Expert Analysis on Dolce & Gabbana's Legal Woes

Stefano Gabbana, left, with Domenico Dolce — and some of the money they owe the government. Photo: Photo Illustration: Getty Images, iStockphoto

Yesterday the news broke Dolce & Gabbana owe the Italian government an assload of cash and are facing a criminal investigation because they haven't paid all of their taxes. It was also reported last week that fellow Italian fashion house Ferragamo is in the same boat. What's going on here? Is there just something particularly shady about Italian designers and the money they make? And will our beloved, sparkly geniuses stay out of the clinker?

In dire need of answers, we contacted New York University law professor Franco Ferrari, an Italian-law expert.

Ferrari explained that both houses screwed up in that they set up companies in foreign countries (Dolce & Gabbana in Luxembourg and Ferragamo in Holland) where taxes are lower than those in Italy. However, they didn't really operate from those countries — they were still running their shows from Italy. "Even the order to buy the toners for printers came from Italy," Ferrari said. "The revenues have to be taxed in Italy rather than the country where the company is said to be operating."

So why'd the fashion houses make such a poor move? Ferrari thinks it was the result of bad advice. "I believe what they tried to do is perfectly legal. The problem is they have not met all the requirements for it to really work," he said. "They have some counselor or CPA who probably has done some wrong stuff. Someone should have consulted with them earlier."

Ferrari speculated Domenico Dolce and Stefano Gabbana would stay out of jail if the company paid its fines on time. Though it's not under criminal investigation (perhaps because they owe less), Ferragamo should be in the clear after it pays up. Dolce & Gabbana has already paid the Italian government half of its 90 million euro penalty (about $140 million), and Ferragamo must cough up more than 20 million euros (about $30 million).

Most important, Dolce & Gabbana customers won't likely feel the burn from any of this. "They have to pay within a certain period of time, and I’m sure that will have an implication on their market value," Ferrari said. But, he added, "customers will not stop eyeing products in Dolce & Gabbana because the IRS in Italy found out they are doing this with the companies abroad." Indeed.

Related: Dolce & Gabbana Under Criminal Investigation