By Lisa Jucca
MILAN (Reuters) - An Italian court is expected to rule on Wednesday on whether legendary fashion duo Domenico Dolce and Stefano Gabbana should be sent to prison for allegedly hiding hundreds of millions of euros from the tax authorities.
The case, one of the few prominent tax disputes to go to court in Italy, dates back to 2004, when the pair sold their brand to Luxembourg-based holding company Gado to allegedly avoid declaring taxes on royalties of about 1 billion euros ($1.3 billion).
Cash-strapped Italy has recently stepped up action on tax evasion, something that was also featuring high at this week's Group of Eight meeting.
The Italian tax agency has carried out highly publicised tax raids at chic tourist locations while increasing scrutiny on corporate structures.
Dolce and Gabbana, who count pop singer Madonna and model Naomi Campbell among their clients and who draw inspiration from Italy's "dolce vita" (sweet life) style of the 1950s, have denied the charges.
Several of their business associates are also on trial in Milan.
Separate to the criminal case, Italy's Tax Commission slapped the stylists earlier this year with 343.4 million euros in fines for not declaring in Italy earnings related to Gado, current owner of the D&G and Dolce & Gabbana brands.
Prosecutor Gaetano Ruta, who is working on the criminal case, said late in May the two should be sentenced to two and half years in jail as they were the people who "indirectly" benefited most from the operation.
"Gado was 80 percent controlled by D&G srl which was owned 50 percent each by Dolce and Gabbana," Ruta has said.
The harshest sentence available to the court in these cases is five years. The two fashion designers can appeal against a potentially negative verdict twice before it gets to Italy's highest court, a process that could take years.
Previous tax cases involving celebrities in Italy have led to out-of-court settlements.
In 2000 the late opera singer Luciano Pavarotti paid more than $12 million in back taxes, while former MotoGP world champion Valentino Rossi agreed to pay $51 million to Italy's tax agency in 2008.
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(Additional reporting by Manuela D'Alessandro; Editing by David Holmes)