One of our previous client alert (March 2012) briefly highlighted the main aspects of the judgement No. 7739 issued by the Criminal Chamber of the Italian Supreme Court on 22 November 2011 (hereinafter the “Judgment No. 7739”). The Supreme Court judgement concerned, inter alia, the criminal tax consequences for the managers of a company formally resident abroad but de facto managed in Italy. The Italian Supreme Court reversed the prior judgement against two very popular Italian fashion designers (hereinafter the “Designers”), and against the managers of a company based in Luxembourg (hereinafter the “LuxCo”) of the Designers’ group.

After Judgment No. 7739, the Criminal Section of the Court of Milan re-examined the criminal proceedings in order to verify the liabilities of the two Designers as well as the managers of LuxCo.

Background

The facts that led to the criminal proceedings can be recapped as follows:

  • LuxCo was incorporated in Luxembourg, by a company of the Italian group participated by the Designers;
  • after the company was incorporated, LuxCo acquired the trademarks totally owned by the Designers;
  • LuxCo had obtained a favorable tax ruling by the Luxembourg Tax Authorities whereby its overall rate would have been 4%;
  • after a few months, LuxCo entered into a trademark license agreement with yet another company of the Designers’ group; therefore, royalties for the exploitation of the designers’ trademark were paid by the Italian company to LuxCo.

According to the Supreme Court decision, as LuxCo was indeed managed by the same Designers, it could be considered a sham company (esterovestita). Therefore, the Designers and the managers of the foreign sham company could be held responsible for having failed to file the relevant income tax returns in Italy, since Italy has always been where LuxCo was being managed.

The First Instance Judgment Issued by the Criminal Section of the Court of Milan

The judgment issued by the Criminal Section of the Court of Milan, filed on 19 September 2013, seemed to be consistent with the Supreme Court’s position and convicted the two Designers of the omitted tax return crime, punishing them with imprisonment for one year and eight months. Moreover, the Court also condemned the LuxCo’s managers, punishing them with imprisonment for having committed the same crime.

The Second Instance Appeal

The Designers and the LuxCo’s managers filed an appeal against the first instance judgment issued by the Court of Milan, requesting the reversion of the prior judgment and consequently the discharge from the crime of omitted tax return.

From the news posted in the media on 25 March 2014, it appears that the Milan District Attorney, during the debate, requested the acquittal of the Designers as well as the LuxCo’ s managers because there were no grounds for criminal charges (il fatto non sussiste).

The District Attorney found that the establishment of a company in Luxemburg is fully legal and that the trademarks’ transfer falls in the free movement of capital.

Finally, the District Attorney clarified that the two Designers established a company in Luxemburg because of its favorable tax regime, capable of attracting capital and international investors. Such aim does not represent a good reason to support the criminal relevance of the Designers’ conduct, since tax optimization is considered lawful under the EU law. Furthermore, LuxCo paid 4% taxes on royalty income in Luxembourg, but on the other hand dividends were taxed in Italy and the overall tax burden reached 32%.

Points of Attention

From the news posted on the media, it is not possible at this stage to fully comprehend the District Attorney’s reasoning, especially with reference to the issue concerning the fictitious tax residence of LuxCo.

In any event, from the information reported in the newspapers, it emerges that the District Attorney has given strong relevance to the free movement of capital and to the lawfulness of entrepreneurial choices. Moreover, according to the District Attorney, the tax optimization cannot be criminally prosecuted as it is considered lawful under EU Law.

In these recent years the reasoning set out above was forcefully debated – both in the case-law and doctrine – in connection to complaints of abuse of law and tax avoidance. The appeal judgment expected for 4 April 2014 will be groundbreaking.