Dolce and Gabbana Lose Appeal Against Tax Evasion Conviction

Domenico Dolce on the right and Stefano Gabbana on the left actress Monica Bellucci pose for photographers during the opening of a new Dolce&Gabbana shop in Moscow last month. Reuters

MILAN—A Milan court Wednesday upheld a tax evasion conviction of designers Domenico Dolce and Stefano Gabbana and sentenced the pair to 18 months in prison.

The two Italian fashion designers, known for their sexy style favored by celebrities such as Madonna and Naomi Campbell, were convicted last June and each sentenced to one year and eight months in prison for failing to file tax declarations for a Luxembourg-based company called Gado.

Prosecutors said Gado was created with the purpose of evading tax in Italy. The total tax that Messrs. Dolce and Gabbana allegedly failed to pay is about €40 million ($55 million) for 2004 and 2005. The pair appealed.

In March, the prosecutor handling the appeal Gaetano Santamaria took the unusual step of arguing before an appeals court that the allegations were groundless because Gado was a real operating company rather than a shell company created to avoid paying tax in Italy.

But on Wednesday, judges upheld the conviction. They did, however, cut the jail sentence to 18 months. The judges weren't immediately available for comment.

Massimo Dinoia, a lawyer for Messrs. Dolce and Gabbana, said the pair were "shocked" by the ruling. The two designers have denied the charges throughout the process and Mr. Dinoia said they plan to appeal. It could take months to hear the appeal.

"I'm speechless," said Mr. Dinoia. "The prosecutor himself asked for them to be cleared."

The tax arrangements of Italian fashion companies have drawn scrutiny over the years, particularly more recently as Italian authorities have taken a hard look at structures such as offshore companies. For many years, Italian companies established offshore subsidiaries, particularly in Luxembourg, to evade or avoid taxes, say tax authorities.

For instance, in December, the luxury giant Prada avoided any potential tax avoidance charges in relation to its Luxembourg subsidiaries by voluntarily deciding to bring them back to Italy. The company also agreed to pay the tax amount that would have been charged if such subsidiaries were in Italy in the last 10 years. The company, which stressed that the decision had no financial impact on Prada, said that it followed "close cooperation" with the Italian tax authority, started in 2008, and "involved seeking a ruling on international transfer pricing standards" for transactions between the company's subsidiaries.

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