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Legal comment: Understanding the Messi, Ronaldo and Neymar’s tax cases

The open proceedings in Spain regarding the tax cases of Lionel Messi, Cristiano Ronaldo and Neymar Jr.[1], are too often believed to be the same, or at least, very similar cases. Alexander Guede in this column clarifies the different cases and their implications for the individuals and Spanish football.

Spanish sport and football in particular has been world leading in terms of performance for some years. Nevertheless, it is crucial to shed light on those “shadowy” areas where Spanish sports governance is having international trouble, such as state aid in football clubs[2], anti-doping enforcement[3], alleged corruption offenses at the Spanish FA[4], etc.

Concerning the tax cases of these three superstars, international questions have generally focussed specifically on (i) why Messi, Cristiano and Neymar do not go to prison[5], and (ii) why, in Spain, have there been so many similar tax evasion cases.

(i) The first question is quite easy to answer. According to Spanish law, courts are basically allowed to decide not to send people to jail if the final judgment is less than 24 months in prison and the condemned has no previous criminal records[6].

(ii) Secondly, and in my opinion, these kind of cases are emerging because several reasons:

  • Spanish “Rule of Beckham” that has been repealed[7].
  • There is a special tax pressure on some top-figures in Spanish society (as an exemplary mode). Due to political changes in Spain, some parties are demanding to enforce tax law severally.
  • LaLiga gathers some of the best-paid players in the world, which means that they generate huge domestic and foreign incomes.

The following article provides some of the keys to the Messi, Cristiano and Neymar’s tax cases, which are being treated as serious economic crimes before the Spanish Tax Agency (Hacienda) and the Spanish courts. At the end of the day, clarifying the difference really matters for Leo, Ney and Cris.

Lionel Messi: tax fraud case

Background:

According to Spanish law, Leo Messi is considered to be tax-citizen in Spain (as any other Spanish citizen). Because of that, Messi must declare every global income he receives to Hacienda.

Facts:

In light of Leo Messi’s final judgment[8], the player did not indicate a willingness to comply with Spanish Tax Agency’s rules. He did not submit the information regarding his contracts prior the opening of the investigation.

In addition, Messi passed on his image right’s sales to companies that Messi himself had relations to. Hacienda found out that Messi had designed a network of companies all around the world in order to hide part of his image rights incomes. The situation became serious when Hacienda uncovered Messi and his father creating a company in Panama, which served to keep their fraudulent billing.

Even though the issue began when Messi was still a minor, the charges are “objectively attributable” to Messi as (i) he kept those practices when he was older than 18 years old, (ii) consciously approved the contracts and (iii) is the holder of his image rights.

Legal basis and result:

According to the verdict of the Spanish High Court (Tribunal Supremo), Messi was convicted for three different crimes (2007, 2008 and 2009) to 21 months in prison as he did not pay relevant taxes in Spain for €4.1 million. On a “deliberate ignorance” basis, states the Court, Messi hid from Hacienda €10,1 million of income from some image-rights contracts.

Messi will not have to go behind bars as the sentence is less than 24 months and he has no criminal record.

Cristiano Ronaldo: alleged tax offense

Background:

When Cristiano signed for Real Madrid, he is eligible under the special-tax regime for top-considered foreign workers (artists, scientifics, company heads, etc.)[9]. At that time, this exception was an attractive reason to come to Spain to play football and turned out to be especially popular when some football stars were eligible to use it. The rule, called widely as “Ley Beckham” (Rule Beckham), allowed certain foreign workers to pay less personal income tax than local workers. In relation to the above-mentioned rule, Cristiano should have declared to Hacienda just the income generated in Spain. This rule has recently been repealed by the Spanish government.

Facts:

When other football players were under tax investigation by Hacienda (i.e Mascherano), Cristiano voluntarily decided, in 2014, to double-check his situation with Hacienda and, where applicable, regularise his tax payments in Spain. That year, Cristiano submitted a complementary declaration of taxes in order to compensate some missing amounts for the years 2011, 2012 and 2013, apart, of the tax year 2014. With this action, it looks clear Cristiano did not try to hide any incomes and wanted to comply with Hacienda’s rules, which is one of the keys to his legal defense.

Cristiano is using a global image rights’ exploitation structure, similar to the one he used playing in the Premier League, but now there are some doubts. Cristiano was eligible to pay tax under the Ley Beckham for a limited period. The player renewed his contract with Real Madrid a couple of times, so in theory, he should not be eligible under the same tax conditions anymore. Particularly, the investigation focuses on some income filed in Hacienda as image-rights income in Spain, which is taxed at around 20%, when in reality, it could be incomes coming from bonuses and canons, which is taxed at about 43%.

 

Legal basis and result:

Hacienda has considered on its preliminary reports that Cristiano may have commiteed a fraud of €8 million[10]. Therefore, Hacienda submitted to the Prosecutor’s Economic Crime Office of Madrid (Fiscalía de Delitos Económicos de Madrid) the results of its investigation and sent a formal proposal to open a criminal proceeding against Cristiano.

The Prosecutor’s Office is currently studying the information and soon will decide whether (a) go to court – similar to Messi’s case, (b) open an administrative proceeding – which would have a minor proceeding importance, or (c) declare that there is no tax fraud offense by Cristiano.

Neymar: two different cases

Background:

There are two very different cases regarding the Brazilian player Neymar Jr. FC Barcelona is the legal entity that faces the most serious part of the investigation rather than Neymar[11].

Case Neymar-1: It was initiated by an FC Barcelona share-holder, who sued his own club’s management to clarify Neymar’s contract. It’s the only case regarding Neymar’s transfer from Santos FC to FC Barcelona that has been finalised[12].

Case Neymar-2: Based partially on the arguments emerged in Case Neymar-1, the DIS investment fund sued FC Barcelona, as well as the former and current Chairmen of the club, Santos FC, Neymar Jr., and his parents at the Spanish courts in 2015. This proceeding is still at court under the investigation[13].

Facts:

After an intense negotiation, FC Barcelona recognised the lack of tax planning regarding the signing of Neymar.

In 2011, the club paid to N&N (Neymar’s family company) €10 million on the basis that Neymar would have signed with FC Barcelona in 2014. Additionally, in 2013 FC Barcelona again paid to N&N another €40 million, so Neymar would sign one year before the original date of the contract. This amount regards a penalty clause under the 2011 contract.

According to Hacienda, FC Barcelona carried out a fraud of €9.3 million as both payments should have been declared as a part of Neymar’s salary as a football player and not as a provision of services of N&N. Therefore, FC Barcelona agreed to pay €5.5 million as a fine.

Legal basis and result:

FC Barcelona signed an extrajudicial settlement with the Prosecutor’s Office and Hacienda to pay the above-mentioned fine and the tax fraud amounts regarding two different proven tax offenses in 2011 and 2013 concerning Neymar’s contract.

As explained, Case Neymar-2 is still open and soon might leak some relevant particulars from the complex investigation.

Concluding remarks

The highlight is that football stars are now under Hacienda’s spotlight. It is a truth that the Prosecution Offices are demanding longer prison terms. However, judges are entitled to bring the sentences down if tax evaders comply with legal provisions, such as having no criminal records and being able to restore the evaded tax amount.

In Spain, the content of the law that courts must apply has not changed substantially in the last few years. What has been reformulated is the approach and criteria to enforce the tax law by Hacienda[14]. We are not sure whether this approach will stay or change in the near future, which will depend on social and political circumstances.

Alexander Guede is a qualified advisor focused on EU regulatory affairs and business consulting on a wide range of matters regarding the sports and entertainment industry. Based in Madrid, Alexander has practiced as a legal counsel both at the EU Commission and a magic-circle law firm. He holds a LLM in EU law and a LLM in Sports law. Alexander is specialised in competition, broadcasting and commercial law. @AlexGuede

Footnotes:

[1] We know very well that Neymar Jr. has recently made a move to PSG. The Neymar Jr.’s citations on this article are just related to his transfer to FC Barcelona some years ago.

[2] See the press release of 4 July 2016 o the EU Commission: http://europa.eu/rapid/press-release_IP-16-2401_en.htm

[3] See WADA press release of 7 March 2017 https://www.wada-ama.org/en/media/news/2017-03/wada-removes-spain-from-the-list-of-signatories-deemed-non-compliant-with-the

[4] See ESPN News http://www.espnfc.com/blog/fifa/243/post/3159687/spain-fa-boss-villar-and-son-arrested-in-corruption-investigation

[5] See the excellent piece carried out by the Bleacher Report team http://bleacherreport.com/articles/2725161-how-are-cristiano-ronaldo-and-lionel-messi-staying-out-of-jail

[6] According to the article 80 of the Spanish Criminal Code.

[7] Royal Decree 687/2005 as known as Ley Beckham. See Cinco Dias article: https://cincodias.elpais.com/cincodias/2015/03/27/economia/1427476110_410270.html

[8] High Court – Criminal crimes, final judgment of 24 May 2017, STS 1885/2017 – ECLI: ES:TS:2017:1885. See the text: http://www.poderjudicial.es/stfls/TRIBUNAL%20SUPREMO/DOCUMENTOS%20DE%20INTER%C3%89S/TS%20Penal%2024%20mayo%202017.pdf

[10] See the BBC News: http://www.bbc.com/sport/football/40048229

[11] See The Guardian News: https://www.theguardian.com/football/blog/2017/mar/30/neymar-brazil-barcelona-santos-transfer

[12] See the Independent News: http://www.independent.co.uk/sport/football/european/neymar-barcelona-to-pay-43m-fine-to-settle-transfer-tax-fraud-case-a7080876.html

[13] See the ESPN News: http://www.espnfc.us/story/2957243/madrid-court-re-opens-case-against-neymar-for-barcelona-transfer-from-santos

[14] See the article of El Pais: https://elpais.com/deportes/2016/07/07/actualidad/1467873087_919814.html