Russians are increasingly wary, and even Spain, so beloved by our compatriots, is ceasing to be a convenient place to minimize taxes
In 2016 Lionel Messi of Barcelona was found guilty of failure to pay taxes for the years 2007-2009 with a € 4.1 million fine, and Barcelona striker Neymar was found guilty of tax evasion on a 2013 episode of the transfer from the Brazilian club Santos with a € 10 million fine. A year later, Real Madrid’s top scorer, Cristiano Ronaldo, was found guilty of episodes of tax offenses for 2011-2014, with additional taxes and fines of €14.7 million, with a two-year suspended sentence. Finally, in 2018, pop star Shakira was found guilty of tax offenses for living in Catalonia from 2012-2014 and failing to pay taxes on her global income for the period, with a corresponding €18 million fine.
This series of scandals associated with the prosecution of the world’s big soccer and pop stars has forced many wealthy Russians with their favorite area of residence in southern Spain in Andalusia to take a slightly different look at the problem of the “tax residency trap” of this Mediterranean country. After all, if with such implacable systematicness and consistency the Spanish fiscal services bring to justice world-famous and legendary persons with a rather powerful resource of tax and legal protection, what can one expect from a former compatriot who has left his native land in the recent past and is carefree on the sunny coast of Costa del Sol with its luxurious resorts in the Marbella area?
In addition to a sufficiently high and progressive taxation scale for the Mediterranean countries, a feature of the tax system in Spain is the global principle of taxation of all personal income. The tax rate is above the average for the south of Europe (the maximum rate is 45% when the annual income threshold of €60,000 is exceeded). Spain is one of the few countries where wealth tax is still levied (the maximum rate is 2.5% on income above €10.7 million). Spain does not recognize dual citizenship, and unlike neighboring Portugal, there is no special tax regime for non-residents permanently residing in the country.
The situation in Spain
The global financial crisis of 2008 had the most devastating effect on the southern European countries with the largest economies – Italy and Spain. During Spain’s rather prolonged recession in the post-crisis period until 2014, when the economy showed negative growth rates for five years, public debt and unemployment in Spain reached their historic highs.
The average unemployment rate for the period 2010-2016 was 22.7%, and public debt to GDP came close to 100%, which added Spain to the “group of leaders” of the Mediterranean countries on the critical indicator of the debt burden on the budget along with Greece (179%), Italy (132%), Portugal (126%).
It is obvious that under the conditions of shrinking economy and growing state budget deficit, the concept of “ransacking” foreign “oligarchs” looks doubly advantageous taking into account the growing internal social contradictions inside Spain.
The model of social and fiscal maneuvering (active inclusion of wealthy non-residents into the orbit of interest of fiscal services) allows the realization of several interrelated state objectives in the largest country in the Pyrenees. This tax activism is perfectly aligned with the actively implemented global concept under the auspices of the OECD (tax compliance and tax transparency). The concept is technically easy to implement through the automatic exchange of information in a unified tabular standard CRS (Common Reporting Standard).
The idea of “unbundling” rich non-residents who regularly reside in Spain, including wealthy Russians, as a tactical measure of the state has a number of obvious advantages, especially in the context of the strong indebtedness of the Spanish economy. It makes it possible to “patch up” budgetary “holes” without resorting to such unpopular with the population measures as an increase in the tax burden, fulfills the function of a social “lightning rod” – revolutionary ideas of expropriation, equality and justice have always found enthusiastic support and approval among the general population of any country, improves the quality of tax administration.
Showing cases should work perfectly for all actively doubting categories of taxpayers (both wealthy non-residents and domestic taxpayers), as well as to stimulate domestic fiscal discipline of traditional (local) taxpayers.
Of course, any negative motivation in the context of long-term policy has a downside – excessive fiscal pressure on non-residents permanently residing in the territory. This pressure obviously leads to a deterioration of the investment environment in the country with such side-effects for the economy as capital flight with stagnation of the traditionally sought-after and liquid real estate market in Spain.
It is easy to imagine absolutely logical and healthy conclusions of a wealthy compatriot, who by virtue of a remarkable combination of natural and climatic conditions with a broad and diverse Russian-speaking community chose the south of Spain in the hope of a cloudless retirement: I paid 20% income tax in Russia, 13% personal income tax on the payment of dividends, now, it would seem, the capital formed years of hard work should give me a cloudless life.
But the inexorable fiscal services of Spain begin a systematic “eating” of savings. With the Eurozone economy growing anemically, with rates in conservative savings instruments bordering on negative, levying a wealth tax (up to 2.5%), as opposed to a traditional income tax, leads to an absolute destruction of the value of capital.
A legitimate question arises: what to do? Use tax residences that offer comfortable and competitive conditions of fiscal burden on capital (low income tax rates, lump-sum tax system, preferential legal regimes for legal entities, family foundations, trusts, foundations, etc.) for residences. Plan travel and accommodation taking into account the peculiarities and specifics of the tax and migration laws of specific countries that are chosen as a comfortable place to live. Do not forget about the actively and rapidly developing industry of asset source compliance, which in the light of tax transparency acquires a completely different weight and significance.