Should Kering be concerned about new fiscal threat?

French luxury group Kering is mired in a new controversy, and its top management is under fire at a time when the group is also struggling, after revenue slumped in Q1. Italian newspapers Domani and Mediapart have reported that a former collaborator of Kering raised a red flag with the Italian tax authorities about a real estate project in Milan. No formal enquiry has reportedly been opened, but it is worth noting that Kering was the object of a tax authority audit in Italy in 2019. According to information gleaned by the two newspapers, Kering has paid money to two companies in which the wife of Jean-François Palus, formerly the group’s second in command, held a minority stake.
 

Domani and Mediapart wrote that the matter dates back to 2012, when Kering started renovation work on a former industrial building in via Mecenate in Milan, which then became the Gucci Hub, the luxury label’s headquarters. The €100 million project was completed in 2016, and was commissioned to architecture studio Piuarch. Also involved, in the project’s final phase, was Argi Consulting Ltd, a company one of whose co-directors and shareholders is Angèle Palus, wife of the former deputy CEO of Kering (from 2008 to 2023), now the CEO of Gucci.
 
The group also involved another company, Luc Germain Design Studio Ltd, jointly headed by Luc Germain and Angèle Palus, who also has a 20% stake in it. Germain is a personal friend of the Paluses and, as stated by Mediapart, the architect who designed their family home. Between 2014 and 2016, he was also commissioned the renovation of Kering’s Buckingham Gate offices in London.

The documents to which Domani and Mediapart had access ask the tax authorities to verify to what extent the company part-owned by Angèle Palus worked on the via Mecenate project. The contention is that the invoices paid by Kering Italy to Argi Consulting Ltd for the Milan renovation work “were classified by the luxury group under costs, so as to reduce its tax base and pay less taxes.”
 
Contacted by the two newspapers, Kering stated that “the services provided between 2014 and 2016 by the architectural firms you mentioned correspond to real documented auditing, consulting and project management assistance services, which turned out to be of proven benefit to Kering and resulted in significant savings on the total cost of the renovation work. These services were billed and paid for at market rates.”
 
The fact remains that the affair has the whiff of a conflict of interests, a surprising one for a group of such calibre. In an email quoted by Mediapart about the setting up of a steering committee for the via Mecenate project, Jean-Marc Duplaix, then Kering’s CFO, wrote that “any potential conflict of interests (…)” among the members of the steering committee “must be avoided,” and notably any involvement of “an employee or a family member in the role of sub-contractor.”
 
Kering is waiting for the Italian tax authorities to decide whether to follow up on the allegations, of which they were made aware only on February 10 2023. The luxury group certainly didn’t need any further media attention right now, especially for something that happened nearly 10 years ago. Kering said it is disturbed by the coincidence. In April, it announced that its operating income is expected to fall by between 40% and 45% in H1. And the group is fully committed to relaunching its leading label Gucci, led since last July by Jean-François Palus, the man specifically targeted by the allegations.