BLOG ESPANA
Thursday December 19 2019
Explained: La Liga stars and tax issues

A series of high-profile Spain-based football stars have been found guilty of tax fraud by the Supreme Court in recent years - Cillian Shields explains.

Closely linked with the arrival of David Beckham at Real Madrid, something happened in the mid-2000s in Spain that transformed the very fabric of football in the country, in a way that indirectly led to the likes of Lionel Messi, Cristiano Ronaldo, and José Mourinho receiving suspended prison sentences and paying “corrective payments” of millions of euros.

Perhaps it is a little unfair to couple Beckham with the legal complications of others, but in Spain, a new law was passed in 2005 that, because the former England captain was one of the first and one of the highest-profile names to take advantage of it, is commonly known as The Beckham Law.

The so-called “Beckham Law” gave foreign footballers, newly arriving to Spain, a very favourable tax rate of merely 23%, whereas employment income was otherwise taxed at 24% up to €600k and 42% thereafter.

Specifically, the law decreed that any person not previously a taxpayer in Spain for the prior ten years who moves to the country and transfers their tax residence to Spain, working for a Spanish employer, would benefit from the tax breaks.

In layman’s terms, this meant that moving to Spanish clubs meant more money in the pockets of players.

But in football, things change very quickly. As the 2000s and 2010s rolled on, image rights became more profitable for superstars, and took on a more central role in contracts. In the industry, image rights mean the ability to control, sell, or license one’s own image for monetary gain, most commonly understood in fashion and advertisement deals that players will have with global brands.

Messi, Ronaldo, and Mourinho all declared earnings from their image rights that were managed through companies and accounts not based in Spain. The three all had their operations set up - in a legal sense, at least - in Panama, Ireland, and the British Virgin Islands. Messi tops the Forbes’s annual list of the worlds’ 100 highest-paid athletes, as is explained in an article about it on Stumped.

The Spanish tax authorities saw this as a way of avoiding taxes, by registering everything in offshore shell companies, as at the time the alleged crimes were committed all three had been living, working and building their image in Spain, and therefore owed tax on this income. In recent years, they’ve been going after the sport’s biggest stars and looking for the monies they believe they are due.

Messi was accused of defrauding the Spanish state of €4.1m between 2007 and 2009 and eventually paid a “voluntary corrective payment” of €5m, which would cover interest over time as well as the original amount. The Barça captain was convicted of tax fraud and was handed a 21-month prison sentence by Spain’s Supreme Court, which was later reduced to a fine of €400 per day of the sentence, totalling €252k.

Former Manchester United winger Ronaldo evaded tax valuing €14.1m between 2011 and 2014, according to Spanish prosecutors. His company in the British Virgin Islands is alleged to have no economic activity other than buying and then ceding the player’s image rights to another company based in Ireland. In January 2019 he settled his case by accepting a fine of €18.8m and a 23-month suspended jail sentence. 

Mourinho, the current Tottenham boss, who was in charge of Real Madrid at the time of his alleged offences, also settled with the authorities over the €3.3m he is said to have evaded in tax.

 

Knock-on effect in La Liga quality?

In a rare interview Messi gave with Catalan radio station RAC1 earlier in 2019, he admitted that he considered leaving Barcelona due to the stress of the whole tax episode. Ronaldo was also said to have been very unhappy with how prosecutors chased him.

The tax questions could have knock-on effects of the players moving to La Liga from abroad. Nowadays, it is common for the biggest superstars in world football to negotiate their salaries after tax, which means it is the clubs rather than players that are affected most by the changes in the tax laws.

If Real Madrid, Barcelona, or any La Liga club are looking to recruit the best talent from abroad, they will be left with the brunt of the tax to pay, and may reconsider signing some players, or at least revise their contract offers.

 

Xabi Alonso fights back… and wins

“I’d be worried if I thought I had something to hide or something I didn’t do right but as that isn’t the case I am carrying on.” These were the words of former Real Madrid, Bayern Munich and Real Sociedad midfielder Xabi Alonso, speaking to reporters outside a court where he appeared to defend himself accused of three counts of tax fraud valuing €2m.

Prosecutors wanted to fine him €4m to go along with the €2m he had already owed, plus slap him with a jail term of two-and-a-half years for not declaring image rights earnings between 2010-2012 through a company he had set up in Madeira.

What is unique about the Real Sociedad B Coach’s case is that he is the only high-profile footballer to date to fight against his accusation, rather than accept paying a fine to settle. Alonso won his case and was acquitted of any wrongdoing.

Whether or not this has any impact on how any future players caught up in similar situations may choose to handle their cases will depend on the individual details of the people and actions involved, but it certainly sets a new precedent for players that the lawsuits can be challenged and won.

Added to the layer of complexity about what this type of cases has in store for the future of Spanish and European football is the fact that Italy have very recently introduced a new law very similar to the so-called Beckham Law, benefitting Serie A over other European leagues in competition for attracting the brightest talent. Their new law comes into effect in January 2020. May we start seeing more and more of the world’s greatest follow in the footsteps of Ronaldo and set up their careers in the new tax-friendly Italy?

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