How French luxury goods group Kering dodged 2.5bn euros in tax

By and Vittorio Malagutti (L'Espresso) et Esther Rosenberg (NRC Handelsblad)

Since 2002, French luxury goods and clothing group Kering, whose brands include Gucci, Yves Saint Laurent, Bottega Veneta, Stella McCartney and Balenciaga, has avoided paying a total of about 2.5 billion euros in tax payments on earnings, mostly to the detriment of the Italian public purse but also that in France and in Britain, according to confidential documents obtained by Mediapart and analysed together with its media partners in the European Investigative Collaborations (EIC) journalistic consortium. Yann Philippin (Mediapart), Vittorio Malagutti (L'Espresso) et Esther Rosenberg (NRC Handelsblad) report.

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It was on November 29th last year when officers from Italy’s financial crime police agency, the Guardia di Finanza, arrived at the offices in Florence and Milan of the fashion brand Gucci. The ensuing search of the buildings lasted three days, when the police also searched the homes of three Gucci directors and questioned the brand’s chief executive Marco Bizzarri.

The raids were carried out on the orders of a Milan-based prosecutor in charge of investigating suspected tax evasion by Gucci estimated to have avoided the luxury goods and clothing firm 1.3 billion euros in tax payments over a period of seven years by declaring part of its corporate revenue in Switzerland rather than Italy, using a financial structure that funnelled funds through Luxembourg and the Netherlands.

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The subsidiary of French luxury goods and fashion clothing group Kering, formerly called PPR (Pinault-Printemps-Redoute) – which owns, among other luxury brands, Yves Saint Laurent, Balenciaga, Bottega Veneta, Boucheron and Stella McCartney – Gucci is Kering’s highest earner.

Confidential documents obtained by Mediapart and analysed together with its media partners in the journalistic consortium European Investigative Collaborations (EIC) suggest that Gucci’s French owner, Kering, has since 2002 evaded a total of about 2.5 billion euros in tax payments on earnings, mostly to the detriment of the Italian public purse but also that in France and in Britain.

Meanwhile, the documents obtained by Mediapart and the EIC also suggest that Kering haute couture subsidiary Yves Saint Laurent dodged about 180 million euros in tax payments through the same system between 2009 and 2017.

Contacted by Mediapart before this report was first published in French on Friday March 16th, and presented with a list of questions on the issues raised in this report, Kering declined to offer precise answers, nor to grant our request for an interview with Kering chairman and chief executive François-Henri Pinault. However, Kering did send a brief reply by email (click on the "MORE" tab top of page for the full text), the group said that its Swiss subsidiary LGI, through which a large amount of Kering’s profits are channelled, “is an important distribution and logistical platform created in the 1990s, before the taking of control of the Gucci Group by PPR".

"It is at the heart of international distribution activities (managing stock, logistics, billing, management of the supply chain) of the brands of the Group and constitutes an important industrial installation with more than 600 employees," Kering added. "Each of the companies of the Group established in Switzerland exercises a real economic activity directly linked to the commercial activity of the brands of the group. As such, the Group pays in Switzerland taxes due, in accordance with the law and the fiscal status of the company, and its situation is well known to the Swiss, Italian and French tax authorities.”

Gucci chief executive Marco Bizzarri (l) with Kering group chairman and CEO François-Henri Pinault. © Reuters Gucci chief executive Marco Bizzarri (l) with Kering group chairman and CEO François-Henri Pinault. © Reuters

However, in a document obtained by Mediapart, the Milan prosecution services describe a “covert” structure established by Kering in order to evade taxes. Most of the documents to which Mediapart has had access are from the Italian judicial investigation into the suspected tax dodge, and they detail the lengths to which the French group went to hide the alleged fraud.

As part of its attempts to justify paying taxes on earnings in Switzerland, about 20 Gucci management staff were presented as being based there, whereas in reality they worked in Italy. As Mediapart reported in January, over a period of seven years, Gucci chief executive Marco Bizzarri paid his personal income tax in Switzerland under a special status that is known as "forfait" – or “lump sum” – taxation, a system for residents who declare no gainful employment in the country and under which, instead of paying tax on revenue, pay a tax levied on their living expenses only.    

The revelations of the documents are all the more disturbing in that both Gucci and Yves Saint Laurent have recorded sharp rises in sales and profits over the past three years, described by Kering as “spectacular”, and which was among the most impressive in the luxury goods sector. Meanwhile, Kering has enjoyed a parallel growth, with its 2017 results described as “phenomenal” by the group’s chairman and CEO François-Henri Pinault, posting 15.478 billion euros in consolidated revenue and operating income of 2.948 billion euros. As part of its strategy to concentrate its booming business in the luxury sector, Kering is preparing to sell of its sportswear subsidiary Puma.

François-Henri Pinault, 55, who took over the reins of the family business from his father François in 2005, when the group was still called Pinault-Printemps-Redoute, is not personally targeted by the Italian judicial investigation.  However, Kering group managing director Jean-François Palus, together with Patricia Barbizet, who up until last year was chief executive of the 30-billion-euro Pinault family investment holding Artemis, had by last October stepped down from their posts with the companies that made up the offshore structure at the heart of the Milan prosecution services probe.

At the summit of the structure are two letter-box companies, Kering Holland and its subsidiary Kering Luxembourg. The latter owns four companies and two other establishments in the Swiss canton of Ticino, which shares part of the Swiss border with Italy. While officially distinct from one another, the companies are in fact part of a single entity.

The scheme has contributed to building the colossal wealth of the Pinault family for almost 20 years. But the practice was not unique to Kering, as Swiss anti-corruption NGO Public Eye reported in 2016, when it denounced the implantation in the same southern location of Ticino of a number of luxury goods and clothing firms seeking what the NGO called “aggressive tax optimisation”.

The origins of the lucrative scheme go back to 1997, when Gucci created a company called Luxury Goods International, LGI, in Cadempino, a suburb of Lugano with around 1,500 inhabitants, which lies just a short distance from the border with Italy.

The site of Luxury Goods International (LGI), a warehouse partly reconverted into offices, situated in an industrial park in Cadempino, close to Lugano in the Swiss canton of Ticino. © Google Street View The site of Luxury Goods International (LGI), a warehouse partly reconverted into offices, situated in an industrial park in Cadempino, close to Lugano in the Swiss canton of Ticino. © Google Street View

At first, LGI was set up there with just a modestly sized warehouse, whose address was Via Industria 19, situated close to a motorway and at about a one-and-a-half-hour truck ride from Milan. But very soon Gucci decided that LGI was to become its essential logistical centre, and all the brand’s products, most of which were made in Italy, were to transit through it before being shipped to Gucci stores around the world.

According to information obtained by Mediapart and the EIC, a special deal was agreed between the brand and the Ticino authorities, by which it was accorded a company tax rate of 8%, compared with 31% applied in Italy. Gucci gave LGI not only the monopoly of the brand’s distribution activities, but also that of its wholesale business with stores. As a result, most of Gucci’s earnings, and in turn its profits, were paid into LGI.

After the PPR group, now renamed Kering, bought a controlling stake in Gucci in 1999, all the other brands in its luxury goods business, except those centred on jewellery, adopted the same scheme, handing logistical activities and sales to LGI. They included Italian high-end leatherware and ready-to-wear fashion firm Bottega Veneta, British fashion houses Stella McCartney and Alexander McQueen, and French fashion houses Yves Saint Laurent and Balenciaga (formally Spanish).

“From Sant'Antonino to the whole world”: the vast warehouse at Sant'Antonino, north of Lugano in the Swiss canton of Ticino, opened by Kering in 2014. © Google Street View “From Sant'Antonino to the whole world”: the vast warehouse at Sant'Antonino, north of Lugano in the Swiss canton of Ticino, opened by Kering in 2014. © Google Street View

Two other warehouses were subsequently built by the group in Ticino to cope with the logistical demands of its growing brands. The most recent was opened in 2014 in Sant'Antonino, about 15 kilometres north of Lugano. There is no sign outside identifying the owners of the building, which has a surface area of about three football pitches, but inside the site trucks come and go shifting batches of dresses, shoes and handbags and other luxury goods which are prepared at a rate of around 2,000 packages per hour.

“It’s the effect of Kering in action, from Sant'Antonino to the whole world,” exclaimed Kering managing director Jean-François Palus  during the inauguration of the warehouse in June 2014. According to information gained by Mediapart and the EIC, between 2009 and 2017 LGI posted a total net income of close to 7 billion euros, representing 70% of all the Kering group’s profits over the same period. Meanwhile, the number of staff employed by Kering in Switzerland is about 600, which is less than 3% of all the employees in its luxury goods division.

The figures translate into a tax avoidance over the same period of about 2 billion euros, a sum which includes 1.4 billion euros that Gucci would otherwise had to have paid in Italy, and 180 million euros that Yves Saint Laurent would have been liable for France.

Kering is not the only one to use the lucrative scheme in Ticino; high-end brands including Armani, Hugo Boss, Versace and The North Face have created logistical sites there for the same reasons. While the fiscal deals firms have obtained from the Ticino authorities remain strictly confidential, an official document produced by the Swiss canton reveals that businesses in what it calls its “Fashion Valley” – which in reality is made up of a series of warehouses rather than designers’ studios – provides its largest source of revenue.

In its 2016 report “Case study: the Ticino Fashion Valley”,  Swiss NGO Public Eye describes the scheme as “fiscal piracy” that operates to the detriment of other European countries. The report noted: “While fashion multinationals – and their shareholders – each year accumulate millions in profits by using such tax strategies, the people who make their products in the factories of their suppliers and sub-contractors are paid miserable salaries. In Asia as in numerous European countries, the salaries of textile workers do not meet subsistence level.”

The Italian prosecutors appear to regard the system as also essentially illegal: while in the case of Kering, its Swiss subsidiary LGI officially sells products of the brands to stores worldwide, such activity is carried out by employees of the brands in Paris, London and Milan. For although those who work in the warehouses in Switzerland may be highly efficient, it is improbable to imagine that they alone create about 70% of the income from the luxury labels that are among the most prestigious in the market. In businesses in general, logistical activity has little added value.   

But in the scheme used by Kering, it is the warehouse business that receives the income, and in turn remunerates, for example, Gucci or Yves Saint Laurent a minimal amount as a sort of licence fee. In the case of Gucci, the system allowed the brand to pay only about 100 million euros in taxes in Italy over the period 2013-2016, instead of about 650 million euros if the profits declared in Switzerland were declared in Italy.

Gucci, an icon of Italian capitalism, is one of the biggest luxury goods brands in the world, with a turnover in 2017 of more than 6 billion euros, and provides 70% of the Kering group’s earnings.

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This investigation was carried out in collaboration with Mediapart’s partners in the media consortium European Investigative Collaborations (EIC), of which Mediapart is a founding member. Mediapart and the EIC have previously published investigations into the off-the-pitch dealings in the world of football under the title Football Leaks (see examples here and here), into the murky offshore business of money laundering and tax evasion via Malta, in The Malta Files (see more here and here), into the secret dealings of the prosecution service of the International Criminal Court (see examples here and here), and the Airbus corruption scandal (see here and here).

The documents cited in the above report were obtained by Mediapart and shared for investigation with its partners in the EIC. Mediapart and the EIC sent a long list of questions to Gucci, Marco Bizzarri and his assistant, Piero Braga, Robert Triefus, and also to the former human resources director of the brand. We received no response of any kind.

We also sent numerous questions to the Kering group, with a request to interview its chief executive François-Henri Pinault. The group declined to offer precise answers to our questions, nor were we granted an interview. Instead, Kering sent a statement by email, the full text of which can be found by clicking on the tab "MORE" situated above the text of the article.