Why It Makes Sense to Invest in the Creative Industries and Support Them

Why it makes sense to invest in the creative industries and support them

While many fast-growth companies in the creative industries are currently the target of heavy private equity investments and a flurry of mergers and acquisitions, it makes sense, from a tax and financial standpoint, for individuals and corporate investors to go ‟long” on creative startups and SMEs.

1. ‟Good times” are coming back: it’s time to invest in the creative industries

With the global economy recovering from the 2007-2012 recession and a tangible boost of confidence, financial investors and corporates alike are becoming more bullish and enterprising, especially in relation to the creative industries. It is time to invest in the creative industries.

In the luxury goods sector, the historical data is very promising, with 2012 being the third year in a row of double- digit growth for personal luxury goods, at 10 percent annual growth rate, now over the Euro200 billion ceiling (1). There was no recession at all, in the luxury goods sector.

As a reflection of the outperformance of this creative sector, many luxury stalwarts have been either acquired (such as Loro Piana and Bulgari sold to LVMH as well as Christopher Kane and Pomellato sold to Kering), invested into (such as the investment of equity investment funds Ardian and Blackstone into a minority participation stake in Versace (2) and the negotiations for an investment made by buyout firm Permira into a Euro450 million majority stake in Roberto Cavalli (3)) or introduced on the stock market at sky-rocketing valuations, which are ever increasing (Prada, Salvatore Ferragamo, Michael Kors, Brunello Cucinelli).

The technology sector is also back to acquisitive mode in full swing, with Facebook spending USD19 billion (!) to purchase WhatsApp, a cross-platform mobile messaging app for iPhone, BlackBerry, Android, Windows Phone and Nokia, which allows to send text, video, images, audio messages free of charge.

The USD19 billion figure is split between USD4 billion in cash, USD12 billion in shares and USD3 billion in Facebook shares, which will be distributed to the founders and employees of WhatsApp, spread over four years after the closing of the deal. Sequoia, the investment fund which invested USD8 million for 15% of WhatsApp’s capital in 2011, is about to make USD3.5 billion out of this transaction.

Juicy business.

With many sectoral experts saying, and proving, that the creative and cultural industries are the booster to global and, in particular, European, growth and recovery (4), the future looks very bright indeed for all those companies which main assets are theirintangibles (knowhow, intellectual property, brand value, reputation, etc).

2. How to benefit from the bullish market in a tax efficient way

If you have some back pocket money (5), i.e. some money sitting around idly in a savings bank account remunerated between 0.5 percent and 1.00 percent, which you absolutely do not need in the short and medium term and which you would not feel badly hurt if you were losing, now is the time to take advantage of the situation.

The taxman is generous to individuals ready to part with their cash to invest in the creative industries, on both sides of the Channel.

In Great Britain, HMRC is only inclined to give tax credits to individuals, the so-called ‟business angels” who are UK tax residents with an entrepreneurial mind. Enterprise Investment Schemes (‟EIS”), Venture Capital Trust (‟VCT”) and Seed Enterprise Investment Scheme (‟SEIS”) are the three tax tools through which individuals can invest in eligible companies (i.e. companies with no more than 250 employees or gross assets lower than GBP15 million, or GBP200,000 for a SEIS) in a tax efficient way.

Tax breaks are summarised below:

SEIS:

Maximum investment: GBP100,000

Inc tax relief/investment: 50 percent

Holding period: 3 years

Capital gain tax: exemption EIS:

Maximum investment: GBP1 million

Inc tax relief/investment: 30 percent

Holding period: 3 years

Capital gain tax: exemption

VCT:

Maximum investment: GBP200,000

Inc tax relief/investment: 30 percent

Holding period: 3 years

Capital gain tax: exemption

In France, individuals who have to pay the French wealth tax (wittily called ‟impôt de solidarité sur la fortune” (‟ISF”), and invest in SMEs, are also rewarded by the French state.

Through the ‟ISF PME” tax breaks, individuals subjected to the ISF can deduct up to 50 percent of the sums invested in French SMEs, up to Euro45,000 per year (6).

For everybody else who pays income tax in France, a new tax break of 18 percent of the cash invested in a French SME, capped at Euro50,000 per taxpayer per year, has been set up (7).

If the SME you have invested in goes bust, you will still have been able to take advantage of the tax breaks. If the SME produces many sparks and is being acquired, at a later stage, by a private equity investment fund, a competitor or any other third party, the early-stage investor individual will be able to cash in and realise a substantial capital gain on its early investment. In the UK, such capital gain is exempted from taxation, unlike in France. That may explain why there are more than 50,000 business angels in the United Kingdom and around 5,000 (!) in France.

Sadly, corporate venture is not currently actively encouraged by either the French or British governments, which results in Euro230 billion sleeping idly in the coffers of all the companies listed on the French CAC40 index, for example.

More lobbying should be done, by institutions representing the creative industries such as Comité Colbert, Fondazione Altagamma, Walpole and the European Cultural and Creative Industries Alliance, to influence governments to provide tax incentives to companies wishing to invest in SMEs in a tax efficient way.

Positive changes are looming though, since corporate venture should kick off on 1 July 2014 in France, with companies paying taxes in France being able to amortise their corporate venture investments in innovating SMEs over a period of five years (8).

Let’s watch the space and hope that Cameron and Osborne are going to take stock and act accordingly, in the UK soon.

It is time to think carefully how to invest any spare cash that you may have and, with the bright economic outlook and new tax schemes pushed by governments to accelerate growth and recovery, both individuals and corporates have more and more investment options at their disposal, to encourage innovative and creative industries.

(1) Luxury goods worldwide Market Study Spring 2013 Update, Bain & Company

(2) M&A in 2014? Luxury brands on sale or seeking for financial partners, Portolano Cavallo Studio Legale (3) Sources Say Roberto Cavalli Nearing €450 Million Sale to Permira, Business of Fashion

(4) 1er panorama des industries culturelles et créatives, EY, November 2013

(5) Back pocket money, Jimmy C. Newman

(6) ‟Réductions, impôt de solidarité sur la fortune”

(7) ‟Réduction d’impôt pour souscription au capital de sociétés non cotées”

(8) Corporate venture: ‟pour financer l’innovation”

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Send VAT refund and tax free shopping: how to make them even more lucrative for luxury brands?

Tax free shopping, in France alone, had a volume of around 4 billion Euros in 2012, progressing between 25 and 30 percent per year. As Chinese tourists spend around 80 percent of their shopping budget in Paris, in particular atLes ‟ Galeries Lafayette” and ‟Printemps”, tax free shopping, also called VAT refund, is a bonanza for Paris-based luxury brands and department stores, as well as tax free providers such as Global Blue and Premier Tax Free.

Note from the author on VAT refund: Since 13 February 2015, the French circular dated 26 January 2011 on sales to travellers residing in a country which is not part of the European Community or an assimilated territory and on the process of export sales slips has been abolished and replaced by the circular dated 13 February 2015 relating to the sale to travellers residing in a state outside the European Union or an overseas collectivity from the French republic.

Indeed, Chinese tourists have increased their shopping budget by 80 percent, during the same period, spending 1,500 Euros on average per purchase in 2012.

What is tax free shopping exactly? How does it work? Who benefits from it? Below are answers to these questions and more.

1. Legal framework of the French tax free shopping system

1.a. Article 147 of Directive 2006/112/EC of 28 November 2006

Set out in article 147 of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “Directive” and ‟VAT”, respectively), the process of export sales slips (‟bordereaux de vente à l’exportation”) allows tourists who have their main residence outside the European Union (‟UE”) to benefit from, under certain conditions, tax removal on exports for purchases destined to their personal use and which are transported outside the EU in their personal luggage.

Point (b) of article 146 (1) of the Directive provides that:

‟1. Member-states shall exempt the following transaction(s):

(…)

(b) the supply of goods dispatched or transported to a destination outside the Community by or on behalf of a customer not established within their respective territory, with the exception of goods transported by the customer himself for the equipping, fuelling and provisioning of pleasure boats and private aircrafts or any other means of transport for private use. (…)”.

Article 147 of the Directive provides that:

‟1. Where the supply of goods referred to in point (b) of Article 146(1) relates to goods to be carried in the personal luggage of travellers, the exemption shall apply if the following conditions are met:

(a) the traveller is not established within the Community;

(b) the goods are transported out of the Community before the end of the third month following that in which the supply takes place;

(c) the total value of the supply, including VAT, is more than 175 Euros or the equivalent in national currency, fixed annually by applying the conversion rate obtained on the first working day of October with effect from 1 January of the following year.

However, Member States may exempt a supply with a total value of less than the amount specified in point (c) of the first subparagraph.

2. For the purposes of paragraph 1, ‟a traveller who is not established within the Community” shall mean a traveller whose permanent address or habitual residence is not located within the Community. In that case ‘permanent address or habitual residence’ means the place entered as such in a passport, identity card or other document recognised as an identity document by the Member State within whose territory the supply takes place.

Proof of exportation shall be furnished by means of the invoice or other document in lieu thereof, endorsed by the customs office of exit from the Community.

Each Member-state shall send to the Commission specimens of the stamps it uses for the endorsement referred to in the second subparagraph. The Commission shall forward that information to the tax authorities of the other Member- states”.

Article 147 of the Directive allows goods not to be taxed twice, in the country where they were purchased and in the import country, the latter being the place of the real consumption of these goods. EU Member-states can neither forbid tax refunds on exports, nor limit them beyond what is allowed by the Directive.

1.b. Article 262 of the French general tax code

In France, the provisions set out in article 147 of the Directive have been transposed in article 262 of the French general tax code (‟GTC”).

As a preliminary remark, it is worth mentioning the various VAT rates that currently apply in France:

19.6 percent is the standard VAT rate, which applies to the majority of goods and services;

7 percent is the intermediary VAT rate, which applies to the following goods and services, among others: restaurants and sale of pre-cooked food stuff (take-away or on site), hotel accommodation, furnished rentals, classified camping, transport services, certain types of renovation works, agricultural products not destined to human consumption, non-refundable medicines, cinemas, sale of original works of art and copyright, entry tickets to museums, zoos, monuments, exhibitions and cultural sites;

5.5 percent is the reduced VAT rate, which applies, for example, to food products (except chocolate, candy, vegetal fat, caviar, which are taxed at 19.6 percent), non-alcoholic beverages, gas and electricity subscriptions, and

2.1 percent is the particular VAT rate, which applies to medicinal drugs refunded by the French social security, living animals for meat consumption sold to non- producers of meat products, contributions to public entertainment channels and certain press publications.

Goods, which may benefit from the VAT refund process, may fall in the three first VAT categories, at 19.6 percent, 7 percent and 5.5 percent respectively.

From 1 January 2014 onwards, the main French VAT rates will be modified, as follows:

the reduced VAT rate will be lowered from 5.5 percent to 5 percent;

the intermediary VAT rate will be increased from 7 percent to 10 percent, and

the standard VAT rate will be increased from 19.6 percent to 20 percent.

Article 262-I-2º of the GTC provides that deliveries of goods exported or transported by a buyer who is not a resident in France, or on his behalf, outside the European community, as well as service deliveries directly linked to exports, will be exempted from VAT.

Furniture and victualing goods used on cabin cruisers, touristic planes or any other means of transportation with a private use, are excluded from this VAT exemption.

When the delivery relates to goods that are transported within the personal luggage of the travellers, the VAT exemption will only apply if the following conditions are met: a. the traveller does not have his domicile or usual residence in France or any other Member-state of the European Community; b. the delivery does not relate to manufactured tobaccos, goods which correspond to, in view of their nature or quality, commercial supply, as well as goods which are prohibited to exit; c. the goods are transported outside the European Community before the end of the third month following the month during which the delivery was performed, and d. the global value of the delivery, including the VAT, is above 175 Euros (as specified in the French circular (‟circulaire”) dated 26 January 2011 on sales to travellers residing in a country which is not part of the European Community or an assimilated territory and on the process of export sales slips (the ‟Circular”).

1.c. Circular dated 26 January 2011 on sales to travellers residing in a country which is not part of the European community or an assimilated territory and on the process of export sales slips

The Circular explains in details the rules that apply to the process of export sales slips in France.

We have detailed below the key rules that are set out in the Circular.

1.c.i. Export sales slip (‟bordereau de vente à l’exportation”) When a seller, liable to pay VAT, decides to exercise its option to perform the formalities of export sales slips for the benefit of its buyers, in relation to goods destined to exports, this triggers, exclusively, the delivery by this seller, on the day of the sale, of an export sales slip (‟bordereau de vente à l’exportation”) to a buyer of the goods who has his domicile and residence outside the UE.

The process of export sales slips is not mandatory and the buyer cannot impose it to the seller. As mentioned above, it is an option that the seller has, and which it decides to exercise or not.

The seller judges whether it wants to accomplish the formalities of the exemption process and undertake these responsibilities, or whether it prefers to sell at the conditions of the internal market (i.e. at full VAT rate, without any possibility of refunds). The export sales slip (‟bordereau de vente à l’exportation”) is, all in one, a sales receipt, as well as a simplified export statement (‟déclaration d’exportation simplifiée”) and a statement of the commitment taken by the buyer, who benefits from the VAT refund, to strictly comply with the rules of this exemption process.

Buyers must then present for visa (i.e. review, confirmation of approval and stamping), the export sales slip provided by the seller, as well as the goods that are mentioned in such slip, to the customs authorities of the point of last and definite exit from the EU.

This will be either customs at the exit point in France, if the buyers leave directly France to go to a country that is not in the EU (France – United States, for example), or customs in the last Member-state at the exit point from the EU from another Member-state (France-Belgium-United States, for example).

1.c.ii. Two visa processes Two visa processes coexist in France: the visa by way of stamp from customs and the electronic visa within the PABLO application.

The electronic visa is possible for VAT refund slips, on which are set out the PABLO logo, at those points of exit from the French territory that have been set up with some electronic visa devices (i.e. French airports, which are Roissy-Charles- de-Gaulle, Orly, Marseille-Provence, Nice-Côte d’Azur, Lyon- St-Exupery, Geneve-Cointrin, St-Julien en Bardonneix and Marseille-Port).

As far as electronic visas are concerned, travellers who definitely leave the EU, from an exit point equipped with automatic PABLO terminals, present their slips, on which are set out the PABLO logo, to the PABLO terminals. Those terminals, usually located close to the customs office in the French airport, read the barcodes set out on the VAT refund slip, on which is set out the PABLO logo. Then, the PABLO terminals provide a ‟CONFIRMED” status to the export transaction of the goods, triggering the electronic visa of such export sales slip.

From whatever exit point located in France, the traveller asks customs to review and confirm the approval of those export sales slips that are not identified with a PABLO logo.

1.c.iii. VAT refund process The seller, in its quality of exporter, must obtain from a printer of its choice, some export sales slips, which comply with the CERFA model nº 10096*03.

Export sales slips must be numbered in continuous series. They contain three identical pages, which must set out mandatory mentions prescribed by decree: the first one is kept by the seller for accounting purposes, the second is to be sent back by the buyer, to the seller, after obtaining the visa, and the third one is for the buyer to keep.

The seller can also use a slip which is in a different format, provided that the content of such slip complies with the provisions set out on the CERFA template model n°10096*03 and that such slip and its content have been reviewed and approved by the Office F/1 from the ‟Direction Générale des Douanes et Droits Indirects”.

Their signatures on export sales slips commit both the buyer and the seller to comply with their respective obligations, as set out below.

A – Seller’s obligations

1. Obligations of the seller, whatever way the visa is granted From a tax standpoint, the seller acquires the title of exporter.

In addition to its obligations as an exporter, the seller must proceed to the following operations: a) check the quality of non-resident of the buyer

This check is performed using official documents such as passports, identity cards, consulate cards, etc. b) set out the following mentions:

the number and nature of the official document presented, and

all mentions concerning the buyer’s identity: surname, first name, foreign address, nationality. c) inform the buyer of the process to follow and the possible applicable sanctions in case an irregularity is discovered. Whenever sellers or buyers do not comply with their respective obligations, which are part of this process, customs will refuse to provide the visa on the slip and, possibly, may apply some penalties. d) clearly indicate to the buyer, from the moment during which the export sales slip is drafted, the exact total VAT amount, as well as the amount which will be actually refunded to the buyer, if management fees are billed by the seller and/or refund companies, such as Premier Tax Free and Global Blue (the ‟Refund companies”).

The sale transaction becomes effectively exempted from VAT when the seller gets the export sales slip back from the buyer, on which has been set out the visa (either through a stamp provided by French customs, or customs from another Member-state of the EU, or an electronic visa).

However, the seller can provide the VAT refund: either at the date of the sale, and in this case, the seller takes the risk of losing the benefit of the VAT exemption if its buyer never justifies the export of the purchased goods;

or when it gets back the sales slip approved and stamped by customs or an electronic visa.

The seller is contractually bound to pay its buyer the amount to which it committed, as set out on the export sales slip. e) prepare the export sales slip, which needs to conform with the annexed export sales slip model nº10096*03, setting out its individual VAT identification number, which was attributed to the seller by the French tax authorities. f) mention, precisely and in a readable manner, on the slip, the exact nature and number of sold goods, in order to allow customs to identify them.

Export sales slips must mention, in addition to their own denomination, the brands and manufacturing numbers set out on jewellery pieces in precious stones and on devices that reproduce sound and picture (cameras, camcorders, dvd players, for example).

However, it is possible for the details relating to the purchased goods to be set out on a separate invoice, provided that the export sales slip expressly mentions the reference number of said invoice.

The French-language wording, set out on the form, of the declaration and undertaking consigned in the D frame (Buyer), must compulsorily be set out on the export sales slip, as well as its translations in the six following languages: English, Portuguese, Spanish, Russian, Japanese and Mandarin Chinese.

A pre-stamped envelope, on which is set out the seller’s address, must be provided to the buyer, so that the buyer can post an original export sales slip, on which is set out the visa, to the seller.

2. Obligations of the seller and the authorised VAT refund operator within the PABLO application Within the PABLO process, the seller prints, for each transaction, an export sales slip on paper, identified by a PABLO logo and a bar code. To this export sales slip, the seller annexes an explanation notice relating to the conditions to obtain the electronic visa.

The seller then generates the following information and transfers it to the French customs’ database, at least once per day:

transaction identifier (bar code number);

seller’s identity;

buyer’s identity;

buyer’s address;

type of goods (precise denomination);

amount inclusive of all taxes (‟montant TTC”);

VAT amount, and

publication date.

3. Timeframe within which to keep stamped export sales slips The stamped original export sales slip, returned by the buyer to the seller, after obtaining a visa from customs, must be preserved by the seller, in case of tax and customs control, until the end of the third year following the year of purchase of the goods.

The original copy of the export sales slip, created under electronic form, can be preserved in electronic format, until the end of the third year, from the year during which such electronic sales slip was created.

B – Buyer’s obligations

1. Formalities to perform, whatever way the visa is granted The buyer must justify its status of resident outside the EU and sign the confirmation set out on the D frame on the export sales slip, in relation to the performance of the various formalities.

To this effect, he must:

present, simultaneously, the goods and two originals of the export sales slip, for visa by customs, at his point of definitive exit from the EU, before the end of the third month following the month during which the purchase was performed;

transfer by himself, outside the EU, in his luggage, the goods which benefit from the VAT refund. This process does not allow the intervention of a third party. Therefore, the buyer cannot transfer the goods through a forwarding agent, a diplomatic pouch, the post office, etc.

If one of these conditions is not complied with, customs will refuse to stamp and put a visa on the export sales slip(s).

2. Formalities to perform, within the frame of the PABLO application The buyer, in possession of his goods, will proceed, by himself, to the electronic visa of the PABLO marked export sales slips, at one of the PABLO terminals with optical reading available in public areas and close to a customs’ office in French airports.

This action provides a ‟CONFIRMED” status to the transaction of exportation of the goods and equals to the electronic visa of the export sales slip.

1.c.iv. Final provision of the VAT exemption

A. In a manual process French customs provides the buyer with two originals, original n. 2 (to be posted back to the seller after the visa) and n. 3 (which is a stamped original that justifies the execution of all customs formalities).

It is the buyer’s responsibility to send original n. 2 of the export sales slip, which now has a visa, to the appropriate seller, within six months following the sale.

B. In the PABLO process The electronic visa confirms the reality and occurrence of the export and clears the export sales slip in the dedicated database.

This status grants to the seller the final benefit from the VAT exemption.

The buyer does not have to send to the seller original n. 2 of the export sales slip.

1.c.v. Controls

A. Immediate controls In adequacy with the Directive, the benefit from VAT refund is subordinated to the visa stamping of the export sales slip (‟bordereau de vente”), or of a document that is equivalent to an export sales slip, by customs at the point of exit from the EU.

It is the responsibility of customs’ agents, to whom the manual or electronic visa of export sales slips is requested, to check that:

the export sales slips are valid; the buyer has a non-resident status;

all the goods set out on the export sales slips are really being exported;

the nature and value of the goods do comply with the authorised nature and quantities, set out in paragraph II-3 of the Circular (goods excluded from the process);

the travel ticket presented by the buyer confirms that the buyer will be travelling directly to a country outside the European Union;

the export sales slips with a PABLO logo, stamped with an electronic visa;

the visa is manually stamped on standard export sales slips, when all the conditions are met, and

a visa be manually stamped, on a PABLO export sales slip, when the PABLO terminals are not functioning properly.

When the customs officers find some irregularities, they may decide to refuse to provide the visa, to invalidate the export sales slip or to inflict a penalty in application with the French customs code.

B. Ex-post controls Some ex-post controls on the regularity of VAT refund operations may be performed by customs agents, at the head office of sellers and/or the Refund companies, in application with the French customs code.

A dedicated team has been set up, entitled ‟Service d’enquêtes de la Direction Nationale des Recherches et des Enquêtes Douanières” (‟DNRED”), by the French customs authorities, to perform such ex-post controls.

To conclude on the framework relating to the French VAT refund system, meticulously described in the Circular, there are many options available to French shops (sellers), as follows:

sellers may prefer to sell only at internal market conditions (at the same prices than those paid by tax- residents of the EU, i.e. without providing any VAT refund services); or

sellers may exercise their option to provide VAT refund services to their buyers who are not tax-resident in the EU. In this instance, they may decide to:

enter into a private bilateral and exclusive contractual arrangement, with a professional VAT refund services provider that is active on the French market; or

organise the VAT refund themselves, by manually providing some export sales slips to their buyers (by getting the printed templates of export sales slips at their closest chamber of commerce or authorised printers); or

organise the VAT refund themselves, by using the electronic process PABLO Indépendants.

2. The beneficiaries of the VAT refund market in France

I understand from the French customs, tax and politics authorities, that the current French framework of VAT refunds is unlikely to change in the near future. As set out in the answers to the written questions n. 32263 and n. 13548 asked at the French National Assembly, on 15 June 2010 and 12 February 2013, France is the first touristic destination in the world. France is increasingly sought after, as THE shopping destination of choice for travellers coming from all over the world. Foreign tour operators include shopping activities in France as part of the attractions in the trips that they propose to their clients. In this context, VAT refunds are an advantage, which is often mentioned in order to boost touristic revenues, for which France stands in the rd3 place, worldwide, behind the United States and Spain. Paris remains at the first European place as far as touristic shopping is concerned, well ahead of London and Milan (76 percent of tax free shopping is done in Paris, 10 percent in the rest of the Ile-de-France region, 7 percent in the French Riviera, 2 percent in the Alps and 5 percent elsewhere in France).

Tightening the legal framework on VAT refunds, and in particular the conditions which apply to these VAT refunds, may trigger an eviction effect of the purchases made by tourists to foreign member-states, in particular Germany and Great Britain. For all these reasons (compliance with the Directive, beneficial effect of the VAT refunds on the business of French sellers and shops), the French congress does not want to amend these rules.

I understand that the only foreseeable change to the current French framework on VAT refunds is that the PABLO process will become compulsory from 1 January 2014. Therefore, all shops will have to use PABLO marked export sales slips, from 1 January 2014, and an electronic visa will be stamped, on these PABLO marked slips, by the PABLO terminals with optical reading, or a visa will be manually stamped, on a PABLO export sales slip, when the PABLO terminals are not functioning properly.

3. Possible solutions to enter the VAT refund market in France

It is important to note that there are no particular legal conditions or state approval requirements, to be complied with, or obtained, by any company that wants to become a tax refund services provider in France.

Unlike banks or financial institutions, a Refund company, i.e. a tax refund services provider, does not need to be registered with, or approved by, the ‟Autorité des Marchés Financiers” or any other French public institution or regulator. The only requirement is that the new tax refund services provider finds some clients on the French private market, i.e. some shops or sellers that agree to enter into a business relationship and bilateral contractual partnership with the new tax refund services provider. The tax refund services sector is unregulated and free for any new entrant to enter, provided that the provisions set out in the Circular and the template CERFA model n°10096*03 are complied with by such new entrant.

Therefore, to conclude, I think that, at this stage, the best way to enter the tax refund market in France, is to:

either contact some French shops, which have no agreement in place with any other tax refund services provider and/or Refund company, and which may be susceptible to attract and appeal to tourists, and negotiate with those French shops a partnership relating to tax refund services, or

provide better and more attractive commercial terms to French sellers (shops), which are already bound by the terms of a contractual relationship with other tax refund services providers, such as leaders on the Refund companies’ market, Global Blue and Premier Tax Free.

I think that these are the two ways in which one should be able to attract new French shops to partner up to offer tax refund services at very attractive rates, to tourists.

To penetrate the French tax refund market, one must first enter into bilateral contractual relationships with attractive French shops before offering tax refund services to tourists who come to France.

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Business breakfast on fashion finance law on Tuesday 30 July 2013

We had a great time, on Tuesday 30 July 2013, during the business breakfast during which we presented our proprietary research on fashion finance. During our presentation on fashion finance law, the audience was really paying attention and asking incisive questions on the tools and tips to get funding!

Please find below our video and slides of the seminar, as well as some information on the content of this cutting-edge presentation on fashion financing.

You will need initial funding to create your first, second or even third collection and set up your fashion business. While family & friends, grants and loans can be a source of financing, don’t underestimate the value of intellectual property (‟IP”) in the context of obtaining funding for your fashion business.

This video was created with the efficient and proactive contribution of the London Film Academy. Thank you LFA!

During this B@B, we covered: tools and tips to get funding;

the different financing sources available to you;

your business plan – key considerations;

attracting third party financial investment – and the important role of IP;

key clauses in partnerships or equity finance agreements, and

next steps after you secured funding.

The speaker is Annabelle Gauberti, founding and managing partner of London fashion law firm Crefovi, an expert in fashion finance law.

She has more than 10 years of experience practising the law of luxury and fashion law, both in the UK and France. Annabelle advises fashion houses, financiers, security providers, on various aspects of fashion finance law.

Her clients base includes fashion houses, designers & models, artists, film production companies.

She is steeped in finance & corporate law, and has been involved in many matters, either contentious or non- contentious, relating to intellectual property, trademark litigation, selective distribution, franchising, tax & internet law.

Annabelle has more than ten years of experience practising fashion law, also known in France as “droit du luxe” (law of luxury goods) and she has written numerous publications about it.

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Art and luxury: how the art market became a luxury goods business – revisited London law firm for creative industries Crefovi publishes its latest proprietary research in the art and luxury issue of INFO Magazine, in relation to the interactions between the art and luxury sectors.

I came across an interesting piece, on Phaidon’s website, recently, entitled ‟How the art market became a luxury goods business”. This blog post describes the reactions to, and contains an interview about, artist Andrea Fraser’s essay entitled ‟L’1 pour cent c’est moi”, freely available to download from the Whitney Museum’s website as part of its 2012 Biennial.

In her essay, the California-based artist and professor at UCLA stresses her concerns that today, art is not only an asset class for the financial elite, but has also become a financial instrument. She also states that, the greater the discrepancy between the rich and the poor, the higher prices in the art market rise. According to Ms Fraser, while there is a direct link – quantified in recent economic research [1] – between the art market boom and economic inequality that has reached levels not seen since the ‘20s in the US and the ‘40s in Britain, it is not just the art market that has expanded from this unprecedented concentration of wealth but museums, art prizes, residences, art schools, art magazines have multiplied in the past decade. She expresses her uneasiness at working in the art field, which has benefited from, and, as an artist, having personally benefited so directed from, the anti-union, anti-tax, anti-regulation, anti-public sector politics that have made this concentration of wealth possible. Andrea Fraser concludes her essay by saying that a‟ broad- based shift in art discourse can help bring about a long overdue splitting off of the market-dominated sub-field of galleries, auction-houses and art fairs. Let this sub-field become the luxury goods business it already basically is, with what circulates there having as little to do with art as yachts, jets and watches. European museums have the potential to be the birthplace of a new art field that could emerge from this split, where new forms of autonomy can develop”.

It is not the first time that an artist has expressed concern, resentment and even cynicism at having to play the game of capitalism and conform to harsh business realities.

Sarah Thornton, in her book ‟Seven days in the art world” [2], cheekily describes her conversation with Marc Jacobs, artistic director of Louis Vuitton Malletier, to whom she says that she heard that artist Takashi Murakami referred to his Louis Vuitton work [3] as ‟my urinal”. After taking an audible puff on his cigarette, Marc Jacobs, who deeply understands the art world – he collects, attends the auctions, visits the Venice biennale -, replied coolly ‟I’m a big fan of Marcel Duchamp and his ready-mades. Changing the context of an object is, in and of itself, art. It sounds like a put-down, but it’s not”. As Ms Thornton notes, ‟given that Duchamp’s ‟urinal” is one of the most influential works of the twentieth century, one might argue that Murakami is in fact glorifying his LV affiliations”. However, one can only wonder how this play on words might be interpreted, coming from an artist.

To further expand on this point, it is worth noting that some street artists have a radical take on the luxury goods business, trying to differentiate themselves as much as possible from this industrial sector. For example, French street artist Zevs made many works of art parodying logos of famous luxury brands, such as Chanel, Louis Vuitton and Ralph Lauren, criticizing the role these brands play in society. Since these street art works may damage and dilute the image of luxury houses, Louis Vuitton and Ralph Lauren, among others, have put in place some robust anti-copying and anti- counterfeiting teams, who do not hesitate to threaten litigation if artists do not stop using their protected trademarks in artworks [4]. The paradox is that, the more street art boldly criticises and parodies the luxury goods business and consumerism, the more expensive it becomes on art markets, fetching ever increasing prices at auctions, just like any other luxury good!

It is true that there is a correlation between the fine arts and luxury goods sectors, as buyers of the former are often buyers of the latter. To give clues about their status and wealth, high net worth individuals (‟HNWIs”) tend, in general, to surround themselves with luxury goods and art works. With a rising trend of HNWIs becoming more numerous, especially in emerging economies such as China, Brazil and India, the demand for luxury goods and art works is bound to increase. ‟In Asia, Russia and the Middle-East, the purchase of artworks has acquired enormous cultural, economic and lifestyle importance. The decade’s new millionaires, hopping from art fairs to auction sales the world over, have transformed the auction market into an increasingly high-end market” [5]. As one of the most important economic features of the art market is that it is essentially supply-driven (i.e. there is a limited amount of high-quality fine arts pieces available on this market), increased demand cannot necessarily increase supply, and instead elevates prices of art works [6]. As a result, only either the 1 percent (or, most likely, 0.1 percent), mentioned by artist Andrea Fraser in her essay, or corporate art collectors, can afford buying works of fine arts.

Indeed, companies play an essential role in the current art world, as corporate collectors, patrons, charity-event organisers, supporters of art exhibitions and collaborators with artists. Luxury houses, in particular, are very attracted to the art world and, despite the ‟disdain” shown by certain artists towards commercial endeavours and the luxury goods sector in general, actively get involved on artistic projects. At the forefront of this movement, Louis Vuitton has even recently published a book, entitled Louis‟ Vuitton: Art, Fashion and Architecture”, to publicise its many collaborations with artists. From theLouis Vuitton Foundation, expected to open in 2014 at the zoological gardens in Neuilly, in the outskirts of Paris, to the many fashion collaborations with artists Takashi Murakami, Olafur Eliasson, Richard Prince and, more recently, Yayoi Kusama and Daniel Buren, Louis Vuitton is the all-time winner of art accolades, even having set up an access and arts education programme for disadvantaged children in partnership with five London museums [7].

Other important corporate collectors are François Pinault, the founder of luxury goods conglomerate Kering (ex PPR), who has created a contemporary art foundation at the Palazzo Grazzi and La Punta della Dogana in Venice and who is the owner of the world’s largest auction house Christie’s; and jewellery house Cartier and its highly originalcontemporary art foundation. In the words of luxury marketing specialists M Chevalier and G Mazzavolo [8], an‟ art collaboration will attract the attention of the press and the public, invigorating the brand’s creativity, giving the brand a renewed pertinence since it will become associated to celebrities of the contemporary art world, giving it the proof of aesthetic sensibility of the brand”.

It all makes sense from a business standpoint anyway, since, according to luxury strategists JN Kapferer and V Bastien, ‟luxury is the artist’s means of financial subsistence. Working for the luxury industry allows an artist to live decently while pursuing his or her artistic work” [9]. In addition, corporate collectors and patrons can benefit from substantial tax advantages when putting money in fine arts: both the US and France grant hefty tax relief to companies that buy works of art to constitute corporate art collections. Another Gallic example is the tax cuts granted to French companies that make donations to public bodies, which main activity is to organise contemporary art fairs for the public [10].

In the United Kingdom, the government has recognised the importance of providing reductions in corporate tax, capital gain tax and income tax, in exchange for donations of qualifying gifts of pre-eminent property to be held for the benefit of the public or nation. A new scheme entitled ‟gifts of pre-eminent objects and works of art to the nation” was introduced in April 2012, in order to boost philanthropy by living individuals and corporations, all of whom are tax residents in Great Britain.

To conclude, I agree that the art market has become a luxury goods business, controlled by the economics rules of supply and demand. If some artists are unhappy with this state of affairs, I think that it is down to them to control the “demand” chain for their art works. If they do not want to sell their art pieces above a certain price and/or to certain types of buyers, they should make it clear when dealing with art gallery owners and other distributors of their work. Artists could even directly approach the types of buyers they want to sell or donate their work to, such as museums, art foundations or non-profit organisations, obtaining written warranties, covenants and undertakings from these ‟selected” buyers that they will not put the art works in the secondary market (in particular, at auctions). As the demand side for contemporary art works is ever increasing, inflated by the cohorts of HNWIs who seek highly visible labels and for whom buying from an internationally renowned gallery is similar to buying from Louis Vuitton, Prada or Chanel, artists need to have a well-thought business plan, in which they lay out their plans to reach financial success as well as recognition from the art world, while holding true to their ethical beliefs.

[1] ‟Art and Money” by William N. Goetzmann, Luc Renneboog and Christophe Spaenjers, 28 April 2010.

[2] ‟Seven days in the art world”, Sarah Thornton, Granta, 2008.

[3] One of Takashi Murakami’s most visible commissions has been for the accessories giant Louis Vuitton Malletier. In 2000, Marc Jacob asked Murakami to reenvision ‟monogram canvas”, the company’s century-old signature pattern in which the beige and brown initials LV float in a field of four-petal flower and diamond shapes. Three Murakami designs were put into production, and one of them, ‟multicolor”, which used thirty-three candy colors on white and black backgrounds, was so successful that it became a standard line.

[4] ‟Art attacks: Perspectives on the use of fashion logos”, Fashion Law Institute at Fordham Law School, 8 February 2012.

[5] ‟Contemporary Art Market 2010/2011”, The Artprice annual report.

[6] ‟Fine art and high finance”, edited by Clare McAndrew, Bloomberg Press, 2010.

[7] ‟Corporate art collections”, Charlotte Appleyward and James Salzmann, Lund Humphries, 2012.

[8] ‟Management et marketing du luxe”, Michel Chevalier and Gerald Mazzavolo, Dunod, 2011.

[9] ‟The luxury strategy”, J N Kapferer and V Bastien, Kogan Page, 2012.

[10] ‟Art tax law: a double-hedged sword”, Annabelle Gauberti, 2013.

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Financing luxury companies: the quest of the Holy Grail (not!)

The main characteristic of a luxury company is the importance of its brand’s value. This is by far the most crucial asset of a luxury business. It is due to the extreme concentration of intangibles that such brand embodies. Since the value of a luxury business is, above all, the financial valuation of its brand, the luxury company’s management needs to implement a strategy that will boost such brand equity. This is the goal of financing luxury companies.

1. What does it take to build a luxury brand with a strong financial valuation?

This implies that the financial strategy will be to maximise, not the net profit, but the luxury brand’s value. Another consequence is that since brands have never been set out on the balance sheet at their true worth, successful luxury companies generally have a very high return on equity, a phenomenon often accentuated by very high profitability.

So, what does it take to implement a strategy that unlocks a luxury brand’s equity?

It takes a lot of time and money to build a lasting luxury brand. Given the importance of the investment to be made in creation, communication and distribution, which are strongly qualitative and only profitable over the long term, a very high gross margin (in the order of 80 per cent) is crucial to the brand’s survival.

To achieve such high gross margins in the long term, some basic rules must be followed from the inception of a luxury brand.

The first one is to be profitable in the core trade first: the burgeoning luxury brand needs to remain concentrated on the core trade and extend only progressively, and in a controlled manner, to luxury goods beyond its core. A luxury brand is deep in deficit at the beginning, since it cannot waver on the product quality it offers, while its low recognition makes it impossible to sell at high prices. This deficit should be considered as an investment on the brand’s content.

The young luxury company must then set the virtuous spiral in motion by:

increasing its sales volume, and thus its production;

lowering its costs, enabled by the experience effect, which leads to a rise in margins, since retail prices are maintained at the same level;

investing in communication, thanks to the release of the level of finance made, and

ultimately, increasing sales prices, made possible by ongoing recognition of the luxury brand.

Diversifying into other products before achieving profitability in the core trade would be a mistake, and could even be fatal to the emerging luxury company.

The second rule is to ensure human stability and coherence of teams. These stable teams will bring creativity of consistent quality, hence fostering brand loyalty in the luxury company’s customer base. When the luxury company launches into products’ diversification, its management team should be mindful of troop morale, since such diversification could be perceived as a rejection of existing lines and their teams. Diversification consuming a great deal of cash, to the detriment of the core trade, management must explain its expansion strategy to its teams, and ensure that money is appropriately spent during the implementation of such diversification. Meanwhile, it is important for the luxury company to keep on investing strongly in its brand and distribution, in order to maintain a very robust brand and thus be shielded from any risks generated by the diversification. Often, part of the royalties, paid by licensees to the luxury company, as a result of products diversification into perfumes, eyewear or children wear, for example, will be reinvested in the luxury brand and distribution.

Achieving high margins for a luxury company always requires seeking the minimum volume of sales beyond its own borders: internationalisation, and then globalisation, is the law of luxury. Only the demand side should be expanded abroad, though, certainly not the production side in order to reduce costs, as this would greatly damage the luxury brand.

When a luxury company consistently follows these rules, it usually generates exceptional profitability on turnover, over time. Initially, it must concentrate the bulk of its small capital on the development of its production volume in order to be profitable at the desired sales price. Then, when the luxury company has reached a reasonable cost price, it should swing the majority of its investment into communication, including the development of a quality distribution network.

2. What types of financing exist, for luxury brands?

Luxury companies, with their high gross margins and net profits rates [1], have become attractive targets for financiers. Private equity funds, in particular, have delved into the luxury world with enthusiasm. From Jimmy Choo [2], to Hugo Boss [3] and La Perla [4], quite a few luxury brands have been acquired, or heavily invested into, by equity financiers.

For young luxury companies, finding a committed, yet not overbearing, equity finance partner is really a way to kick- start their brand to the next level. For example, England- based ready-to-wear and bespoke tweed company, Dashing Tweeds, was initially backed-up by equity investors, allowing the brand to grow and reach national recognition through a major collaboration with high street chain Topshop.

Equity investments may be easier to secure for UK-based luxury businesses, since there are 50,000 business angels in the UK compared to 8,000 in France, and since London is the largest hub for private equity and venture capital funds in Europe. However, the French business angels community, in particular France Angels, is keen to invest in French emerging luxury companies and has inaugurated the Réseau‟ mode Business Angels” in December 2012, to federate business angels around equity investments for fashion and luxury start-ups.

For luxury and fashion start-ups, which do not have ‟proof of concept” yet, and therefore cannot convince business angels and venture capital funds to invest in their companies, a solution may be crowdfunding. In spring 2013, AudaCity of Fashion, a crowdfunding platform dedicated to fashion and luxury startups, will launch in the UK. This way, individuals will network and pool their money to collectively support efforts initiated by fashion and luxury startups.

Coming back to private equity investments, these may be a way for the founders of a mature luxury company to ‟cash in” and get financially rewarded for all their prior hard work. However, problems arise if the laws of luxury management are not scrupulously complied with. Indeed, if these laws, which are the opposite of traditional marketing laws, are not respected, further to the equity investments, the high profitability of the luxury brand becomes volatile as a result. These laws of luxury management are often unfamiliar to non-specialists and are highly subjective and qualitative, therefore far from the quantitative measures dear to financiers. One of the easy traps to fall into, is to force a reduction in structural expenditure on maintaining the luxury brand, particularly if that brand is undergoing short-term pressure from shareholders because of temporary falling profitability. While these cuts in ‟useless” expenditure may seem to have an immediate positive impact on the operating results of the luxury company, the cuts damage the brand and image in a way which is invisible, at first, but which, a couple of years down the line, may be irreparable.

In addition, the exact valuation of the luxury company may become an issue, during the negotiations between the luxury company’s owners and the private equity financiers, as the valuation of the brand is based on an extreme concentration of intangibles, difficult to measure in factual terms.

Another external strategy to find funding for a luxury company is to get access to debt financing. While this would be a relatively easy move for an established luxury business, because it already has several sets of annual returns and statements to prove its financial stability, an emerging luxury company may struggle.

Mature luxury houses, which can provide evidence of solid sales revenues, have access to global debt markets, tapping into investment grade facilities, bridge loans, or, even more sophisticated loan products such as structured trade finance. For example, a fur brand like Hockley may approach its usual bank to finance the purchase, at auctions, of extremely high quality and expensive furs. Such short-term financing would be secured against these furs. Hockley would then make some luxury coats or accessories out of these furs and pay back the capital and interest deriving from the structured trade financing, by way of regular instalments, using the cash flow generated by the sale of these luxury products over time.

As debt finance is difficult for them to access, emerging luxury companies may look at factoring as a viable alternative for the management of their cash flows. Factoring seems relatively difficult for SMEs to obtain in the UK, while it is a standard and often-used financial tool in France and the US. Factoring companies such as GE Capital or Hilldun Corporation in the US, Eurofactor, BNP Paribas Factor or Natixis Factor in France, agree to advance 80 to 90 percent of the total amount of an invoice, to the luxury company, after such luxury company has delivered its merchandise to its distributors. The remainder of the invoice, minus the costs for the factoring service, is paid back to the luxury company when the distributor pays the factor. Costs for the factoring service vary between 0.6 to 3 percent of the amount of the invoice. Such costs are based on the luxury company’s annual turnover, number of invoices issued and number of clients.

National trade associations, keen to nurture creativity and innovation, have provided several financing tools for emerging luxury and fashion companies.

One of the most innovative tools is the ‟Banque de la Mode” (i.e. fashion bank), launched in March 2012 in Paris. Chanel, Balenciaga and Louis Vuitton Malletier, among others, have pooled their efforts with the Fédération Française du Prêt-à- Porter Féminin, to create a ‟guarantee fund”, which provides financial guarantees to young designers who are asking banks for loans, as well as a ‟refundable advance fund”, which provides short-term financing up to Euros 100,000 per designer.

In England, the launch in March 2013 of Creative Industry Finance, an Arts Council England initiative offering business development support and access to finance for creative industry enterprises, may prove a useful tool to accelerate the growth of English emerging luxury companies in the future.

Finally, NEWGEN, set up by the British Fashion Council (‟BFC”), offers catwalk designers financial support towards their show costs and the opportunity to use the BFC Catwalk Show Space. NEWGEN has successfully supported designers such as Christopher Kane, Mary Katrantzou and Meadham Kirchhoff. Fashion Fringe, founded in 2003 by Colin McDowell and IMG Fashion, also nurtures talents such as Erdem and Fyodor Golan.

Unlocking the brand equity potential of a luxury company is a delicate balance between forefront, as well as cutting-edge innovation and creativity, and rigorous financing and human resources management skills. Finding the right finance partner and financing solutions should be a priority for any luxury company, especially if such enterprise is still quite vulnerable, at the early stages of its development.

[1] Highly concentrated brands on niche products, such as Louis Vuitton Malletier and Rolex, have consistently obtained net profit rates above 35 per cent on sales for more than 20 years.

[2] Jimmy Choo was sold in 2011 by private equity firm TowerBrook Capital Partners LLP to Labelux, the privately held group that owns Bally, for more than GBP500 million.

[3] It is said that private equity fund Permira bought Valentino Fashion Group for Euros2.6 billion in 2007, in order to acquire Hugo Boss, in which Valentino had a 51 percent stake.

[4] Since 2007, La Perla is owned by JH Partners, a consumer- focused private equity firm.

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