The pair's lawyer, Massimo Dinoia, said they planned to appeal, adding that the case is "groundless." The designers, known for their sexy styles favored by celebrities such as Madonna, Naomi Campbell and Katy Perry, have denied the charges.
The case dates back to 2004, when two of the company's main brands were sold to Luxembourg-based holding company Gado.
Prosecutors alleged that the sale was made to avoid declaring taxes on royalties deriving from the two brands' activities.
Under Italian law, the pair wouldn't go to prison because sentences of less than three years are served with house arrest or community service. Moreover, the designers have the right to appeal the verdict twice, and Italian courts often take years to reach a final decision.
Public prosecutor Laura Pedio dubbed the operation as a "sophisticated tax fraud" and originally asked for a two-year jail term for the duo. If the conviction is upheld, the pair would also need to pay a fine to Italy's tax agency for €500,000.
Over the last five years, Italian tax authorities have ratcheted up pressure on tax evasion in an effort to claw back an estimated €120 billion a year in unpaid taxes, cracking down in particular on the use by Italian companies of offshore centers to avoid taxes.
According to Italian tax authorities, the country lost about €17 billion in undeclared or under-declared income to offshore centers last year, compared with €11 billion for 2011, with Luxembourg the leading country used by Italian individuals and companies seeking to hide money abroad. Corporate tax rates in Luxembourg can be close to zero, while they are about 28% in Italy.
While Dolce & Gabbana has emerged as one of the most high-profile cases pursued by Italian tax authorities, Italian authorities have gone after other fashion groups in the past. In 1996, Giorgio Armani received a nine-month suspended sentence and was fined $64,000 for paying off tax authorities in exchange for favorable audits. Mr. Armani admitted to having paid the bribes.
Late last year, prosecutors launched an investigation into whether the Marzotto family, a wealthy textile dynasty, and four managers dodged 65 million euros in Italian income taxes when it sold fashion house Valentino through a Luxembourg holding company in 2007.
Earlier this year, the family paid the taxes that the state claimed it owed, but will face a criminal trial later this year.