ROME — Innocent and acquitted. The Dolce and Gabbana tax trial is over.

After seven years of legal troubles that included an acquittal from charges of fraud from a judge at the preliminary hearing level in 2011, a reversal at a higher court, new charges of tax evasion and two trials at lower courts, Domenico Dolce and Stefano Gabbana were cleared on Friday of charges of tax evasion.

This story first appeared in the October 27, 2014 issue of WWD.  Subscribe Today.

The sentence made headlines that day and over the weekend in newspapers, on the Web and on Italian national television. “D&G. It’s victory in Cassazione [Italy’s highest court],” titled Il Sole 24 Ore on Saturday. A day earlier, Gabbana, who has rarely commented on the tax issue, tweeted, “We were sure of it!!! We are honest people!!! W Italy”#proudtobeitalian.”

A legal source outside the courtroom Friday said the sentence “sets a precedent and will make history.”

Italy’s highest court on Friday declared Gabbana and Dolce not guilty of tax evasion, overturning two previous sentences in lower courts. After three hours behind closed doors, the five-member jury headed by president Alfredo Teresi also cleared the other defendants, including general director Cristiana Ruella, finance director Giuseppe Minoni and accountant Luciano Patelli, as there were no grounds for a case.

“I am very satisfied,” said a visibly pleased Massimo Dinoia, the designers’ lawyer, after the verdict. “We have been saying that they were innocent for the past seven years. Nobody can take back the negative publicity they received over these seven years, but we knew we were in the right all along.”

While the guilty verdict by Milan’s appeals court in April was handed out in a courtroom brimming with reporters and TV cameras, the expansive marble and stuccoed room and corridors of the Corte di Cassazione, Italy’s equivalent of the U.S. Supreme Court, were virtually empty by 5 p.m. on Friday when its ruling was issued — perhaps also because of a massive national public transport strike that day. The jury read out the sentence in the blink of an eye. The dapper and affable Dinoia shook hands with the judges and swiftly left the room — phone in hand to share the news, no doubt with the defendants in Milan on the other end.

Giuseppe Bana, the lawyer for accountant Patelli, said, “We are entirely pleased with the acquittal of Mr. Patelli.”

Colleague Fabio Cagnola said the ruling “has arrived at the end of a trial that should never have taken place, after a preliminary hearing judge had deemed the accusations totally unfounded.”

Although the previous guilty verdict is annulled, the only defendant who may still see a trial is Domenico Dolce’s brother, Alfonso Dolce, who is the legal representative of the company, as his paperwork is being sent back to the appeals court in Milan. The Cassazione, which was called upon to determine if there were any breaches or procedural flaws at the lower court levels, “believes that the criteria used to determine that Gado was a fictitious entity were wrong, but it can’t rule on Alfonso Dolce’s papers, as this is not its role,” explained a legal source.

There may never even be a trial because the statute of limitations in the case expires in November.

While the ruling Friday cleared them of the tax evasion charges, the designers could still have to pay a fiscal fine to the state. And that might be a large amount. In March last year, Italy’s Tax Commission fined the designers 343.4 million euros, or $434.6 million at current exchange, plus interest.

A well-placed fiscal source said “it would be necessary to wait until we know the motivations behind the verdict” for a clearer understanding of whether the fine still stands as well. “From what I can tell from the verdict, the jury excluded all responsibility as there is no willful misconduct to evade the tax payment. This would not rule out an evasion or the fiscal fine.”

The fine by the Tax Commission is separate from the tax evasion trials, but both stem from the same accusations put forward by Italy’s Internal Revenue Agency of omitted and unfaithful earnings declarations.

The designers were charged with alleged tax evasion totaling 416 million euros, or $533.2 million, related to the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company, Gado Srl. The Italian tax police reportedly considered Gado essentially a legal entity used to avoid higher corporate taxes in Italy. The investigations began in 2008 and were initiated by the Guardia di Finanza, an Italian police force under the authority of the national minister of economy and finance.

In January, during the first-level trial, a former employee of the Internal Revenue Agency confirmed that the designers paid 90 million euros, or $121 million, in taxes and fines in 2007 for 2004 to 2007 as part of a separate probe.

On Friday morning, general prosecutor Francesco Salzano in his speech refuted the appeals presented by the defendants’ lawyers at the Cassazione following the guilty verdict handed down by the Milan appeals court. Salzano defined the appeal to the Cassazione as “unfounded” but requested a slight reduction of jail time from the 18 months issued by the Milan appeals court as the payment of VAT taxes for 2005 had exceeded the statute of limitations.

Salzano told the Cassazione that Dolce and Gabbana are to be considered “responsible” for their activities in setting up Gado as much as the other defendants individually, claiming that “operations there were secondary and marginal” and that Gado operated without autonomy from the Milan headquarters. State lawyer Gabriella Valadia said this was “one of the most common and simple examples of a fictitious company” in a country with a lower tax rate and lamented that the “center of impulses remained in Milan.”

Lawyers for the defendants took the floor reiterating that Gado was a legitimate and operative company and Dinoia also underscored how “being made aware of the facts does not mean to concur” in any action. His colleague, Riccardo Olivo, the lawyer for Alfonso Dolce, outlined how there were “several reasons behind the restructuring of the Dolce & Gabbana company,” including the need to disconnect the brands from the designers as individuals, also in light of their “sentimental union” and “for more stability” and given a potential initial public offering down the road. “The appeals judges themselves realized this,” he said, adding that it was “key” for the designer’s company in Milan to be “making the decisions and obvious it should manage the brands.” He also said it was “wrong to compare willful misconduct with a tax saving” option.

Bana underscored how Patelli “from the very beginning clearly expressed how the company should be set up to act legally.”

The first hearing at the Cassazione had taken place in Rome on Tuesday morning last week. None of the defendants was in attendance at the two hearings. Their lawyers were appealing the guilty verdict by the Milan appeals court, which, headed by Judge Laura Cariati, dismissed the possibility of ignorance in the matter, which the designers claimed in their defense, and, instead, saw “an intentional” plan to avoid a higher tax rate in Italy, compared with rates in Luxembourg, where they had based ownership of their company. The lower court judges also ruled that Gado was only fictitiously based in Luxembourg and that the administration and main location of the company’s activities were in Italy.

The appeals court upheld the decision of the lower court, ruling the defendants guilty, albeit with a two-month reduction in their jail sentences. Dolce, Gabbana and Patelli were sentenced by the appeals court to one year and six months of jail time. Alfonso Dolce, Ruella and Minoni were sentenced to one year and two months in jail plus legal expenses. None were likely to serve jail time even if the Cassazione had upheld the lower court rulings, given the Italian practice of waiving incarceration for sentences of less than two years.

The defendants, who have always denied all charges, were acquitted in June last year on the second count with which they were originally charged, regarding the valuation of the company and the tax rate paid. The defendants were originally absolved of fraud claims by a lower court in April 2011, but the Cassazione in November 2012 overturned that decision, saying that tax avoidance, or tax mitigation, on an earnings declaration is a criminal offense under the law. A new trial at the first court level began in December 2012 and wrapped up at the end of June 2013, with the defendants found guilty. The appeals court then upheld that decision.

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