Sevillanas in Spain

Did you know that Spain functions as a tax haven for certain people who come from abroad?

Over the course of my conversations about the morality of paying taxes, I’ve come across people who think that moving your company or residence from one country to another to pay less tax is wrong, since you’re not sharing your money with the people around you, in the country you grew up in.

According to them, the case is clear: tax havens shouldn’t exist, we should support the State, and it’s wrong for countries to take tax money away from other States with a greater tax burden in order to attract companies and rich people…

But do these people know that their own country is often used as a tax haven by others, and that it tries to attract foreigners using the same tactics?

Today’s article explains why Spain is a tax haven for some people, how it can become one for you too (if you’re not Spanish or have spent a long time outside of Spain), and, for football fans (and gossipers), how to understand the problems Cristiano Ronaldo is having with the Spanish tax office, as well as how his example has led to the creation of a tax system that is even more beneficial than before (although only for foreign managers and entrepreneurs).

The fiscal situation of foreigners in Spain

Spain is by far one of the most attractive destinations for English and German emigrants. You only have to step outside in the Balearic Islands or along the south and east coasts of the peninsula to know that it isn’t just a question of tourism; there’s also a large contingent of foreigners who have emigrated to Spain.

Officially, Spain is a country with a high tax burden, like Germany, France, and Italy. However, Spain has always been an unofficial tax haven.

It’s not hard to find islands where there are foreigners living without paying a cent in taxes (direct taxes, of course; they still have to pay VAT and indirect taxes).

Obviously, this isn’t legal, but the authorities don’t seem to care that foreigners don’t register as taxpayers. In other words, foreigners usually live as permanent tourists (meaning they don’t pay taxes in any country), spending years in the same place.

Now that the Spanish State is in more need of money, it seems that Central Government is starting to take the matter more seriously.

However, if you rent a house as a foreigner without calling too much attention to yourself, you’ll be able to live unnoticed across most of Spain, and especially outside the big cities.

Of course, no one knows how much longer this will go on. So if this is the case with you, it may be time to move to a South American country with territorial taxation. If you stay in Spain, expect to pay taxes in the long term.

In any case, as I’m sure many of you are wondering, why does a country like Spain allow foreigners to live here without paying taxes (or why did it allow this, depending on the region)? Well, for several reasons.

Firstly, it’s not true that they don’t pay taxes: they pay 21% VAT, as well as special taxes on petrol, tobacco, property, etc.

Secondly, foreigners like these are good for the local economy. They use facilities, go to restaurants, shops, and hotels, buy and rent houses and cars… and they do so all year round, not just during peak season.

Thirdly, it gives the country a competitive edge. If you had the option of living in Portugal, Spain, Greece, Croatia, or Italy (all countries in Europe with similar climates), why would you decide on Spain? Because they don’t make you pay direct taxes.

But returning to the central theme of the article, what interests us here are the legal ways of avoiding taxes in Spain.

The Spanish government has (gradually) introduced more favourable conditions for entrepreneurs, including the reduction of corporate tax from 30% to 25% in 2015. What’s more, newly created companies only pay 15% during the first two years.

Compared to the advantages of other countries in the EU, taxes are still high, but Spain is still an option to bear in mind for entrepreneurs who are attracted to the country’s quality of life.

In fact, few people know about the various loopholes in the Spanish tax system. Thanks to these, it’s possible to live as an entrepreneur in Spain without paying taxes. Unfortunately, this is only feasible in certain special cases, as with the special tax scheme for NHRs (non-habitual residents) in Portugal.

In spite of this, these special cases can be actively granted or even “created”. If you go to live in Spain for a certain amount of time, you may able to take advantage of these cases totally legally, in a similar way to Cristiano Ronaldo (but without his current problems with the Spanish tax office, of course).

The so-called Beckham Law (named after the footballer) constitutes one of the loopholes you can take advantage of, and is the one we’ll focus on today. There are also other legal gaps for entrepreneurs in the ZEC (Canary Islands Special Zone), Ceuta, and Melilla, but we’ll save these for a later article.

The Beckham Law and how Cristiano Ronaldo used it to hardly pay any taxes

As was revealed by the Football Leaks, football stars such as Cristiano Ronaldo have long been able to live in Spain with great tax advantages.

In the case of Ronaldo, it appears that most of his actions were legal, at least according to the media. Only the shell company in the British Virgin Islands can be considered in breach of international tax law in Spain. Of course, that’s only if the company was really in Ronaldo’s name.

As with other professional athletes in Spain, Ronaldo took advantage of a system of tax advantages that Spain has boasted since 2005. These advantages were introduced after the signing of football icon David Beckham.

In his case, the issue didn’t revolve around how much he was paid by Real Madrid, but the income from his brand, which was taxed at 50%.

The big Spanish clubs (and their fans in the political and business spheres) presumably had something to do with the passing of this law.

The Beckham Law allows professional athletes and other “high-performance” workers to a pay a reduced tax rate, and only on domestic revenues. In other words, they don’t pay for income earned outside Spain, under the so-called “Inbound Expat Tax Scheme”.

Have you ever wondered why the best football players come to Spain? Well, now you have your answer. If anyone tries to tell you it’s about quality of life in Spain, or the great history of its clubs, this might change their mind.

In the case of Beckham, as well as that of Ronaldo and many other foreign stars, this special tax scheme promised some incredible tax advantages.

Instead of having to pay the highest tax rate in Spain, they would only pay a flat rate of 24% on income up to €600,000. Only beyond this €600,000 would they have to pay 45%.

In other words, compared to the common implementation of tax brackets, foreign players would save an average €128,645 a year in taxes. It’s true that they could only take advantage of the Beckham Law for 6 years, but that didn’t matter. It’s very rare for a star player to spend longer than this at any club. After 6 years, they would have saved €750,000 in taxes.

For players like Ronaldo, this is hardly a great sum (although for other foreign players with salaries below six figures, it’s another story).

What was much more important than the taxes he saved on his salary, however, was the tax he saved on income earned through international branding rights, which he paid nothing on in Spain for 6 years, completely legally. Under the Beckham Law, all foreign income remains tax-free.

And speaking of licences and branding rights, there’s no shortage of attractive countries to start up a company in, where hardly any taxes are paid on this type of income.

As with many big international corporations, Ronaldo also chose Ireland as the headquarters for the companies that managed his branding rights. Of course, the money was then moved to a shell company in the British Virgin Islands (without notifying the tax office of its existence, which is where his problems began).

Besides paying very few taxes on his income, this strategy allowed Ronaldo to have ready money at his disposal in Spain, all completely legally. He was also permitted to invest his money outside Spain without paying taxes, since neither his interest, dividends, rental income, or trading profits were taxed.

It’s important to remember that the sale of companies and property outside Spain is also tax-free.

And this is where elite athletes stop benefitting from the Beckham Law, paving the way for a different group, who unlike Ronaldo, can continue to profit from this special tax system.

On 1st January 2015, the Royal Decree on which the Beckham law was based excluded athletes from the scheme, meaning this specific group of expat workers could no longer avoid paying tax. Since the 2015 reform, the scheme has become much more attractive for executives of international companies.

The new special system for expat workers (the Inbound Expat Tax Scheme)

The Beckham Law was not designed for footballers alone, not even from 2005 to 2015, when the law was introduced. According to its creators, it was conceived as a ploy to attract well-paid international executives through tax advantages.

Curiously, since 2015, what used to be known as the Beckham Law (which we’ll now refer to as the special tax system for expat workers), has no longer benefitted international sportspeople, whereas it has become much more attractive to foreign entrepreneurs and executives.

Without a doubt, if you’re a foreign businessperson who falls under this scheme, you have a lot to thank Ronaldo for, since it was his attempt at tax optimisation that laid the foundations that now allow entrepreneurs and executives to benefit from the system much more easily.

Until 2015, to be able to make use of this special system for expat workers, you had to meet a few fairly strict conditions:

  • you couldn’t have been a taxpayer in Spain during the previous 10 years
  • you had to have a contract with a Spanish employer or with the permanent establishment of a foreign company in Spain
  • at least 85% of your work had to be carried out on Spanish soil
  • you had to pay taxes on income earned in Spain (at 24% up to €600k, and at 45% from then on)
  • since 2010, you weren’t allowed to earn more than €600,000 a year

The Beckham Law was therefore attractive not just to elite sportspeople (signed by clubs in Spain), but also executives of international companies who were going to Spain to, for example, set up a permanent establishment.

The law began to change from 2010 onwards, meaning that the special system for expat workers no longer covered employees with salaries of over €600,000. Of course, people who started accessing the system before 2010 were able to benefit from its privileges until their maximum six years were up.

Since 2015, sportspeople have no longer been able to apply to this special system, but this has resulted in the simplification of the conditions of entitlement for everyone else, including foreign businesspeople. Of course, unfortunately, the scheme no longer includes tax exemption for income earned abroad. The most important changes are the following:

  • besides employees, company managers can now also benefit from the special scheme, but only if they don’t own over a 25% share in their company and their salary doesn’t derive from its foreign subsidiary in Spain
  • the employer can be established abroad (the presence of a permanent establishment in Spain isn’t compulsory)
  • their physical work doesn’t have to be carried out in Spanish territory
  • foreign salaries have to be declared and taxed in Spain (of course, even if the total sum exceeds €600,000, it will be taxed at 24%)

So what are the practical consequences of these changes for managers of foreign companies who want to start up a subsidiary in Spain?

According to old legislation, beneficiaries of the scheme had to be employed by a Spanish establishment and pay 24% tax on their salaries up to €600k, and 45% from then on.

Under the new system, it’s no longer necessary for expat workers to be employed in Spain; they can also be dispatched to Spain while receiving their whole salary from abroad. Foreign revenue is no longer tax-free, but instead, expat workers will never have to pay more than 24%, even if they earn more than €600k a year. However, the special system still has a six-year limit.

One of the fundamental changes to the law makes it more difficult to avoid taxes on income earned through branding rights, since from 2015, all salaries fall under the same category, regardless of their origin.

Of course, foreign dividends, interest, trading profits, and other foreign income is still exempt from taxes. Dividends earned domestically are still taxed at 19%, 21%, and 23% (from €50k), as has been the case in Spain since 2016.

The important point here is tax-exempt status for profits earned through sales. In other words, if you have a company valued at several million euros, and you sell it while resident in Spain (provided that you’re entitled to the special system), you won’t pay tax on income earned through the sale.

The special system for expat workers in practice

With a little fiscal planning, both business owners and investors can benefit from the tax advantages offered by the special system for expat workers. They simply have to follow the right structure.

Investors and traders can be hired by a foreign company and then be assigned to a working or managerial post in Spain. They would pay 24% tax on the salary they earn, but the income on their investments in the stock market would remain tax-free.

This 24% flat rate can also benefit digital nomads and employees with good salaries who aren’t tied down to any one place, while allowing them to increase their savings through investment and further projects abroad. Of course, it’s important to remember that Spanish CFC rules make it difficult for Spanish residents to create and manage foreign companies (if you have any questions, our consulting and data verification services will be able to answer them).

Entrepreneurs who want to live in Spain can use a well-planned holding structure to reduce their tax burden enormously.

For example, if you owned a German limited company, you could also set up a subsidiary anywhere in the Canary Islands, where you would only pay 4% corporate tax (we’ll discuss this in more depth in a future article on the fiscal opportunities in Spain that also apply to Spaniards).

To be able to take advantage of the special tax system for expat workers, remember that you can’t own over a 24% share in the Canary Islands company, and that it must not pay you a salary (since it’s the permanent establishment of a foreign company).

Since the company in the ZEC (Canary Islands Special Zone) would be 100% owned by the German parent company, you’d have no problem with your share. The company in the ZEC could take advantage of the community directive with respect to profit transfer. This would allow it to transfer the profits from the Canary Islands company to the parent company in Germany, tax-free. Of course, you would then have to pay 5% tax on the dividends received in Germany.

The parent company (which could be owned by a single person) could then transfer the dividends to the owner who is residing in Spain and entitled to the special Spanish tax system. Dividends from abroad, of course, would be exempt from taxes.

But that isn’t all, since in this case, German withholding tax (Abgeltungssteuer) comes into play. Here, this would be at least 15%.

This means that, in turn, the German company would have to be a subsidiary of another parent company within the European Union, and this parent company would need to reside in a country that doesn’t tax the distribution of dividends to natural persons. This could be, for example, Malta, the UK, the Netherlands, or Cyprus.

Since the management of both foreign countries would come under Spanish international tax law (CFC rules), this structure would quickly become more complex than necessary. It would be more advisable to directly create the holding company in a strategic place, like the Netherlands for example, a country that has a low tax burden despite not being considered as such.

Thanks to the privileges enjoyed by holding companies, the Dutch parent company could collect the profits from the ZEC country tax-free, and then transfer them tax-free to the manager of the Spanish ZEC company in the form of dividends. In the end, only 4% corporate tax would have to be paid.

This may sound complicated, but there’s no reason it should be. The complications arise due to the strict Spanish international tax laws. As we discussed in the last post, it’s not easy to manage foreign companies in Spain.

If you simply transferred the profits from a company to another foreign country, Spain would treat it as a domestic company; in other words, you would have to pay Spanish taxes on the dividends.

Instead, if you set up your holding company in a country with a high tax burden, like the Netherlands, the “substance” the company needs is much less. Furthermore, the Spanish subsidiary wouldn’t have problems with international tax law either, because it resides in a country with a double taxation agreement, and is therefore sheltered by the community directive for parent companies within the European Union.

Unfortunately, it’s not easy to start up a company in the Canary Islands. Unlike the situation in Malta and Cyprus, you have to carry out certain investments and create jobs if you want to benefit from tax advantages.

We’ll discuss the conditions and advantages of ZEC companies in more depth in a future article, as well as those of companies in Ceuta and Melilla. Contrary to the conditions of the Beckham Law and the special scheme for expat workers, these tax advantages are also available to Spaniards. You can sign up here to make sure you don’t miss a thing.

In any case, bear in mind that if you really want to optimise your taxes, the simplest and most effective way is to transfer your fiscal residence abroad and become a permanent tourist. You know by now that if you want to be treated well, it’s time to leave.