’s the only one that has this,’ said Patrick Silverio, special services manager for LuxairCARGO.

Vehicles delivering from outside the airport might find things more difficult, as the new road is yet to be completed: ‘The government istwo years late in building the access road. Until then I’ll have to zigzag through a construction site with my trucks,’ Arendt tells me.

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Not even its nearest neighbour is especially pleased to see the freeport. Luxembourg airport’s CEO, Johan Vanneste, sees considerable pressure on the airport’s facilities: ‘We don’t even have a decent hangar to put [large cargo aircraft] inside.’ Vanneste also questions one of Le Freeport’s vaunted ambitions: to make the country ‘a cultural art capital’ by incentivising lending to museums and galleries via tax breaks and protecting art from theft and ensuring proper storage. ‘I don’t think this will trickle down to the Luxembourg art scene,’ he says.

But all these teething problems haven’t dimmed Arendt’s enthusiasm: ‘We are still looking for tenants, so you can write that in your story. There is no better place to store, handle, show and trade valuable assets. This is a product you cannot find in the UK, and that statement is made after due investigation.’ (This is not strictly true, as an art logistics person told me: ‘I don’t think there will be too much impact: the bonded system in the UK is similar and UK import tax on art is still the lowest in Europe.’)

Those who put up the money are confident this is the right product in the right place at the right time. One of the freeport’s major investors, Yves Bouvier, highlights political and economic stability as a draw, as well as quality of service and the fact that the airport is a major cargo hub.He hopes this investment will guide a similar nascent project in Beijing, where he says the economic climate isn’t right for an establishment of this size just yet. He also points to the current flush of global art buyers: ‘Collectors have a problem: they buy too much. They are addicts. They have space at home for one and they buy ten.’

Overstocking might be the least of their worries. Although Arendt claims the Freeport is able to trace previous ownership and identify stolen goods, he then tells me: ‘The fact that you bring your works of art and valuables to Luxembourg is not a stamp of approval that the works are authentic and that the provenance is as you state it.’ I ask him if people might take advantage of such a situation by parking fakes inside the freeport, away from the scrutiny of market valuation. ‘I don’t keep an inventory of what’s coming in, that’s the duty of the logistics company. That’s the way the law works in Luxembourg.’ That logistics company tells Spear’s: ‘As is the case in many firms, our company policy does not allow us to give you any information on items being stored at Le Freeport Luxembourg and their owners.’

I spoke with Aude Lemogne, a director at Right Capital, an art finance business that has just opened an office inside the Luxembourg Freeport. She says fakes are nothing to worry about as one would want to sell one rather than store it. She also downplays the tax evasion image, saying that although there are no customs or VAT to pay while an item is inside the freeport, the owner is responsible for paying CGT in their home jurisdiction. She emphasises the level of customs involvement, saying even the flowers for her office are scanned.

When asked if tax savings are the biggest motivator for her clients, she says no: ‘To be honest it’s really just for security reasons. You can already structure investments where you avoid paying a lot of these taxes, you can already optimise taxes through very well thought-out investments — you can minimise VAT and even capital gains tax, so it [the freeport] is not really a way to pay less taxes, it’s a way to simplify your operation.’

Not everyone sees that as valid. Alex Cobham, research fellow at the Centre for Global Development, compares the simplicity excuse with the reasoning used to defend Swiss bank accounts: ‘Ten years ago, you could reasonably have said, and expected a lot of people to agree with you, that the use of Swiss bank accounts was primarily about their security, about having these assets outside your own country, and that by and large this is not being used for any tax purposes. I think if you were to say that now, most people would laugh in your face.’

Another issue is the ability to buy, sell and swap assets inside the freeport without them even having to move rooms. ‘It all depends on who is doing the deal,’ says Lemogne. ‘The art dealers are really the problem because you see a lot of people who are not professional in the market.’ Therein, it seems, lies the crux of the freeport argument. Whereas some see the facilitation of prudent investment in luxury assets, others see the opportunity for tax avoidance. Where neither side disagrees is that individuals may take advantage.

At the opening of the freeport is Luxembourg’s finance minister Pierre Gramegna, whom I ask about the potential for shady dealings: ‘I don’t see it, we’re ready to answer all the questions on this subject. Now that we need it [the freeport] we are adjusting our legislation to something that is totally compliant with EU law. It goes along very well with the new policy of transparency that this new government is embarking on so this is transparent, monitored, controlled, everybody can come and visit and see.’

But with an inherent emphasis on trust (or privacy or secrecy, depending on your politics), he cannot speak for, or guarantee the motives of, those using the freeport. Indeed, following Luxembourg’s FATCA (Foreign Account Tax Compliance Act) disclosure agreement with the US in March 2014, the freeport could not be timelier for those looking to keep their assets offstage to misuse it.
’If you were running a freeport and you wanted to be absolutely clear that you were in no way interested in that [tax evasion] business, then I think you would structure ways of making sure the information was automatically available for information exchange,’ says Cobham. ‘I suspect nobody will do this, from which one might draw one’s own conclusions. But that doesn’t mean all this stuff is dodgy.’

It doesn’t, but it does provide the latitude for both the client and the service provider to avoid responsibility, thereby frustrating the tax-hungry authorities of other countries. One such authority — HMRC — confessed that questions about freeports had never come up; eventually it was able to issue a lean statement: ‘We expect all taxpayers to pay the right amount of tax: the vast majority do. HMRC has published its strategy for tackling offshore tax evasion — “No safe havens 2014”. It has also been consulting on enhanced sanctions for offshore tax evasion.’ Neither freeports nor Luxembourg is mentioned in ‘No safe havens 2014’.

There is a further twist that suggests this lack of transparency is by no means a storm in one of the Ming teacups probably stashedinside the freeport. Beyond art, freeports can have a major impact on regulated markets with significant global influence.

In June 2014, market analysts predicted a rise in platinum prices following a five-month strike in South Africa. In the event the rise was conspicuously small; it transpired a major factor was uncertainty over how much platinum was resting in the world’s freeports. Whether that’s a coincidental by-product of conservative investment or deliberate market manipulation is unclear, but it doesn’t take agenius to see that if stockpiling keeps the prices of a finite valuable low, it will incentivise stockpiling further.

’It may be a much less deliberate manipulation,’ says Cobham, ‘but it’s certainly something you’d expect regulators to get more and more concerned about, at the freeports’ expense. It may be that the next bit of pressure comes from commodity market regulators. Itmight set a precedent for some transparency.’

What is transparent about freeports is the hunger of wealth managers and allied professionals to use them. Deloitte and ArtTactic launched their ‘Art & Finance Report 2014′ on the state of the art market the day after the Luxembourg freeport opened. It predicted another record year for sales in 2015 and found that private banks are increasingly looking at freeport services to take their clients’ assets out of taxable regimes and into untaxed professional storage. Fifty-seven per cent would recommend their use to a client, and41 per cent of global wealth managers said they were likely to create or expand their art services because of freeports.

But the legitimacy brought by these service industries may be just a veneer. Sixty-seven per cent of art professionals identify the need for ‘discreet transactions’ and there is a correlation between the international squeeze on undeclared assets, not least in Switzerlandand Luxembourg, and the greater demand for disclosure-free, tax-free facilities.

That squeeze is being painfully felt in Luxembourg: the Grand Duchy has recently been criticised for ‘rubber-stamping’ tax-avoidance schemes for major corporations such as Amazon, leading to an EU inquiry. Jean-Claude Juncker, president of the European Commission and former prime minister of Luxembourg, has been internationally embarrassed for the role he allegedly played in Luxembourg’s low-tax antics, and in November there was a motion of censure in the European Parliament (albeit one moved by anti-EU MEPs).

Such scrutiny might well pressure individuals and companies to move their tangible assets into the castle-keep of the Luxembourg freeport before national regulation and international condemnation storm the outer walls. But Luxembourgers are not giving in quite yet: Nicolas Mackel, CEO of Luxembourg for Finance and a former diplomat, tells the assembled journalists, ‘Jean-Claude Juncker was certainly not the man to protect the Luxembourg financial centre. He was in fact always the person to push, in Luxembourg, for less banking secrecy.’

Le Freeport is not a bank, but it is secretive and largely tax-exempt, and if it finds itself against the temper of the time, it may well end up as one of the worn warehouses its CEO scorns.

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