By  on November 22, 2010

MILAN — In the latest go-round between fashion designers and crusading Italian authorities, Stefano Gabbana and Domenico Dolce have been indicted for alleged tax evasion, sources said.

The designers now may have to face a court trial, which would be the latest step in a case that began in 2008 and which could result in the designers, if they are found guilty, being personally liable for more than $1 billion in unpaid taxes and fines. Dolce and Gabbana have always denied any wrongdoing.

The designers are charged with tax evasion and abuse of rights relating to the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company Gado Srl. A spokeswoman for the company could not be reached at press time.

According to a legal source, the ball is now in the hands of the designers’ lawyers and in those of the judge who will preside over preliminary hearings. The latter will evaluate the evidence provided by Milan-based prosecutor Laura Pedio and has the option to dismiss the case if the evidence doesn’t justify moving forward.

If the judge decides to proceed, Dolce and Gabbana’s lawyers may decide to negotiate, pay a fine and avoid a drawn-out and costly court trial. In addition, their criminal record would remain clear. However, as the designers have claimed their innocence, they may not be willing to take that route, and an ordinary trial would take place over the coming years.

A third alternative is a shortened and speedier trial, based on a reduced number of documents and witnesses, which results in a penalty that is discounted by one third. The designers’ alleged evasion of national income tax carries up to a three-year prison sentence or a fine up to 1 million euros, or $1.3 million at current exchange.

Dolce’s brother Alfonso, a shareholder, and board member Cristiana Ruella are among others believed to have been indicted, but this could not be verified at press time. The investigations were initiated by the Guardia di Finanza, an Italian police force under the authority of the national Minister of Economy and Finance.

Upon receiving news of the accusations in May 2009, Dolce and Gabbana issued a vehement denial of the allegations.

“It’s a paradox! Since when does one have to pay taxes on money one never actually collected,” the designers said in a personal statement. “It’s an absurd demand based on a completely abstract calculation. This higher taxable sum…is a virtual figure we have never received, the result of a theoretical accounting exercise.”

According to Dolce and Gabbana, the police claims are based on “the mistaken interpretation” of a regulation which enables the tax authorities to replace the sum actually paid with a hypothetical market value.

“This claim, far from offering an opinion of the actual facts, describes only the interpretation of a guideline,” the statement read. “[The] said allegation constitutes only an invitation to the [tax office] to examine the legal basis of that thesis, and will translate in a payment request for Mr. Dolce and Mr. Gabbana only in case [the] said thesis is proven. If this happened, [the designers] would be facing a blatant violation of the principle of contributory capacity…as the request would then be for taxation of unearned income.”

Dolce and Gabbana explained they had “only actually received 360 million euros,” or $447.8 million, from the transaction and had declared and paid everything that was owed to the fiscal authorities. They said that if the police’s calculations were correct, their brands would have been worth 1.1 billion euros, or $1.37 billion, in 2004.

“We wish!” the designers scoffed.

The personal allegations follow a separate criminal probe into supposed tax irregularities at the Dolce & Gabbana group, As reported in 2008, fiscal authorities alleged the firm owed more than 125 million euros, or $175 million, in unpaid taxes and fines relating to Gado. The police are understood to consider Gado essentially a legal entity, allegedly used to avoid higher corporate taxes in Italy. The designers allegedly did not declare earnings of around 260 million euros, or almost $400 million at current exchange, at a satellite company between 2004 and 2006.

Dolce and Gabbana are the latest in a string of fashion designers and executives who have had a brush with Italy’s tax authorities — which have resulted in everything from acquittal to the designers deciding to pay a fine simply to make the situation go away. Sources speculated that, despite Dolce and Gabbana’s claims of innocence, they too, in the end, might just pay a fine to end the matter.

In July, an inquiry by the Guardia di Finanza resulted in allegations that Belgian designer Dirk Bikkembergs evaded tax payments of 111 million euros, or $151.7 million. Bikkembergs rebutted the allegations, calling them “shameful towards a foreign investor” that has “attempted to set up a part of its business in Italy, not to mention the damage to the reputation of a designer who has done much to contribute to the local economy.”

The investigation is focusing on two companies, 22 Srl, which produces clothing in Fossombrone, Italy, for Bikkembergs’ brand, and Luxembourg-based IFF Sarl, the distributor of the brand’s products.

The authorities alleged that the designer’s organization is in Italy and that revenues were redirected to Luxembourg instead of being declared and taxed in Italy. The designer’s lawyer, Francesco Giuliani, said at the time: “Our position is that the authorities have not taken into account the real situation: IFF does not have a structured organization in Italy, and they [the tax authorities] did not correctly calculate the turnover of IFF, as they did not take into account the company’s costs.”

Last year, the Lazio, Italy, regional tax office hit Valentino Garavani and his longtime business partner, Giancarlo Giammetti, with a 33 million euro, or $45.1 million at current exchange, fine for allegedly evading tax payments. The fine was levied in relation to possible undeclared earnings. According to the tax office, the couturier and Giammetti avoided declaring their incomes in Italy by moving their residence outside the country, while effectively keeping their business operations here. However, their lawyer, Marino Bastianini, stated that both parties have been residents in the U.K. for almost a decade and have “in that period always declared and been subject to tax in the United Kingdom, which included taxation of the consultancy income received from the Valentino company. The dispute with the Italian authorities is in essence not about tax evasion but related to the interpretation of facts and circumstances concerning tax residency. The issue has been [the] subject of a previous investigation in Italy and the U.K. and on both occasions the U.K. residency has been considered in full compliance with the Italian and U.K. tax regime, thus acknowledging the legitimacy of their U.K. residency.” Bastianini said the issue “disregarded some elements which were previously taken into consideration.”

Two years ago, Roberto Cavalli was cleared by Italy’s Supreme Court of Cassation of a tax evasion indictment, after the designer was accused in 2002 of evading fiscal responsibilities by booking costs to remodel his villa on the hills surrounding Florence as company expenses for the fiscal years 1996 through 2000. Cristiana Cavalli, daughter of the designer and president of the company, told WWD at the time that they had proved “there were never fictitious activities or expenses.”

Salvatore Ferragamo SpA was also accused of tax fraud, reportedly to the tune of more than 20 million euros, or $31 million, in unpaid monies related to the group’s Netherlands-based holding company. However, the fashion company was cleared of the charges on appeal two years ago. Ferragamo proved on appeal that its holding company, Ferragamo International BV, was a fully consolidated part of the group and not, as fiscal authorities had alleged, little more than legal entity, which the fashion house used to avoid paying higher corporate taxes in Italy.

Gianfranco Ferré, Santo Versace, Mariuccia Mandelli of Krizia and their business associates were indicted in July 1995 on charges of corruption and bribing tax police in return for swift, trouble-free audits. While they were originally found guilty, a higher court overturned the verdicts and found they were victims of extortion.

At that time, Giorgio Armani, Gerolamo Etro and Krizia chairman Aldo Pinto were indicted on similar charges, but pleaded guilty in May 1996 before the trial began. They, too, said they were victims of extortion, but took plea bargains to end their cases as soon as possible to save themselves and their businesses from the impact of a long judicial process.

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