Tax Incentives in Spain: Beckham Law and Mbappe Law
The Spanish passion for celebrity culture and sports plays a big role in shaping its tax laws. This influence is especially visible in the financial incentives created to bring in high-profile figures. This includes the Beckham Law, and the more recent changes introduced under the Mbappé Law. Both are designed to attract athletes and investors by offering appealing tax incentives in Spain. While these laws are designed to boost the economy, they have also raised concerns about widening social inequality and led to multiple tax fraud charges against celebrities. Let’s take a closer look at these laws and their implications, breaking them down in simple terms.
Key Takeways:
- Don’t be fooled, Spain is not very tax-friendly.
- Financial affairs of celebrities are put under the microscope by tax authorities.
- Beware of schemes that sound too good to be true.
Brief Summary of the Spanish Tax System
Spain’s tax system is characterized by a combination of national, regional, and local taxes. The main components include:
- Income Taxes (State & Regional): Progressive taxes on personal income, consisting of both state and regional (autonomous communities) taxes. State tax rates range from 9.5% to 22.5%. In Madrid, these rates are effectively doubled, with combined rates ranging from 19% up to 47%. Tax rates reach the 45% bracket for incomes over €60,000 in 2024.
- Corporate Tax: Usually set at 25%, it applies to the profits of companies operating in Spain.
- Additional Local and Regional Taxes: Autonomous communities can impose their own taxes and adjust rates.
Adding to the above, Spain also has regional wealth taxes, along with other levies such as the standard 21% VAT rate.
What is the Beckham Law?
Named after footballer David Beckham who joined Real Madrid that year, the 2005 Beckham Law is a special tax regime for foreign workers in Spain. The law was designed to attract international talent by offering a highly favorable tax structure.
Key Features of the Beckham Law:
- Tax Rate: Foreign workers can be taxed at a fixed rate of 24% on their income up to €600,000, significantly lower than the standard rates that can reach up to 54% in the Valencia community.
- Duration: The benefits last for up to six years.
- Income Scope: The law only applies to income generated from work performed in Spain. Income earned outside the country is ignored.
- Who Benefits? The Beckham Law has primarily benefited foreign football players, attracting stars from around the globe to La Liga clubs and boosting the league’s international appeal. This regime offers preferential tax treatment not only to the applicant but also to their spouse and children under 25. It covers income and assets within Spain. To qualify, individuals must meet several criteria. These include not having been a resident of Spain for the five years preceding their move and relocating to Spain for a work contract.
New Tax Incentives in Spain for Moving to Madrid: The Mbappé Law
A new tax benefit is now available for individuals considering a move to the Madrid community. This initiative, known as the Mbappé Law, is retroactively applicable from January 1, 2024. The law provides a personal income tax deduction for individuals who make certain qualifying investments in debt or equity. Key conditions include:
- Foreign Tax Residency: The individual must have been a tax resident in another country for at least five years prior to moving to Madrid.
- Madrid Tax Residency: The individual must establish tax residency in the community of Madrid for a minimum of six years.
- Investment Duration: Investments must be held for at least six years, although reinvestment is permitted under certain conditions.
As a result of these investments, the maximum personal income tax rate can be reduced from 45% to 24.5%.
Comparing the Mbappé Law to the Beckham Law
While both offer tax incentives, their objectives differ. The Beckham Law primarily targets foreign athletes, whereas the Mbappé Law aims to attract a broader spectrum of talent and investors to Madrid by extending personal income tax incentives to a wider group, if they establish tax residency in Madrid.
Tax Incentives in Spain Point of View
The response to these financial incentives has been mixed, especially concerning the disparity in tax treatment between the ultra-wealthy and average citizens of Spain. Note that the average Spanish citizen earned around €30,000 in 2023. This reaction could come from relative poverty, where income comparisons to wealthier peers lead to unhappiness.
However, Spain’s pursuit of tax evasion charges against celebrities proves that the government is committed to enforcing tax laws, regardless of status. This sends a clear message that tax evasion will not be tolerated.
Spanish Tax Authorities Target Footballers
Among the high-profile cases, Lionel Messi faced tax fraud charges in Spain related to his income from image rights between 2007 and 2009. The charges centered on Messi and his father, who were found guilty of defrauding the Spanish government of €4.1 million. They used tax havens in Belize, Uruguay, Switzerland, and the United Kingdom to hide earnings.
In his defense, Messi argued that he had entrusted his father with managing his finances and claimed to have been unaware of the way his wealth was handled. However, the court maintained that Messi should have been aware of his tax obligations. To address the issue, Messi and his father made a voluntary payment of €5 million in 2013. This amount covered the alleged unpaid tax along with interest, and was part of their effort to resolve the matter before it went to trial.
In 2016, Messi was sentenced to 21 months in prison and fined around €2 million. His father received a 15-month sentence and a €1.5 million fine. However, following an appeal, the Spanish Supreme Court rejected Messi’s case. The court altered the prison sentence to a fine of €252,000 (€400 for each day of the 21-month sentence).
More footballers committing tax evasion…
Cristiano Ronaldo also faced charges of tax evasion in Spain for income earned from image rights during his time at Real Madrid between 2010 and 2014. The accusations pointed to his use of offshore companies to avoid paying taxes on earnings from endorsement deals. The total untaxed income was approximately €14.8 million. In January 2019, Ronaldo reached a settlement with Spanish authorities to resolve the case. As part of the agreement, he accepted to pay a hefty fine of €18.8 million. The settlement also included a 23-month suspended prison sentence.
Similar charges were brought against multiple footballers including Radamel Falcao, Fabio Coentrao, and Xabi Alonso, who also used offshore companies to conceal income from their image rights. Other footballers faced tax evasion charges in Spain, including Neymar Jr. accused of hiding the true cost of his transfer to Barcelona.
If it sounds too good to be true, it probably is.
Shakira and the Spanish Non-Resident Tax Regime
In 2018, the Colombian pop star Shakira found herself in a major tax dispute. The controversy stemmed from claims that she avoided paying €14.5 million in taxes between 2012 and 2014. Despite living in Spain with Spanish footballer Gerard Piqué, Shakira maintained that she was a non-resident of Spain for tax purposes. During this time, she was supposedly a tax resident of the Bahamas.
In Spain, the tax system distinguishes between residents and non-residents, each subject to different tax obligations. Non-residents are individuals who do not meet the criteria to be considered tax residents in the country. It is primarily defined by spending fewer than 183 days in Spain within a calendar year.
An individual is considered a tax resident of Spain if they meet any of the following criteria:
- Physical Presence: Spending more than 183 days in Spain during a calendar year.
- Center of Economic Interests: Having the main source of income or professional activities in Spain.
- Family Ties: Having a spouse or dependent children who are residents of Spain.
Given Shakira’s extended stays in Spain, her family ties, and her professional commitments in the country, authorities argued that she met the criteria for tax residency. Effectively making her liable for taxes as a resident of Spain.
On the other hand, non-residents are subject to a special tax regime, which applies a flat tax rate on income earned within the country. This includes income from sources such as property rentals, business activities, and capital gains. The standard tax rate for non-residents is 24% on income from residents of non-EU or EEA countries and 19% on income from residents of EU countries. This system allows non-residents to avoid the higher progressive tax rates that apply to residents.
Shakira’s €7 million Settlement
Shakira denied the accusations and insisted that she had always complied with her tax obligations. She also argued that she was a non-resident for tax purposes during the years in question. The case attracted significant media attention, focusing on how international celebrities handle their taxes.
On November 20, 2023, Shakira settled her 2012-2014 tax fraud case with Spanish prosecutors. The trial, set to begin in Barcelona, ended with the singer receiving a three-year suspended sentence and a fine of more than €7 million.
To sum up, if it sounds too good to be true, it probably is. Celebrities have their finances closely watched by tax authorities and must be overly cautious with their financial decisions. Lastly, the Spanish tax system can be difficult to navigate and is not particularly forgiving.
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Cover image: Flag of Spain (1981)
