Football and the Law: The Beckham Law (Part One)
What is the Beckham Law? As a devoted fan of the game of football, I regularly peruse through the sports section of newspapers and media websites. In recent times, there has been heightened media coverage of footballers and most recently a football coach; implicated in tax evasion scandals.
What is the common denominator between Javier Mascherano of FC Barcelona, Angel Di Maria, a former midfielder of Real Madrid CF, Lionel Messi of FC Barcelona, Cristiano Ronaldo of Real Madrid CF and Jose Mourinho, a former coach of Real Madrid CF?
Aside from having a connection with a world renowned La Liga football team, all of the above have been accused of tax evasion by the Spanish tax authorities.
What is the Beckham Law?
Royal Decree 686/2005 is a Spanish tax decree colloquially referred to as the ‘Beckham Law’ which came into force on 10 June 2005. The twin aims of the Spanish Special Tax regime was to attract top-tier income earners and highly skilled individuals to Spain who had been offered an employment contract or appointed a board of directors.
In addition, the Spanish tax decree was intended to encourage foreign executives to establish regional headquarters in Spain and thus spur economic investment and tackle the skills shortage in Spain. The Beckham Law changed the income tax position for wealthy Spanish residents, namely, individuals who had relocated from abroad to Spain. Individuals who have spent 183 or more days of the tax year in Spain which mirrors the calendar year and therefore runs from 1 January to 31 December are regarded as resident in Spain for tax purposes.
What was the purpose of the Beckham Law?
The Beckham Law was designed to allow expatriates to elect whether they will be taxed as a Spanish resident or a non-Spanish resident. If an individual chose to be taxed as a non-Spanish resident, they could benefit from their worldwide income and assets being exempt from tax for a maximum of six years from the date of their arrival in Spain.
David Beckham was one of the first expatriates living in Spain to take advantage of the tax exemption when he transferred to Real Madrid CF from Manchester United FC for a transfer fee of £25 million. David Beckham benefited from his tax affairs being subject to Non-Resident Income Tax rules, which meant that he only paid tax on income generated in Spain such as his weekly wages from Real Madid CF.
Other high net worth expatriates in Spain who met the eligibility criteria for the Special Tax regime were subject to a flat tax rate of 24% on income under €600,000 rather than a progressive tax rate of 45%. The personal advantage to David Beckham was that income derived from the exploitation of his worldwide image rights such as his lifetime endorsement deal with Adidas valued at $160 million was not subject to Spanish taxation.
What changed in 2015?
The Royal Decree 633/2015 that came into force on 10 July 2015 amended the personal income tax regime in Spain. Significantly, employees who earned more than €600,000 per annum are ineligible to apply for the Special Taxation Regime which effectively excludes top-level professional sport-players.
Notably, foreign football players were the main beneficiaries of the Beckham Law that was intended to stimulate the weak Spanish economy by attracting affluent foreign workers to Spain. However, the Beckham Law became shrouded in controversy as it enabled wealthy foreign workers to pay less tax than a Spanish resident who was subject to the sliding scale of tax and paid tax on the net of worldwide income.
What’s the latest news with the Beckham Law?
The current coach of Manchester United, Jose Mourinho, is the latest foreign worker in the realm of football to be formally charged for tax evasion in Spain. The charge relates to income derived from his image rights during his tenure as coach of Real Madrid CF. Mourinho joins high profile footballers such as Cristiano Ronaldo who is accused of defrauding Spanish tax authorities of €14.8 million.
Five-time FIFA Ballon d’Or winner, Lionel Messi and his father were found guilty of evading tax on €4 million of income generated from Messi’s image rights controlled by off-shore companies in Belize and Uruguay. Most recently, former forward for Atletico Madrid, Radamel Falcao is accused of failing to declare the income tax generated from his image rights between 2012 and 2013 which was valued at €5.3 million.
It is likely that Spanish tax authorities will continue to scrutinise the tax affairs of footballers in their pursuit to ensure that a fair and commensurate amount of tax is paid by all residents of Spain. In the words of the incumbent Spanish Prime Minister, Mariano Rojos, ‘every government has a duty to ensure a fair and equitable contribution to financing public expenditure and to fight all practices and schemes aimed at exploiting gaps and mismatches in tax rules to artificially reduce the payment of taxes, which, ultimately, damages our society as whole.’
To be continued…
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Words: Hilda-Georgina Kwafo-Akoto