Laura Pedio pursued the case against designers Stefano Gabbana (left) and Domenico Dolce

Italian fashion designers Domenico Dolce and Stefano Gabbana have been handed suspended prison sentences of a year and eight months and fined nearly half a billion euros by a court in Milan for evading millions in taxes.

A judge ruled that the pair, who are the owners of the multinational fashion group, had sold their brand to a Luxembourg-based holding company in 2004 in order to avoid declaring more than €100m in royalties. They were also fined nearly €500m, opening up the possibility that tax police may seize shares in the company and assets.

Mr Dolce and Mr Gabbana’s lawyers in a statement said they feared the impact on the company given “the Internal Revenue Service might proceed with their operations against them fining them for the excessive and surreal amount of money of more than €400m”.

The case arose as a result of a clampdown by Italian finance police on tax evasion as the European sovereign debt crisis roiled Italy. The widespread use by Italian business of holding companies registered in Luxembourg has been a specific target for tax authorities as Rome seeks to boost state coffers by bringing back onshore billions of euros estimated to be held in tax havens.

At the centre of the trial was the decision by the designers to create a Luxembourg-based holding company, known as Gado, in March 2004 which subsequently took control of the Italy-based business.

Mr Dolce and Mr Gabbana, who were not present in court, have denied the charges and their lawyers have said they intend to appeal against any conviction. They are unlikely to serve any prison sentence because of the length of the appeals process in Italy.

The court also handed out suspended prison sentences of as much as one year and eight months to the fashion house’s chief executive Cristiana Ruello, chief financial officer Giuseppe Minoni and legal counsel Luciano Patelli and a brother of one of the designers, Alfonso Dolce.

Two years ago, a judge threw out a tax evasion and fraud case against the pair, whose label Dolce & Gabbana is a Milan fashion mainstay. Italy’s high court later ruled the designers could be prosecuted for tax evasion, though not for fraud.

Prosecutor Laura Pedio argued that the designers had conducted a “sophisticated tax fraud” and set up the Luxembourg holding company specifically to evade paying taxes.

Luigi Macioce, tax partner in law firm Withers’ Italian practice, said the decision by the court was “further evidence that the Italian tax authorities are looking more aggressively than ever at evasive or abusive schemes implemented by Italian companies of all sizes.”

Some Italian companies have sought to set up international structures for legitimate and legal reasons as domestic demand no longer offers growth for their businesses, Mr Macioce said.

“That said, it is true that in the past many Italians have used internationalisation as a means of obtaining tax advantages through the use of abusive tax avoidance schemes,” he added.

While the Dolce & Gabbana trial is the most high profile case to come to court since the tax clampdown in Italy, other brands have also been in the sights of the authorities.

Tax police seized assets owned by Roman jeweller Bulgari and the Marzotto textile dynasty in recent raids alleging that they had failed to pay taxes. Both have denied the allegations.

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