Ferragamo France Transfer Pricing Case: Key Lessons for Luxury Brands


  • Court: Conseil d’État (France’s Supreme Administrative Court)
  • Case No: Information not explicitly provided in the sources
  • Applicant: Ferragamo France
  • Defendant: French Tax Authorities
  • Judgment Date: November 23, 2020

The Ferragamo France case is a significant transfer pricing dispute between the French tax authorities and Ferragamo France, a subsidiary of the Italian luxury goods company Salvatore Ferragamo. The case centered around the tax years 2009 and 2010, with implications extending to subsequent years.

Ferragamo France, established in 1992, is a wholly-owned subsidiary of the Dutch company Ferragamo International BV, which in turn is owned by the Italian parent company Salvatore Ferragamo SpA. The French subsidiary’s primary business activities involve retailing shoes, leather goods, and luxury accessories under the ‘Salvatore Ferragamo’ brand in France.

Key Issues in the Case

The main contention in this case was whether Ferragamo France had been adequately compensated for its activities and contributions to the Salvatore Ferragamo brand in the French market. The French tax authorities argued that the subsidiary had not been sufficiently remunerated for:

  1. Additional expenses incurred in the French market
  2. Contributions to the value of the Ferragamo trademark

The tax authorities asserted that these factors resulted in an indirect transfer of profits from Ferragamo France to its Italian parent company, Salvatore Ferragamo SpA.

  1. Initial Tax Assessment: The French tax authorities issued an assessment to Ferragamo France, claiming that the company had been undercompensated for its activities and contributions.
  2. Administrative Court Decision (2017): The Paris Administrative Court ruled in favour of Ferragamo France, dismissing the tax authorities’ assessment. The court stated that the tax administration had not sufficiently demonstrated the existence of an advantage granted by Ferragamo France to the Italian parent company, nor had they adequately quantified this alleged advantage.
  3. Administrative Court of Appeal Decision: The Administrative Court of Appeal upheld the lower court’s decision, maintaining the ruling in favour of Ferragamo France.
  4. Supreme Court (Conseil d’État) Decision: The French tax authorities appealed to the Supreme Administrative Court (Conseil d’État). In a significant turn of events, the Supreme Court overturned the lower courts’ decisions and remanded the case back to the Administrative Court of Appeal for further consideration.
  5. Final Administrative Court of Appeal Decision (June 2022): Following the Supreme Court’s guidance, the Administrative Court of Appeal issued a final decision in June 2022. This ruling annulled the 2017 decision of the Paris Administrative Court and reinstated the tax assessment issued by the tax authorities.

The Role of the Resale Price Method (RPM) in the Case

The Resale Price Method played a crucial role in the Ferragamo France case, serving as a key transfer pricing methodology to evaluate the arm’s length nature of the transactions between Ferragamo France and its parent company. To understand its importance, let’s first define the Resale Price Method and then examine its application in this specific case.

Definition of the Resale Price Method

The Resale Price Method is one of the traditional transaction methods recognized by the OECD Transfer Pricing Guidelines. It is primarily used to determine an arm’s length price for the purchase of goods in a controlled transaction between associated enterprises, where the purchaser resells the goods to an independent party.

The RPM starts with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin (the “resale price margin”) representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit.

The formula for the Resale Price Method can be expressed as:

Arm’s Length Price = Resale Price – (Resale Price × Appropriate Gross Margin)Where:

  • Resale Price is the price at which the product is sold to an independent enterprise
  • Appropriate Gross Margin is determined by comparing the gross margin that the reseller earns from the controlled transaction with that earned from comparable uncontrolled transactions

Application of the Resale Price Method in the Ferragamo France Case

In the Ferragamo France case, the Resale Price Method was central to the analysis of whether the French subsidiary was adequately compensated for its distribution activities. Here’s how the RPM was applied and why it was significant:

  1. Determination of Comparable Companies:
    The tax authorities and Ferragamo France had to identify comparable companies to establish an appropriate benchmark for the gross margin. This process was crucial and contentious, as evidenced by the court documents. Ferragamo France argued that many of the companies included in the comparison panel were not truly comparable because:
  2. Analysis of Gross Margins:
    The RPM focuses on the gross margin earned by the distributor. In this case, the tax authorities likely compared Ferragamo France’s gross margin to those of the selected comparable companies. The fact that Ferragamo France had been loss-making from at least 1996 until 2009 was a significant point of contention.
  3. Consideration of Additional Expenses:
    One of the key issues in the case was the additional expenses incurred by Ferragamo France, particularly higher wages and rents compared to independent companies. The RPM analysis had to consider whether these additional expenses were adequately reflected in the gross margin and whether they should have resulted in higher remuneration from the parent company.
  4. Brand-Building Activities:
    The court noted that the exposure of additional charges for wages and rents was intended to increase the value of the Italian brand in a strategic luxury market. This aspect is particularly relevant to the RPM analysis, as it raises questions about whether standard distribution margins are sufficient when a subsidiary is actively contributing to brand value.
  5. Profitability Analysis:
    The court’s consideration of Ferragamo France’s profitability from 2010 to 2015 (after the disputed period) in relation to its transfer pricing policy highlights the importance of looking at longer-term trends when applying the RPM.
  6. Most of their activities were carried out in provincial areas, whereas Ferragamo France’s activity was concentrated in international tourist areas, mainly in Paris.
  7. The comparable companies had smaller workforces (less than ten employees) compared to Ferragamo France’s 68 employees.
  8. They were mere distributors, while Ferragamo France managed a network of boutiques and concessions in department stores.
  9. Some owned their premises, whereas Ferragamo France rented its premises at much higher costs, particularly in Paris.

Importance of the Resale Price Method in the Case

The Resale Price Method was crucial in this case for several reasons:

  1. Appropriate Method for Distribution Activities:
    The RPM is particularly suitable for analyzing the transfer prices of distribution activities, which was Ferragamo France’s primary function. It allows for a direct comparison of the gross margins earned by the tested party (Ferragamo France) with those of comparable independent distributors.
  2. Focus on Gross Margin:
    By focusing on the gross margin rather than the net profit, the RPM allows for a more direct comparison of the compensation for distribution functions, which is less affected by differences in operating expenses between the tested party and the comparables.
  3. Consideration of Market-Specific Factors:
    The application of the RPM in this case highlighted the importance of considering market-specific factors that might affect the appropriate gross margin. This included the luxury nature of the products, the strategic importance of the French market, and the high costs associated with operating in prime Parisian locations.
  4. Brand Value Contributions:
    The case brought attention to how the RPM might need to be adjusted or supplemented when a distributor is not just selling products but also contributing significantly to brand value. This is a crucial consideration in the luxury goods sector.
  5. Long-term Perspective:
    The court’s consideration of profitability trends beyond the audited period underscores the importance of applying the RPM with a view to longer-term business strategies and market development efforts.
  6. Comparability Analysis:
    The disputes over the selection of comparable companies highlight the critical nature of the comparability analysis in applying the RPM effectively. It emphasizes the need for careful consideration of functional and economic factors when selecting comparables.
  7. Indirect Profit Transfers:
    The RPM was instrumental in the tax authorities’ argument that there was an indirect transfer of profits to the Italian parent company. By analyzing the gross margin, they sought to demonstrate that Ferragamo France was undercompensated for its activities and contributions.

Key Findings and Implications of the Court’s Decision

The final decision of the Administrative Court of Appeal in June 2022, which ruled in favour of the tax authorities, has several important implications:

  1. Recognition of Brand-Building Activities:
    The court acknowledged that Ferragamo France’s activities, including incurring higher expenses for wages and rent, contributed to building the Salvatore Ferragamo brand in the French market. This recognition suggests that distributors engaging in significant brand-building activities may require compensation beyond standard distribution margins.
  2. Importance of Long-term Profitability:
    While Ferragamo France argued that its profitability improved from 2010 to 2015, the court found this insufficient to justify the previous years’ losses. This highlights the need for consistent arm’s length pricing over time and suggests that temporary losses may be scrutinized even if followed by profitable years.
  3. Burden of Proof:
    The case underscores the importance of taxpayers being able to justify their transfer pricing policies with robust documentation and economic analysis. Merely claiming improved profitability in subsequent years was not enough to overturn the tax authorities’ assessment.
  4. Consideration of Strategic Market Importance:
    The court’s decision takes into account the strategic importance of the French luxury market, suggesting that transfer pricing in high-value, strategic markets may require special consideration.
  5. Indirect Transfer of Profits:
    The ruling supports the tax authorities’ position that insufficient remuneration for a subsidiary’s activities can constitute an indirect transfer of profits to the parent company, even in the absence of direct payments.

Broader Implications for Transfer Pricing

The Ferragamo France case has several broader implications for transfer pricing practices, particularly in the luxury goods sector:

  1. Valuation of Marketing and Distribution Activities:
    The case highlights the need for careful consideration of how to value and compensate subsidiaries that engage in significant marketing and brand-building activities, especially in key strategic markets.
  2. Application of the Resale Price Method:
    While the RPM remains a valuable tool for analyzing distribution activities, this case suggests that it may need to be applied with greater nuance in situations where distributors contribute significantly to intangible value creation.
  3. Importance of Comparability Analysis:
    The disputes over comparable companies underscore the critical nature of thorough comparability analysis in transfer pricing. Companies need to carefully consider functional, asset, and risk profiles when selecting comparables.
  4. Long-term View of Transfer Pricing Policies:
    The court’s consideration of profitability trends beyond the audited period suggests that tax authorities and courts may take a longer-term view when assessing the arm’s length nature of transfer pricing arrangements.
  5. Documentation and Economic Analysis:
    The case reinforces the importance of maintaining robust transfer pricing documentation and conducting thorough economic analyses to support pricing policies, especially in cases of sustained losses.
  6. Consideration of Location-Specific Advantages:
    The recognition of higher costs associated with operating in prime Parisian locations suggests that location-specific factors may need to be more explicitly considered in transfer pricing analyses.

In Closing

The Ferragamo France case represents a significant development in transfer pricing jurisprudence, particularly in the context of luxury goods distribution and brand-building activities. The application and interpretation of the Resale Price Method in this case highlight both its strengths and limitations in addressing complex transfer pricing issues.

The case underscores the need for multinational enterprises, especially those in the luxury sector, to carefully consider how they structure and document their intercompany transactions. It emphasizes the importance of aligning transfer pricing policies with the economic reality of business operations, particularly when subsidiaries play a significant role in developing and maintaining brand value in key markets.

Furthermore, the case serves as a reminder of the ongoing scrutiny of transfer pricing arrangements by tax authorities worldwide. It highlights the need for companies to be proactive in reviewing and adjusting their transfer pricing policies to ensure they can withstand regulatory scrutiny and align with evolving interpretations of arm’s length principles.

As transfer pricing continues to be a key area of focus for both tax authorities and multinational enterprises, cases like Ferragamo France will likely shape future practices and interpretations. Companies operating in similar sectors or with similar business models should take note of this case and consider its implications for their own transfer pricing strategies and documentation practices.

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