Prosecutors are seeking a jail term of four years and nine months for the 65-year-old Italian, accusing him of failing to pay more than one million euros ($1.1 million) due to undeclared earnings from image rights in 2014 and 2015 during his first spell at the club.

They argue Ancelotti had only reported the salary he was paid by the club and had omitted income from his image rights in his tax returns during this period.

Prosecutors allege he set up a "confusing" and "complex" system of shell companies to hide his extra earnings during this time from his image rights and other sources such as real estate.

Ancelotti told the High Court of Justice in Madrid that this payment system had been proposed to him by Real Madrid, and that "all the players do it" as did another former coach, Jose Mourinho.

"When the club suggests it to me, I put Real Madrid in touch with my advisor. I didn't deal with it because I had never been paid that way," he said.

"I never realised that something wasn't right," he added, saying he "never considered committing fraud".

Ancelotti arrived at the court with his wife Mariann Barrena and his son Davide, who serves as assistant manager at Real Madrid.

The trial is expected to last two days. The parties could reach an out-of-court agreement at any point in the process.

Previous similar cases involving footballers have resulted in suspended sentences, often via an out-of-court settlement.

Ancelotti told the court he never realised that the company he had set up to transfer these rights to him allowed him to pay less tax.

"At that time, all the players and coaches were doing it that way, it seemed like the right thing to do," he said.

- Spanish crackdown -

Spain has cracked down in recent years on top football players who have not paid their due.

Mourinho received a one-year suspended sentence after reaching a guilty plea for tax fraud in 2019.

Lionel Messi and Cristiano Ronaldo were both found guilty of tax evasion and received prison sentences that were waived for being first-time offenders.

Colombian superstar artist Shakira in 2023 agreed to receive a three-year suspended sentence and pay 7.3 million euros in fines to settle a tax fraud case and avoid trial.

Prosecutors had accused the "Hips Don't Lie" singer of defrauding the Spanish state of 14.5 million euros on income earned between 2012 and 2014, charges Shakira had denied, saying she only moved to Spain full-time in 2015. She was in a relationship at the time with Barcelona defender Gerard Pique.

Ancelotti took over at Real Madrid in 2013, leaving in May 2015, before being appointed by Bayern Munich the following year.

The former Italy international midfielder, who as a player won the European Cup twice with AC Milan, later managed Napoli and Everton before returning to Real Madrid in 2021.

Aside from his success in the Champions League, he has won domestic league titles with Madrid and Milan, in England with Chelsea, in Germany with Bayern Munich and in France with Paris Saint-Germain.