Directors’ Liability to Pay Corporate Taxes Comes (Back) Into Fashion

With governments in certain economies around the world still strapped for cash, it’s unsurprising that a clampdown on what they would wish to regard as tax evasion (but what taxpayers will argue is legal tax avoidance) looks set to continue.

A recent Italian example of such a clash, in which the taxpayers came off very much second best, was the 20-month prison term imposed on Dominico Dolce and Stephano Gabbana—better known as the founders of the fashion house Dolce and Gabbana (“D&G”).

Slight Scheme

The case concerned a scheme under which Dolce and Gabbana sold the D&G brand at an alleged undervalue to a Luxembourg company, which they continued to control and through which they continued to receive substantial royalties.  In effect, the court of Milan set aside the entire scheme and treated the royalties as having accrued in Italy with the result that they attracted a 45% tax rate rather than the 4% tax rate applicable in Luxembourg. The amount of unpaid tax at stake is estimated at €400 million.

The court seems to have disregarded the scheme entirely and taken the view that it sole purpose was to circumvent obligations and prohibitions by the Italian tax authorities.

Blurred Lines

The case is a high-profile example of the risks associated with trying to tread a blurred line between evasion and avoidance. It’s worth noting in that context that the Italian tax authorities lost at first instance but succeeded on appeal. It seems likely that there will be further appeals.

This is good for the lawyers but less so for directors of companies and their advisors looking to maximise shareholder returns whilst staying within the law. (Here’s a link to my earlier article on this subject re bearer bonds). Tax avoidance, though unpopular and politically sensitive, does not attract personal liability let alone prison sentences.

In my next blog I will consider the D&O policy coverage implications of this type of case.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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