The news that Marcelo, the Real Madrid footballer, pleaded guilty to defrauding the Spanish state of €490,000 and received a fine of €750,000 and a suspended jail sentence of four months won’t come as a surprise to those that have been following the Spanish Tax Administration’s (AEAT) raid on footballers over recent years. Like many before him, Marcelo had used a non-Spanish company to exploit his image rights with the income not being taxable in Spain.

Footballers and image rights are a dangerous combination, especially when the cocktail is being stirred by the ever thirsty agent. It appears Marcelo has been hard done by as he settled his tax debts in 2013, which he might legitimately have expected to be the end of the story. However, the AEAT reopened the case on new grounds, this time targeting his personal tax affairs, rather than corporate. It doesn’t appear that any new facts have come to light, which would justify this second bite of the cherry, suggesting instead that emboldened Spanish officials simply see footballers as rich pickings.

The case of Cristiano Ronaldo, which some readers may be familiar with, is perhaps even more concerning because he had applied for and been granted the special tax status afforded by Royal Decree Royal Decree 687/2005), otherwise known as the Beckham Law. In this case, the AEAT argued that the royalty income ultimately received by the British Virgin Islands (BVI) company owned by Ronaldo was a Spanish source, simply by virtue of the fact that the photoshoot or video of Ronaldo was shot in Spain. It was irrelevant that the images were exploited by an unrelated Irish company and the royalties / license fees were paid by non-Spanish licensees.

The main criminal law offences are:

  • the use of fraudulent measures (e.g. false invoices, use of persons or companies to avoid revealing the real taxpayer etc); and
  • the use of a sham arrangement to reduce the tax due.

The use of companies by individuals for exploiting their image and / or providing their personal services is not uncommon. Only in very limited circumstances will such an arrangement fall foul of the sham doctrine. In Ronaldo’s case, the use of a BVI company to own and license his image rights would unlikely be a sham and would ordinarily stand up to scrutiny. The AEAT appear to have gone out of their way to find a way of taxing the image rights income – they achieved this by arguing that the royalties had a Spanish source simply because of the location of the photoshoot.

The case is a concern not just for footballers, but for wealthy entrepreneurs, entertainers and expats living in Spain because it is evidence of a growing trend of the AEAT using the threat of criminal tax evasion in tax avoidance cases. The threat of lengthy trials, bad publicity and imprisonment in effect force the taxpayer to plead guilty. It could be argued that the AEAT’s actions are undermining the rule of law. Using the criminal code to attack taxpayers is a concern, especially if the taxpayer hasn’t committed tax fraud or the facts are such that the case should be properly litigated. Offering and taking a plea deal in such circumstances to avoid penal sanctions rather than allowing the tax payer to appeal their innocence is fundamentally flawed.

So what does this mean to the thousands of other high net worth individuals who aren’t footballers, who live in Spain? For many years expats, in particular, paid lip service to their Spanish tax obligations because it was understood that the AEAT was more interested in Spanish nationals avoiding Spanish tax. Of course, since the global financial crisis Spain, like many other European member states, has suffered economically. As such, expats are now very much “fair game” and the AEAT’s position has been strengthened by the introduction of domestic provisions such as the Modelo 720 and international exchange of information protocols, in particular the Common Reporting Standard.

Being cynical, the likes of Ronaldo, Messi and Marcelo are low hanging fruit for the AEAT. It is a great shame and much to the discredit of the Spanish authorities that they pursue what are essentially civil law cases using the criminal code. Individuals living in Spain or thinking of relocating there need to take very specific, expert advice on how to structure their affairs and to monitor their arrangements on a regular basis.  The threat of AEAT is such that everyone, from football superstar to entrepreneur is at risk.

Read Miles’ article in Taxation

Posted in Uncategorized

November 2, 2018


Posted by Miles

Miles is a founder of Milestone having started his career in international tax in 1994.

Read More All Posts By Miles Dean

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