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Kering’s €1.4 Billion Tax Bill, Explained

The French luxury giant is facing a possible €1.4 billion tax bill in Italy after accounting practices linked to a Swiss subsidiary attracted scrutiny.
A Gucci boutique | Source: Shutterstock
  • Sarah Kent

PARIS, France — French luxury group Kering is facing a possible €1.4 billion ($1.6 billion) tax bill in Italy following a roughly year-long probe by local authorities. But how much the owner of Gucci, Saint Laurent, Balenciaga and other brands will end up paying — if anything — is a more complicated question.

The issue has dogged the company for more than a year, ever since a  raid on Gucci offices in Florence and Milan by Italian tax investigators in late 2017. Kering disclosed its potential liability last month, citing an Italian audit that found the company had underpaid its taxes between 2011 and 2017. With fourth-quarter earnings due out on Tuesday, the company will have an opportunity to address the issue. Many analysts and investors will be looking for guidance on how the controversy will affect the future finances of one of the world’s largest luxury groups.

Kering has said it challenges the Italian investigation’s findings “both on the grounds and the amount,” and it is cooperating with the Italian tax authorities to “defend all its rights.”

So how did Kering run afoul of Italian tax authorities in the first place?


At the heart of the matter is whether Kering used a Swiss subsidiary to improperly book profits made in Italy in a country where taxes are lower. The alleged scheme centered on Gucci, the Italy-based brand that has fuelled much of Kering's growth under chief executive Marco Bizzarri and creative director Alessandro Michele.

In the first nine months of 2018, Gucci generated $5.9 billion in sales, or about 60 percent of all revenue at Kering. Much of the brand’s products are manufactured in Italy; last year, Kering opened its ArtLab design complex in Florence, home to 800 craftspeople, designers and product testers.

According to a report by French investigative publication Mediapart, however, when a retailer wanted to stock Gucci products, they dealt with a different Kering subsidiary, Luxury Goods International. LGI employs around 800 people centered around a logistics hub in the Swiss Canton of Ticino, which borders Italy. The subsidiary’s facilities there acted as a waystation for Gucci bags, dresses and shoes on their way to shops around the world.

Crucially, retailers would send their bills to LGI as well, allowing Kering to record profits in Ticino, where its tax rate was just 8 percent, according to Mediapart’s investigation. In 2017, LGI recorded a net result of more than €1.4 billion, according to financial accounts filed in Luxembourg. Kering’s total profit from continuing operations excluding one-off charges for that year amounted to €2 billion.

Kering has said LGI is a strategic hub for centralised distribution and logistics, and that all its Swiss entities carry out tangible business activities in the country, justifying their tax domicile. The company said Kering Luxembourg does not provide any tax benefit to the Kering Group.

Plenty of large, international companies, from Apple to Nike, structure their operations in part to reduce their tax liability. But such measures can be politically unpopular in the brands’ home countries and are tempting targets for regulators.

“It’s a grey line of legality,” said Jefferies analyst Flavio Cereda.

It's a grey line of legality.

Kering’s tax optimisation may not have been limited to LGI’s logistics hub, according to media reports. To bolster the case for taxing profits in Switzerland, Gucci claimed around 20 executives were based in the country when much of their business activities were centered in Italy, Mediapart’s investigation found. Until recently, some senior Gucci executives, including chief executive Marco Bizzarri, had email addresses ending in, implying that they were based in Switzerland.

Kering said that Bizzarri is fully compliant with his tax obligations in Italy, where he is a tax resident. Bizzarri and former Gucci chief executive Patrizio Di Marco are also subject to the investigation because of their role as legal representatives of the company, Kering said.


The slow-boil investigation has stuck to Kering for more than a year, even as Gucci's global popularity and sales have soared. The brand is currently going through an uncharacteristic rough patch, however, having had to pull from sale a turtleneck that resembled blackface imagery. Kering flagged last year that it expects rapid growth at Gucci to inevitably slow.

The tax issues at least are not likely to go away any time soon, with the situation expected to take months to resolve.

Italy has an aggressive tax authority, and Kering is certainly not the first major fashion house to fall afoul of the tax man. Over the last 10 years, brands including Prada, Bulgari and Giorgio Armani have all faced investigation, mostly choosing to eventually settle out-of-court. Dolce & Gabbana battled tax avoidance charges for years, with the brand's founders even being sentenced to jail in 2014, though they did not end up serving time.

Kering is likely to wind up paying a smaller sum than €1.4 billion, assuming it can’t get the charges dismissed entirely.

“Normally the big companies prefer to find an agreement and not go to court,” said Angelo Cremonese, a finance professor at Rome’s Luiss University. “It’s easier to find an agreement with the tax authorities and try to arrange a payment.”

According to analysts, such settlements normally amount to much less than the initial claim made by the tax authorities. If it is unable to fight the allegations, Kering is likely to end up with a final bill of a few hundred million euros, the analysts said.

“You normally end up paying a fraction,” said Jefferies’ Cereda.

Prada struck a voluntary deal with authorities for an undisclosed sum in 2013 and agreed to repatriate assets held in Luxembourg and the Netherlands. Giorgio Armani agreed to pay€270 million in 2014, and Bulgari settled for€42 million in the same year.


So far, Kering has not disclosed any specific provision for its potential tax liabilities.

“You want to keep that communication pretty tight,” said John Guy, luxury, branded and sporting goods analyst at MainFirst Bank AG. “Clearly this is ongoing, it’s going to be sensitive, and you wouldn’t want to say anything that riles behind-closed-doors negotiations with Italian tax authorities.”

The bigger risk for Kering may be reputational rather than financial. High-profile tax cases against major companies like Amazon, Apple and Starbucks have stoked antagonism towards companies that are viewed as trying to avoid tax.

Last month, the European Commission announced an investigation into whether Nike has enjoyed an unfair tax advantage in the Netherlands for years.

Related Articles:

Prada Said to Be Under Investigation for Tax EvasionOpens in new window ]

Dolce and Gabbana Convicted of Tax Evasion, Sentenced to 20 Months in JailOpens in new window ]

Italian Police Seize Bulgari Executives’ Assets in Tax ProbeOpens in new window ]

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