MILAN — Domenico Dolce and Stefano Gabbana had to know, according to the appellate court judges who in April handed down a guilty verdict in their tax trial.

This story first appeared in the June 26, 2014 issue of WWD. Subscribe Today.

On Wednesday, the judges explained that decision and concluded, “It is not at all believable that the designers, once made aware of the project [to avoid Italian taxes], could feel they were operating legally.” The judges underscored that, in delegating to others, there is also an obligation of company principals to provide direction to those same subordinates. The appeals court, headed by Judge Laura Cariati, dismissed the possibility of ignorance in the matter, which the designers claimed in their defense. Instead, Cariati saw “an intentional” plan to avoid a higher tax rate in Italy, compared with rates in Luxembourg.

Following investigations that began in 2008, initiated by the Guardia di Finanza, an Italian police force under the authority of the national minister of economy and finance, Dolce and Gabbana were charged with tax evasion 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 consider Gado essentially a legal entity used to avoid Italy’s higher corporate taxes.

The judges expressed their belief that Gado was only fictitiously based in Luxembourg and that the administration and main location of the company’s activities were in Italy. They underscored the fact that the project profited the designers the most, in turn confirming the responsibility of all the defendants.

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 accountant Luciano Patelli were sentenced by the appeals court to one year and six months of jail time. Last June, the Italian designers and Patelli had been sentenced to one year and eight months in jail, plus legal expenses for omitted tax declarations.

Dolce’s brother Alfonso, Dolce & Gabbana general director Cristiana Ruella and finance director Giuseppe Minoni were sentenced to one year and two months in jail plus legal expenses, reduced from the original sentence of one year and four months.

None are likely to serve jail time, given the Italian practice of waiving incarceration for sentences of less than two years. And the designers are appealing fines potentially in excess of $550 million based on what Italian revenue authorities claim are unpaid taxes related to the sale of the brands to Gado.

The defendants’ lawyers, who are expected to appeal to the highest court, the Cassazione, filed their appeals in November, and during the first hearing at the appeals court in March, Milan general prosecutor Gaetano Santamaria unexpectedly rebutted the allegations, overturning the tax service’s arguments, and asked for all the defendants to be acquitted. Santamaria said that the case was “groundless,” and that the verdict last year “contrasts with common sense.”

The defendants, who have always denied all charges, were acquitted last June 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 the 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 trial at the first court level began in December 2012 and wrapped up at the end of June last year.

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