France vs Ferragamo France, November 2020, Conseil d’Etat, Case No 425577

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Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company.

An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark.

The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies.

The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to Salvatore Ferragamo SPA, nor the amount of this advantage.

Judgement of the Conseil d’Etat

The Conseil d’Etat overturned the decision of the Administrative Court and remanded the case back to the Administrative Court of Appeal for further considerations.

In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.

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