Fashion tycoons could face jail in tax evasion case

They are accustomed to bathing in the adulation of models and fashion critics as they parade down the catwalks of Milan. But Domenico Dolce and Stefano Gabbana's next public appearance in Italy's fashion capital will take place under rather less glamorous circumstances, as the famed stylists appear in court tomorrow accused of tax avoidance on an epic scale.

They are alleged to have evaded more than €400m in tax when they sold their D&G and Dolce & Gabbana brands to a holding company, Gado, which they set up in Luxembourg in 2004.

Prosecutors say the complex arrangement enabled the duo, whose friends and clients include Angelia Jolie, Scarlett Johansson, Monica Bellucci and Naomi Campbell, to avoid paying higher taxes in Italy and instead pay at a lower rate in Luxembourg.

Investigators say the price at which the companies were sold – €360m – was about one-third of their true market value. The designers vehemently deny the allegations and have called the charges "absurd" and based on "a completely abstract calculation" of their companies' market value.

The business partners, regarded as gods in a pantheon of Italian fashion icons that includes Versace, Valentino and Armani, face prison sentences of up to five years if found guilty.

Six associates of the duo will also be on trial, including their tax consultant, prosecutors say.

The trial comes as Mario Monti, Italy's straight-talking technocrat prime minister, has declared the government to be "at war" with tax evaders, in a country in which, until recently, tax dodging has been regarded almost as a national sport.

"Some measures adopted by the government against tax evasion may seem like war measures and, in reality, they are," Mr Monti said last month. His predecessor, Silvio Berlusconi, was famous for his soft stance on tax evasion, even suggesting that it was justified if tax rates exceeded a certain level. But since Mr Monti replaced him a year ago, he has led a crackdown on rampant tax dodging, which is estimated to cost the country around €115bn a year.

Despite the gravity of the allegations, Dolce and Gabbana will not necessarily attend the first days of the trial, when the timetable for witnesses will be determined. "They are not obliged to appear in court," Laura Pedio, one of the prosecutors, said.

A spokesman for Dolce and Gabbana in Milan refused to comment about the case. Lawyers for the fashion tycoons also declined to comment.