MILAN — “The verdict contrasts with common sense.”

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

So Milan general prosecutor Gaetano Santamaria surprisingly proclaimed on Tuesday of the ruling last June in the Domenico Dolce and Stefano Gabbana tax trial as he asked for all the defendants to be acquitted, saying the case “is groundless.”

In June, the designers were sentenced, together with accountant Luciano Patelli, to one year and eight months in jail, plus legal expenses for omitted tax declaration. Dolce’s brother Alfonso, general director Cristiana Ruella and finance director Giuseppe Minoni were sentenced to one year and four months in jail plus legal expenses.

During the first hearing of the defendants’ appeal in the case, Santamaria basically overturned the tax service’s arguments during a vibrant, captivating and at times even impromptu speech before the three-judge appeals court. The designers, who never attended the trial last year, were not present in court, while fixtures Ruella, Alfonso Dolce, Minoni and Patelli were once again part of the audience.

In Italy, general prosecutors work at the appeals court level to verify the law has been applied correctly. The appeals court will examine the documents in the case, with no further testimony, and could decide to overrule the general prosecutor. Even after the appeals court rules, either the state or the defendants could appeal to an even higher court, the equivalent of Italy’s Supreme Court.

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 alleged 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 higher corporate taxes in Italy.

Santamaria rebutted those allegations.

He said that it was “anomalous and a dangerous situation to have the designers physically own the brands,” which justified a restructuring. “As per the Cassazione [Italy’s equivalent of the Supreme Court] and the European Community, there is no regulation that forbids such a restructuring, nor the choice of a country, according to the free circulation of capitals in the market. These are sacred principles,” he said.

Echoing the defendants’ lawyers, who claimed during the trial that the Dolce & Gabbana company was eyeing a public listing after the restructuring, Santamaria said of the firm’s reasoning at the time: “This company thinks big as it is fit for a big group that is expanding. It is thinking of an initial public offering; its international prestige is growing, and it positions itself as is fit for a global company.” Accordingly, he saw an “economic justification” for the financial operation. “They choose the Bourse in Luxembourg because it is the most vivacious in Europe, because its fiscal legislation attracts capitals, it has an efficient public administration and, yes, it offers fiscal benefits but it is legitimate to optimize them.”

While prosecutors Gaetano Ruta and Laura Pedio claimed that Gado’s structure in Luxembourg was fictitious and alleged that the only purpose in selling the Dolce & Gabbana brands to Gado was to avoid paying taxes, Santamaria refuted this by saying, “Should we believe that companies must have pharaonic structures?”

Speaking of the one executive employee in charge of the protection of the brands based in Luxembourg, he said she “was more than adequate — all of the witnesses said so.” As for Alter Domus, which offered different administrative services, “it helps to cut fixed costs. It’s a common and convenient practice.” He also underscored that board meetings were held in Luxembourg.

Speaking of the lower tax rate in Luxembourg compared to Italy’s, he said: “I can be upset as an Italian taxpayer and applaud the Guardia di Finanza for highlighting these issues, but as a man of law, I have to divest myself of prejudices. To have the Guardia di Finanza at home — it looks like we don’t know what it means,” he exclaimed, saying that this brought “shadows” on the company’s credibility. “And I can also expect an intervention on [Fiat chief executive officer Sergio] Marchionne and Fiat when they will transfer their legal headquarters in the Netherlands,” he said to a round of chuckles.

“When I heard that they [the designers] had been condemned to a year and a half, I thought, ‘Wow, they must have really done something serious.’ But then I realized that they did not actually manage the company, they signed the deals because they were the owners, but never actively intervened,” he said.

The designers are “totally taken by their models, their fabrics and events, they are creative minds. I just don’t see them dealing with bills and schemes to cut their tax rate.” He praised Patelli for his expertise and Ruella as a “competent and reliable” executive that served the company for many years, reiterating what she had said while giving testimony. As the company relied on its image, “could she ever have proposed anything less than legal?”

He underscored that the fiscal and penal trials are “autonomous and separate,” and that the designers have already paid 40 million euros, or $55.6 million at current exchange. “They deserve the ‘extenuating circumstances.’”

Santamaria hinted at an involvement of politics, the revenue service “looking for money and the minister of economy worrying about foreign investors running away.” The designers paid only 4 percent of royalties in Luxembourg but they paid taxes on their dividends in Italy with a 32 percent rate, he added.

The defendants were also charged with paying the Revenue Agency a provisional fine of 500,000 euros, or $668,650 at current exchange. The plaintiff solicitor Gabriella Valadia at the end of May asked for a provisional fine of 10 million euros, or $13 million, citing damages to the image of the Revenue Service. Valadia on Tuesday asked for a confirmation of the verdict. The court’s fine is separate from one imposed by the Revenue Agency of more than 400 million euros, or $535 million at current exchange, at the end of March last year.

The designers’ lawyer Armando Simbari and Patelli’s Fabio Cagnola asked the president of the court, Laura Cairati, to acquit their clients, the designers and Patelli, respectively.

The other defendants’ lawyers are expected to deliver their speeches on April 4 and the final verdict may even be issued that day.

The defendants, who have always denied all charges, were acquitted on the second count they were originally charged with, which regarded the valuation of the company and the tax rate paid.

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