In the background, far from grabbing headlines and the limelights, the shareholders of Chanel – the Wertheimer family – have relentlessly restructured and reorganised the Chanel business, since Brexit. Sensing a massive tax opportunity, Chanel has completed its Frexit in September 2022, kissing goodbye to the nosy and invasive strategies and idiosyncrasies of the French tax administration and control systems. The United Kingdom, and in particular London, is reaffirming its position as a tax haven for the rich and powerful, post Brexit, while France has lost one of its crown jewels, and does not even understand its massive financial loss, blinded by the belly-dancing charm offensive put up by Chanel’s top management in France. How did this happen?
1. Chanel: a corporate genesis
Gabrielle Chanel, whose nickname was Coco Chanel, founded the couture ‟maison” ‟Chanel” in 1910, in Paris, France. She was financially backed by her boyfriend, Englishman Arthur ‟Boy” Capel, via a loan to rent her company’s offices at 21 rue Cambon, Paris. While, initially, the Chanel house was only selling hats, Coco Chanel quickly expanded into clothing, when she opened her first shop in Deauville, France, in 1912. In 1915, a second shop was opened in Biarritz, another French seaside resort town.
At the end of the first world war, Gabrielle Chanel paid back Arthur Capel’s loan, and became financially independent. She opened a third shop at 31 rue Cambon, in Paris, in 1918.
The 20s were a boom era for Chanel, and several new boutiques, ateliers and offices were set up, at 31 rue Cambon in Paris, and later at numbers 25, 27 and 23 rue Cambon in Paris. A boutique was also opened in Cannes, another seaside resort town on the French Riviera.
French perfumer, Ernest Beaux, suggested to Coco Chanel to create her own perfume, ‟nº5”, which, in 1921, was sold solely in Chanel’s boutiques, but then became available in perfumes retail shops around the world. ‟Chanel nº5” is one of the most sold perfumes in the world, even today.
In 1924, Gabrielle Chanel met, at the Longchamp horse racetracks, Pierre and Paul Wertheimer, two powerful French Jewish brothers who owned the Bourjois perfumes, among other businesses. Together, they created the company ‟Parfums Chanel” (or ‟Société des Parfums Chanel”), for the manufacturing of ‟Nº5” on 16 April 1924. This new business was financially-backed by the Wertheimer brothers, and the shareholding of ‟Parfums Chanel” was owned:
- at a stake of 10 percent, by Gabrielle Chanel (in exchange for the transfer of ownership in her name, via a license, and a 2 percent share in the annual income on the perfume sales, i.e. around USD1 million in 1947);
- at a stake of 70 percent, by the Wertheimers (who bear all financial risks), and
- at a stake of 20 percent, by Théophile Bader (founder of the Paris department store, Galeries Lafayette, who introduced first Coco Chanel to the Wertheimers).
In parallel, Ms Chanel started making makeup products, and in particular a “blood red” lipstick, from 1924 onwards.
Many more perfumes are created, from 1924 onwards: Ernest Beaux creates ‟Gardénia” in 1925, ‟Cuir de Russie” in 1927 and ‟Bois des îles” in 1928.
However, from 1928 onwards, Coco Chanel and the Wertheimer brothers starting having some disagreements. Ms Chanel considered that the Wertheimers were making money ‟on her back” and became vocal about it, publicly shaming the Wertheimer brothers by calling them “bandits”. She also snubbed the board meetings of ‟Parfums Chanel” and, consequently, in 1933, its shareholders decided to remove her from the management and board of their company. In 1934, she instructed a young lawyer, René de Chambrun, to defend her interests and renegotiate the 10-per-cent partnership she entered. But the lawyer-to-lawyer negotiations failed, and the partnership-percentages remained as established in the original business deal among the Wertheimers, Bader and Chanel.
Then, the second world war started and Gabrielle Chanel shamelessly collaborated with the nazis, denouncing the Wertheimer brothers as Jewish, in order to attempt to gain full control over the ‟Parfums Chanel” business.
Following the war declaration in 1939, Coco Chanel closed down her couture house in Paris, leaving only her perfumes boutique opened. She went to live in the South of France, where she owned the beautiful villa ‟La Pausa”, but came back to Paris the following year.
During the second world war, the Wertheimers fled to the United States. Gabrielle Chanel attracted the attention of the French Pétain collaborationist government, on the fact that the Bourjois and ‟Parfums Chanel” companies had majority shareholders who were Jewish, using the laws against Jews and foreigners during the Vichy regime. But the Wertheimer brothers had transferred their shareholding in ‟Parfums Chanel” and ‟Bourjois” into the hands of a trusted, and non-Jewish, friend (Félix Amiot), acting as proxy, so Coco Chanel’s attempts to take over the shareholding of all the other shareholders in ‟Parfums Chanel” failed.
At the end of the second world war, the Wertheimers got their shareholders in ‟Parfums Chanel” and ‟Bourjois” back. The ‟war” with Coco Chanel continued until 1948, when the parties settled their dispute by renegotiating the 1924 contract that had established ‟Parfums Chanel”: Gabrielle Chanel got her share in the turnover of ‟Parfums Chanel” in 1948 (i.e. USD400,000 in cash (wartime profits from the sales of perfume ‟Nº5”)), a 2 per cent running royalty from the sales of ‟Nº5” ‟parfumerie”, and a perpetual monthly stipend that paid all of her expenses. In exchange, Gabrielle Chanel sold to ‟Parfums Chanel” the full rights to her name ‟Coco Chanel”.
Coco Chanel decided to sell the ‟haute couture” business to ‟Parfums Chanel” in 1954 (following her failed attempt to return into the fashion world, post second world war), while keeping its direction and management until her death in 1971. To replace her, Karl Lagerfeld became artistic director of Chanel in 1983, reinvigorating the dwindling ‟haute couture” business, and creating its ‟prêt-à-porter” line. In 2019, when Mr Lagerfeld died, Virginie Viard, who had worked with him at the fashion house for over 30 years, became Chanel’s new creative director.
Following this above-mentioned acquisition of the ‟haute couture” business by ‟Parfums Chanel”, the company took the new name ‟Chanel SA” (‟Chanel Société Anonyme”) and registered with the registrar of the Nanterre ‟greffe” of the commercial court, on 27 August 1954.
In 1954, date of the reopening of the couture house, the perfume boutique located at rue Cambon is refurbished. The perfumer Henri Robert takes over: the first men’s ‟eau de toilette”, ‟Pour Monsieur”, is launched in 1955. Then, Jacques Polge becomes Chanel’s ‟nose”, in 1978, and ‟Egoiste Platinium” is launched in 1993, then ‟Allure” in 1996, then ‟Coco Mademoiselle” in 2001, then ‟Chance” in 2003, then ‟Bleu de Chanel” in 2010. In 2014, Jacques Polge’s son, Olivier, joins him, in order to succeed him as the ‟maison”’s perfumer. In February 2015, Olivier Polge becomes the new nose of Chanel, at 40 years’ old.
Meanwhile, Paul Wertheimer died shortly after the second world war and his brother, Pierre, bought his stake in Bourjois and ‟Les Parfums Chanel”. Following Pierre Wertheimer’s death, in 1965, his only son, Jacques, aged 56 years’ old, took over the group’s management. However, it was not a good fit and Jacques was ousted in 1974, and replaced by his more-capable son, Alain Wertheimer.
Alain’s mother, Eliane Fischer, divorced from Jacques (with whom she had Alain and Gérard), became a business lawyer working at the law firm of Samuel Pisar in Paris. Mr Pisar and Ms Fischer actively counselled Alain when he took over the management of the group, and ‟Chanel SA” in particular, in 1974. Since, Ms Fischer founded the law firm Salans (now Dentons) in 1978, and became the ongoing and longstanding private practice lawyer of Chanel.
So Alain, with his brother Gérard Wertheimer, became the owner of ‟Chanel SA”, the Bourjois cosmetics, the hunting guns’ brand Holland & Holland (bought by ‟Chanel SA” in 1996), the swimming costume brand ‟Eres” (purchased by ‟Chanel SA” in 1996 too) and the book publishing house ‟La Martinière”. The Wertheimer brothers, whose wealth was ranked at number two in France in 2018, with USD40 billion, also own the wineries ‟Château Rauzan Ségla” in Margaux and ‟Château Canon” in Saint-Emilion.
On 24 December 1998, ‟Chanel Société Anonyme” was transformed into ‟Chanel Société par Actions Simplifiée” (‟Chanel SAS”), which is a more flexible type of French companies than ‟sociétés anonymes”.
2. Chanel: a recent change of corporate structure which puts the UK on the map, post Brexit
Alain Wertheimer incorporated ‟Chanel International B.V.” in 1979, as the Netherlands-based financial holding company controlling ‟Chanel SA” and around 90 subsidiaries.
A holding company is a company whose primary business is holding the controlling interest in the securities of other companies. A holding company does not usually produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group.
While the Chanel group’s corporate structure chart is extremely opaque, I understand that Chanel International B.V. was still the ultimate financial holding company for the Chanel group, until recently. The Chanel Group is still privately-held (i.e. not listed on the stock market). The Dutch entity held the group’s subsidiaries across the globe and consolidated its accounts. Chanel International B.V.’s main subsidiaries were, via a cloud of shell companies such as Mousse Investments Limited incorporated in the Cayman Islands:
- ‟Chanel SAS”, a private company limited by shares, incorporated in France on 16 April 1924 (and transformed into a ‟SAS” on 24 December 1998), owned by a sole shareholder which name is kept secret by both Chanel’s management and the French authorities (!), which current president is Bruno Pavlovsky, and which current managing director and chief financial officer is Luc Dony, and
- Chanel Limited, a private company limited by shares, incorporated in London, United Kingdom, on 6 February 1925 (and renamed from ‟Parfums Chanel Limited”, to ‟Chanel Limited” in 28 November 1957), wholly-owned by Mousse Investments Limited as sole shareholder, which current global executive chairman is Alain Wertheimer and current global CEO is Leena Nair.
As set out in the 2021 annual accounts of ‟Chanel SAS”, the tax integration group in place in which ‟Chanel SAS” was also the parent-company was terminated on 1 January 2021. A new tax integration group was set up, from 1 January 2021 onwards, preserving ‟Chanel SAS” as its top company.
It is set out, in the 2021 annual accounts of ‟Chanel SAS”, that, according to the integration agreement, the parent-company is the sole beneficiary of the corporate tax credit and additional contributions’ credits, resulting from the application of the group’s tax regime, and is the sole company due to pay these taxes. The companies member of the integration group are however jointly liable to pay these taxes, within the limit of the amount which would be due by each one of them if they had not opted for the group’s tax regime. Each company member of the integration group is liable to pay to ‟Chanel SAS”, under its participating share of corporate tax owed by the latter, a sum equal to the corporate tax which would have been deducted from its turnover, if it had been taxed separately.
It is further set out, in the 2021 annual accounts of ‟Chanel SAS”, that the French tax administration conducted a tax control on its 2016, 2017 and 2018 tax years’ results, and that ‟Chanel SAS” had to pay some additional taxes to the French taxman for the 2016 tax year, while it was still disputing the outcome of the tax investigations for the 2017 and 2018 tax years.
Finally, it is mentioned, in the 2021 annual accounts of ‟Chanel SAS”, that UK-based Chanel Limited is the consolidating entity of the group, which ‟Chanel SAS” is a party of, as a subsidiary.
Indeed, in the 2021 annual accounts of Chanel Limited, are set out the consolidated financial statements, which comprise the financial results for Chanel Limited and its subsidiaries (including ‟Chanel SAS”). ‟Subsidiaries included in the consolidation are all entities over which the Group (i.e. Chanel Limited and its subsidiaries) exercises control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The concept of control generally implies owning more than half of the voting rights of an entity, although that is not a requirement to demonstrate power over an entity. The existence and effect of potential voting rights that are exercisable or convertible are taken into account in the assessment of control”.
Then, in the notes to the 2021 consolidated financial statements of Chanel Limited, it is set out that, as far as the ultimate parent company is concerned, ‟the consolidated financial statements of Chanel Limited and its subsidiaries represent the largest group in which the financial statements of Chanel Limited and its subsidiaries are consolidated and publicly available. Chanel Limited’s, and its subsidiaries’, immediate and ultimate parent company is Litor Limited (now renamed Mousse investments Limited), a company incorporated and registered in the Cayman Islands”.
So why has Chanel shifted its group’s control and financial power, away from France, and into the UK and, ultimately the Cayman Islands?
Because France and its tax administration are too nosy and demanding, what with their constant tax investigations and controls, which imply that Chanel has to pay back taxes, and penalties, relating to its previous tax years’ results, all the time.
The UK, post Brexit, has become a tax haven, where successful business groups and wealthy individuals can hide the exact shareholding of their holding companies and operating subsidiaries, as well as the exact ownership of their assets, via a flurry of shell companies usually incorporated in tax havens like the British Virgin Islands, the Cayman Islands, Bermuda, Jersey, Guernsey and the Isle of Man.
Besides, the UK tax authorities are far less controlling and invasive than the French tax administration, by a wide margin. By consolidating its accounts within its UK entity, Chanel Limited, and shielding its global consolidated revenues in the UK, the Chanel business is ensuring that all this French state’s constant micromanagement is put to an alt. Additionally, the corporate tax rate is lower in the UK, compared to France, and in its 2021 annual report, Chanel Limited set out that its effective tax rate had fallen from 28 percent the previous year, to 25.70 percent.
Moreover, Chanel’s management is spread between New York (where Alain Wertheimer is located, at the 40th floor of the Chanel tower, located at 9 West 57th Street), Cologny in Switzerland (the golden Genevan suburb where silent shareholder Gérard Wertheimer is located), London (where Chanel’s new global CEO, British citizen Leena Nair, is based) and Paris (where Bruno Pavlovsky is based). So it makes sense for London – an English-speaking place – to be the centre of control of Chanel, due to its easy access by plane and train and its cosmopolitan culture, when the management needs to meet up for board meetings.
Speaking of the board of Chanel Limited, in addition to Leena Nair, Chanel has also named to its board entrepreneur Martha Fox Lane, who served as digital adviser to David Cameron during his time as British prime minister and who also sits in the House of Lords and on Twitter’s board. Alex Mahon, who chairs the British public broadcaster Channel 4, has also joined Chanel Limited’s board.
This shift of power and control to London has been in the making for many years: after Brexit, in 2018, the Wertheimer brothers started relocating some of Chanel’s staff (in the legal, HR and finance divisions) from New York to London, into the head office of Chanel Limited, citing the need to ‟simply and rationalise the company’s structure”.
In September 2022, the long restructuring process was completed with the appointment of Alain Wertheimer as the head of the board of Chanel Limited, which has become the parent company of the group, controlling all of Chanel’s global subsidiaries and which financial results consolidate all of its accounts. ‟The decision to turn Chanel Limited into the operating holding, common to all Chanel companies, was taken in 2018, with the goal of simplifying and modernising Chanel’s administrative and legal organisation, as well as its decision centre which used to be in New York”.
So the Netherlands-based financial holding, Chanel International B.V., is less prominent, today, since all the financial interests are now concentrated into Chanel Limited, the operating holding, as well as its sole shareholder, Mousse Investments Limited (previously named ‟Litor Limited”), the Cayman Islands-based family holding company of the Wertheimers. The family office that manages the Wertheimers’ stake in Chanel, Mousse Partners, is based in Bermuda, another British Crown territory. Both the Cayman Islands and Bermuda were listed on the European Union (‟EU”)’s list of fiscally uncooperative countries until 2020.
In 2019, when the Cayman Islands were still on the EU’s blacklist, Chanel Limited paid dividends of USD1.6 billion to its parent company Mousse Investments Limited. In 2021, these dividends reached USD4.98 billion. During the same period, the Wertheimer brothers’ financial structure lent USD382 million to Chanel Limited, which repaid the loan in January 2021.
Of course, the French tax authorities did not take it well that Chanel was doing a Frexit, but Chanel’s Bruno Pavlovsky and Chanel SAS went on an efficient charm offensive, especially with French president Emmanuel Macron and his minions. Mr Pavlovsky seats on the board of prestigious French luxury institutions, such as the ‟Comité Colbert” and ‟Fédération de la haute couture et de la mode”, which he presides. He centralises and coordinates relations between Chanel and the French state. On 20 January 2022, Mr Pavlovsky inaugurated with Mr Macron and his wife the building 19M, located on the borders of the 19th arrondissement and poor suburban two of Aubervilliers. 19M houses 11 specialised artisans, the majority of whom work for Chanel’s ‟haute couture”.
Operationally, the group benefited greatly from the UK’s government’s funding opportunities for business during the Covid-19 pandemic. It received GBP600 million (Euros694 million) from the Bank of England’s and Treasury’s support programmes, in 2020. These short-term loans have since been repaid by Chanel Limited.
This restructuring and reorganisation towards London is strategic, as it precedes the inevitable handover between Alain and Gérard Wertheimer, now 74 and 71 years old respectively, and the fourth generation of the shareholder’s family. Gérard’s children, Olivia and David Wertheimer, have taken little interest in the business, while Alain’s three offsprings, and in particular Nathaniel, have taken a closer interest. The changing of the guard will take place between London and the two British Crown dependencies which house the Wertheimer family’s holdings, Bermuda and the Caymans, and far away from France.
If you think that your own company needs a similar restructuring, come to us, at Crefovi, we will be delighted to support you in your endeavours!
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