According to the Spanish Constitution, in its article 18.1, the image rights are recognised alongside other personal rights, such as the honor and privacy. The purpose of the constitutional protection is to disallow illegal third party infringements, in the context of their moral scope .

As regards the economic scope of the image rights, its treatment is included in depth in the Royal Decree 1006/1085, dealing with the special labour relationship of the professional sportspersons. It clearly states there is a distinction between the image rights’ income obtained by employed sportspersons, which are considered to be salary, in accordance with the Collective Labor Agreement and the particular contract, as opposed to those arising from commercial relationships, between the sportsperson and companies with advertising or sponsorship purposes. Bottom line, the force of attraction from a labour viewpoint is of exceptional character, by extending its effects only and limited to those image rights licenses granted by the sportsperson to his/her employer.

It is also worth noting that the particular Collective Labor Agreement of Spanish professional football confirms the above conclusion and even goes further3 . It explicitly states that image rights income only can be categorised as salary, insofar as two qualifying conditions are met. On the one hand, the exploitation of the image rights must be carried out by the sportsperson himself. On the other hand, the direct exploitation must be concluded between the football player and the Club hiring him/her. Accordingly, those scenarios whereby the football player’s image rights are licensed to a third party, prior to being granted to the Club, will not fall within the salary classification. Again, the force of attraction from labour viewpoint relies upon certain thresholds about by who and to whom the image rights are licensed.

Tax treatment

Within this context, the classification from a tax perspective must fit, by taking into consideration the legal characterisation. In this regard, from the Spanish Personal Income Tax viewpoint, the characterisation of the income arising from the exploitation of image rights depends on whether the income stream is directly obtained by the holder, versus income obtained by third parties. If the latter, as a general rule it is considered to be passive income. The express referral within the Spanish Personal Income Tax (hereinafter PITA) is of income from movable assets. Thus, they are taxed at a limited progressive scale ranging from 19% to 23% . At the time of payment, a 24% withholding tax applicable on gross income must be deducted . However, said qualification of passive income gives preference to business/professional income, when it is obtained within the course of a professional/business activity of the image right´s holder .

Accordingly, both streams of income are subject to tax, according to the general progressive scale ranging from 19% to 43.5%. Conversely, when the income is directly exploited and obtained by the sportsperson, the characterization may be, in its turn, twofold. Income from professional activity8 , as earlier explained or when it takes place within the context of a working relationship, may be subject to the regime applicable for employment income which is further analyzed.

Tailored tax regime: Image rights attributed to employed sportspersons

There exists a Spanish safe harbour tax rule, whereby image rights payments made by the employer to its employed Spanish tax resident sportsperson9 exceeding 15% from the total remuneration will be caught and classified under attributed income. As a result, the progressive personal income tax rate scale, from 15% up to 43,5% becomes applicable.

The key point resides in determining the threshold of 15%, regardless of whether the image rights payment is performed to the employee or to any other third person. This rule reflects the common position reached by the Spanish Professional Football League and Spanish Ministry of Finance, back in 1996. During the previous years to that date, football players took advantage of the income tax characterisation, when third parties were exploiting image rights, by granting the corresponding licenses to Spanish football clubs .

However, Spanish tax authorities, alongside the Courts adopted a straightforward approach, whereby image rights where considered to be intransferrable, based on Spanish civil law, and, as a result, re-characterised them as employment income for income tax purposes.

In this sense, the tax burden was shifted to the Spanish football clubs by not imposing withholding taxes in accordance with the mentioned re-characterisation. As a consequence, most of them were lead to the edge of bankruptcy. Within this context, the above mentioned 15% safe harbour tax rule was implemented by the Spanish legislative, in order to combat the potential abuse of using interposed companies which, in fact, where loan-out companies owned by the football players .

Therefore, the qualification of income arising from image rights within a labour underlying relationship is allowed, but up to 15% of the overall employee remuneration. In addition, when said 15% threshold is exceeded, that tainted income is not classified as work income since it is considered to be attributed income. Nevertheless, the tax consequences of both qualifications are the same, in terms of applying the progressive tax rate to personal income, up to 43.5%. The key point of this tailored tax regime is to grant the Spanish tax authorities with an anti-abuse tax tool, helping to overcome the income classification under passive income, insofar as the above conditions are met.

However, it does not take into account that said domestic anti-avoidance tax measure goes beyond previously agreed boundaries, when applying double tax treaties signed by Spain or the European Union Fundamental Freedoms . When tax treaty context is tackled, the image rights characterisation differs to the classification of the Spanish Non-Resident Income Tax Act (hereinafter NRITA) mirroring the one explained in previous paragraphs for Spanish tax resident employed sportspersons. The latter becomes applicable when a non-resident tax payer receives income in exchange for licensing his image rights, but the country where he is tax resident does not signed a tax treaty to avoid double taxation.

In accordance with Spanish Courts’ sentences when dealing with double tax treaties scenarios, they have given preference to including income within Article 17 of the OECD Model (entertainers and sportspersons income), in those cases where income arises from image rights linked to entertainers or sportspersons, as opposed to Article 7 OECD Model (business/professional income) or Article 12 (royalty income).

Spanish tax and Courts practice

End of 15% safe harbour The application of the above mentioned 15% safe-harbour was the target of a massive tax audit plan, by Spanish tax authorities in recent years, including football players, among other entertainers. To this end, the Spanish transfer pricing tax rules are used as the yardstick to challenge the use of Spanish companies with regard to 15% image right´s allowed income. In particular, Spanish tax auditors are considering that in order to license the image rights from a company to a club, the rights must be previously acquired by the company from the employed sportsperson. The point is that, in most scenarios, said employed sportsperson is a shareholder qualifying as a related party for transfer pricing purposes. As a consequence, the transactions must be valued on an arms length basis between independent parties.

The criteria used by the Spanish tax authorities consists of using the ex-post results of the company exploiting the image rights in order to determine the previous transfer value from the employed sportsperson to said company. Accordingly, the transfer benefit is considered to qualify as professional income, subject to the progressive personal income tax rates. Therefore, a “de facto” non-application of the 15% safe harbour related to taxation of image right´s income is taking place, since football players are not willing to bear tax audits and reputational consequences. They would rather negotiate their salaries on a net basis, by transferring tax burden arising from image rights’ income to Spanish football clubs.

Use of image rights companies located in low tax jurisdictions

The approach of the tax authorities, as well as the Spanish Criminal Courts, differs when tackling companies which exploit image rights but are tax resident in countries with low tax regimes and benefiting from lack of transparency. The most relevant sentence in this regard was issued by Barcelona´s Province Court in July 15, 2016. Image rights contracts between a football player and companies located in low tax jurisdictions were considered to be a sham, due to the reduced price of the image rights license, taking into account the actual value of them at that time, as well as the high expectations of future income from exploitation of the image rights. The taxation of the image rights becomes highly difficult when tax audits involving low tax regimes are intertwined with the application of the so-called Beckham Law. Apart from determining the value of the image rights transferred to a third company, the split between those arising from Spanish territory versus those from foreign countries must be ascertained .

Conclusion

The above analysis leads to the conclusion that, over the past decades, the Spanish image rights tax regime has been evolving commensurate to the business development. However, the degree of uncertainty arising from the Spanish tax authorities approach alongside the abusive implementation of aggressive tax planning by top football players poses an actual situation with no clear-cut outcome. There are certain issues, such as the required substance of the image rights companies, as well as the valuation of the image rights at the time of the transfer and subsequently, which need to be addressed, from a common viewpoint and at supranational level.

La entrada Image Rights: Spanish Taxation se publicó primero en Durá Tax&Legal.

Below are summarized the Spanish tax consequences to be taken into account, even though each case should be studied individually, to ascertain the corresponding implications.

1. ADQUISITION

Indirect Taxation. The purchase of new properties is subject to 10% VAT alongside stamp duty tax. The stamp duty applicable is ranging between 0.5% and 2%, depending on the Autonomous Region where the property is located.

On the other hand, in case of resale of properties, the purchase is subject to Transfer Tax at a rate generally ranging from 6% to 10%, again depending on where the property is located. However, when the property is purchased by a company/entrepreneur and the seller is registered for VAT purposes, the buyer may waive the VAT exemption and therefore, the purchase is subject to stamp duty, and VAT through reverse charge mechanism, by entailing the corresponding VAT deduction. In other words, the transaction is neutral for VAT purposes.

In order to face tax avoidance transactions, the Spanish legislative included an anti-abusive clause, whereby the explained indirect taxation also applies, in case of transfer of shares of companies with real estate properties representing more than 50% of its assets.

1. MAINTENANCE

Local Property Tax. Annually, the local property tax must be paid. The property tax is calculated taking into account the cadastral value, determined by local authorities and generally lower than the market value. Then, to said cadastral value a percentage (between 0,4% and 1,3%) determined by the local town is applied.

Wealth Tax. It applies annually at a progressive scale ranging from 0,20% to 2,75% of the net value of the assets located in Spain. Each Autonomous Region has legislated differently in this regard. For example, Wealth Tax is not applicable in Madrid. EU tax residents apply the legislation of the Autonomous region where the property is located, whilst non-EU tax residents apply general wealth tax rules implemented by the Spanish tax authorities, with very reduced allowances.

Note that there is a general exemption of the first 700.000€ of net wealth (500.000€ in certain regions such as Cataluña). The first 300.00€ of the habitual abode are also exempt.

The above explained wealth tax might also be applicable in case of properties held by Spanish or foreign corporate structures, as Spanish properties might be subject to wealth tax when directly or indirectly held, according to the far reaching interpretation of Double Tax Treaties by Spanish tax authorities.

Inheritance Tax. When heirs receive a Spanish property, they are subject to Spanish inheritance tax at a progressive scale ranging up to 34% (36,5% in some regions). The final outcome depends on special rules adopted by the Autonomous Region legislation to be applied, such as exemptions, surcharged based on the degree of kinship with the deceased, disabilities of heirs, etc.

Income Tax. Income arising from the exploitation of properties is subject to Non-Resident Income Tax. The tax rate applicable to non EU residents is 24%, said rate is reduced to 19% in case of EU tax residents, as well as EEA tax residents.

In the latter scenario, expenses directly related to the exploitation of the property are deductible, and therefore, the final taxation is on net income. When the property is held by a non-resident company, the same rules apply, as opposed to Spanish Companies being subject to 25% tax rate.

If the Spanish property is not being exploited, the above explained rates apply to a presumed obtained income via imputation applicable to a tax base amounting to 2% of the cadastral value (1,1% in some specific scenarios). Said imputation does not apply in case of properties held by companies, regardless of their tax residency status.

Special levy on real estate properties of non-resident entities: entities (owning Spanish properties) tax resident in a jurisdiction qualifying as a tax heaven for Spanish tax purposes, are subject to a special levy on real state of 3% of the cadastral value of the property.

III. SALE

Tax on the Increase in Value of the Land. In case of sale of the property another cumulative and almost unknown tax is levied at municipal level.  It taxes the increases of the sold land, it is calculated taking into account the number of years the property has been held by the seller and the cadastral value, among others. It can represent a relevant value when selling the property.

Said tax also applies in case of direct sale of the property by a company. Conversely, it does not apply in case of sale of shares of the Company.

Capital Gains Tax. The Capital Gains arising from the sale of the property are subject to tax at a rate of 19%. In order to guarantee said payment, the Spanish buyer of the property must withhold 3% of the overall price, and pay it on behalf of the seller to the Tax authorities.  If finally, the capital gain tax to be paid is lower than the mentioned 3% withheld, the taxpayer is entitled to apply for refund. In order to face avoidance structures, said taxation is also applicable to transfer of shares belonging to companies mainly composed of Spanish real estate.

Taking into account the explained implications, it is important to carefully analyze and plan each acquisition, in order to optimize from the taxable point of view the purchase and maintenance of Spanish properties.

La entrada Spanish Real Estate: Non-Resident Tax Implications se publicó primero en Durá Tax&Legal.

In September 28th 2013 was published in the Official Gazette a special Law tailored for the internationalization of the companies, as well as to support the entrepreneurs.

In this regard, particular measures have been enacted for the purposes of attracting foreign investors. In particular, a Residency Authorization will be granted to them, when complying with any of the below conditions:

• Investment of at least EUR 2,000,000 in Spanish public debt or
• Investment amounting to at least EUR 1,000,000 in shares or participations of Spanish companies, regardless of being traded in the stock market, or
• Acquisition of real estate properties valued from EUR 500,000 onwards; or
• Business investments involving new employments within the Spanish territory or R&D relevant developments.

One of the key issues included in this new law resides in granting said Authorization to investors structuring the investment acquisition through a company, insofar it is not located in a tax haven country and the foreign applicant owns the majority of the voting rights, as well as he/she has the right to appoint or remove the company board of directors.

Since July 30th 2015, the Investors may directly request the Authorization without the prior request of the entrance Visa. Said change was made taking into account the Investors’ needs, as most of the Investors personally come to Spain to implement the investment, and according to the previous regulation, needed to go back to their countries only to request the corresponding Visa. That’s the main reason why, nowadays, as long as the Investor is legally in Spain, he/she could directly request the Authorization avoiding the previous request of the Visa.

Said Authorization allowing working and living in Spain is granted initially for two years but could be renewed for 5 years periods, as long as the Investor keeps the investments.

Therefore, Spain, mirroring other EU countries has implemented a very attractive policy in order to enhance foreign investors to purchase Spanish real estate. This legal measure mixed with the reduced market price of the Spanish properties, as well as the healthy standards of living in Spain is expected to foster the attraction of capitals and investments into the Spanish territory.

La entrada Spanish Residency Authorisation for Investors se publicó primero en Durá Tax&Legal.

It did become relevant in the international tax arena, where famous sportspeople could benefit from it. In fact, the tax law regulating said tax regime took the name of “Beckham Law”, for obvious reasons. Today such a special tax regime is no longer applicable to professional sportspeople. Nevertheless, it still applies to certain qualifying impatriates, as the main purpose of said special regime consists of attracting valuable human capital from international multinationals.

In order to qualify for said beneficial tax regime, the requirements are as follows:

-The inbound resident should not have been Spanish tax resident, during a 10 year period prior to his/her relocation to Spain.

-The relocation into Spanish territory must be caused for an employment contract or by acquiring the status of company’s director, not owning more than 25% of the shares.

-No income obtained can qualify as obtained through a Spanish permanent establishment.

The temporary status of said elective impatriate regime limits its application to the year in which the impatriate becomes Spanish resident, as well as the following five years. Therefore, when accurate planning is carried out, it allows for the first year of arrival not wasted by not spending more than 183 days in the Spanish territory.

When the impatriate regime becomes applicable, the taxpayer is subject to tax. However, it is worth noting that limited to Spanish sourced income, in the context of Spanish Inheritance Tax, Wealth Tax and Income Tax. Exceptionally, all employment income is considered to be obtained in Spain and regarded as Spanish sourced. Such employment income is subject to 24% of gross income, and 45% when exceeding EUR 600,000. Thus, said regime is also applicable even if the EUR 600,000 threshold is exceeded.

Under said special regime, the taxation of dividends, interests and capital gains is established at 19% as a general rule, 21% when exceeding EUR 6,000 and up to EUR 24,000, and 23% when exceeding such amount.

In summary, the impatriate tax regime would be extremely tax advantageous for inbound residents moving into Spain. They would only be subject to tax on their Spanish sourced dividends, interests and capital gains, and otherwise would be taxed on their annual worldwide income that is left aside for tax authorities’ control, including strict reporting obligations of foreign income or wealth.

La entrada Impatriate Tax Regime se publicó primero en Durá Tax&Legal.