Is Cristiano Ronaldo an international tax fraudster, or a victim of over-reaching government officials?
According to Spanish prosecutors, the 32-year-old Real Madrid forward knowingly used shell companies in the British Virgin Islands, Ireland, Colombia and Panama to conceal earnings from the sale and licensing of his image rights. These rights reflect Ronaldo and Real Madrid’s respective shares in how Ronaldo’s name, persona, likeness and other unique characteristics are commercialized. For star players, image rights are of significant value. They also reflect one of the two ways Ronaldo generates revenue for Real Madrid—through his superior play and through his high marketability.
In recent years, Ronaldo and other globally recognizable stars have used “image rights companies” or IRCs. These companies manage a player’s image rights and take receipt of accompanying earnings from the sale and licensing of those rights. For obvious reasons, IRCs are often placed in countries that offer favorable tax treatment. By itself, a player taking advantage of one country’s comparatively favorable tax laws is not illegal; in fact, one might argue that a failure to select the most favorable set of tax laws is akin to throwing money away.
According to Spanish prosecutors, Ronaldo crossed the line from opportunistic tax practices to illegal tax fraud. They charge that Ronaldo refused to provide Spanish tax authorities with complete accountings of earnings associated with his image rights. Prosecutors contend that Ronaldo filed tax returns that underestimated his income and accompanying tax obligation. Further, if prosecutors are correct, Ronaldo’s alleged scheme defrauded the Spanish government of €14.7 million (about $16.5 million) between 2011 and 2014.
This high amount of money is important for purposes of Spanish law. €14.7 million easily exceeds €120,000 ($135,000), the minimum amount necessary under Article 305 of the Spanish Criminal Code to trigger a finding of tax fraud. Spanish law defines criminal tax fraud as “he who by action or omission defrauds the Public Treasury” of at least €120,000. Here's a closer look at Ronaldo's case and what he's potentially facing.
Comparing, contrasting Ronaldo with Messi, Neymar
The accusation against Ronaldo comes on the heels of Spanish authorities’ similar cases against Barcelona stars Lionel Messi and Neymar. Unlike at the 2015 Ballon d'Or, this surely is a stage that Ronaldo would prefer he not share with his rivals.
Last month, the Spanish Supreme Court upheld Messi’s tax fraud conviction, which centered on Messi’s use of accounts in Belize and Uruguay to manage revenue associated with the sale of his image rights. As a legal defense, Messi professed ignorance. He stressed that his father, Jorge Horacio Messi, made all of the related business decisions and thus Messi lacked the knowledge or intent to defraud the Spanish government. Jorge, who was also convicted, supported his son’s portrayal of what took place. Spanish courts didn’t believe them, however, finding that the son knew or had reason to know what his father was doing.
Although Messi received a 21-month jail sentence, he has not been jailed. So long as he stays out of trouble, Messi will remain free. Under Spanish law, sentences of less than 24 months for “first-time” offenders are typically suspended. In a suspended sentence, a defendant is not jailed so long as he or she adheres to probationary restrictions imposed by the court.
For his part, Neymar’s case centers on allegations that he, Barcelona and Santos fraudulently conspired to classify a €40 million payment as a wage when it was connected to his transfer from Santos to FC Barcelona. The classification of that payment is important both because of its tax implications and because under a third-party ownership contract, an investment company, DIS, was owed a percentage on any transfers by Santos of Neymar to other clubs. In February, a Spanish court ruled that Neymar will stand trial.
Ronaldo’s defenses and The Beckham Law
In a statement, Ronaldo’s agency, Gestifute, highlights that Ronaldo’s use of what it calls “off shore structures” is commonplace among soccer players and that his intent has always been to comply with Spanish tax laws. Gestifute’s emphasis on Ronaldo’s intent is meaningful for purposes of the law. Prosecutors are much more likely to prevail if they can prove the defendant knew or had reason to know that his or her handling of taxes was problematic under the law.
Gestifute further highlights that Ronaldo, who joined Real Madrid in 2009 after playing six seasons for Manchester United, qualified for protection under Spain’s Law of Impatriots until the law’s repeal in 2014. This law was better known as the “Beckham Law” in recognition of David Beckham, who played for Real Madrid from 2003 to 2007. By offering favorable tax treatment, the Beckham Law was designed to encourage high-earning persons from other countries to work in Spain and become Spanish residents. The Beckham Law pursued this goal by, among other things, permitting new residents the choice of paying a flat 24% tax rate or a progressive tax rate of up to 43% and by ensuring that new residents’ offshore earnings were exempt from Spanish taxes.
Prosecutors contend that Ronaldo was paid a suspiciously large amount of money—€153 million ($172 million)—for his image rights only days before the Beckham Law was to be revoked from Spanish law in December 2014. Some of that money reflected the sale of Ronaldo’s image rights for a future time period, 2015 to 2020—a period when the Beckham Law would no longer be in effect and tax rates would be higher. Ronaldo’s representatives charge the Ronaldo lawfully paid taxes on all of the money and that the appropriate tax rate is the one in place when the money was paid in 2014.
As of now, there is no indication that Ronaldo will, like Messi, offer a defense based on ignorance. Given the sophistication of players like Messi and Ronaldo and their exposure to various business dealings over the years, claiming obliviousness may be too much of a stretch for courts to believe.
A likely timeline and Ronaldo's outlook
It will likely take several years before Ronaldo’s Spanish tax dispute is resolved. Messi’s case took four years from the initial complaint to the last appeal. A court must still authorize a trial of Ronaldo. If that happens, a trial would not occur for many months. If convicted in a trial, Ronaldo would have opportunities to appeal the conviction to higher courts. Throughout this timeline it would be possible for Ronaldo and Spanish authorities to reach a settlement, thereby ending the case.
Even in a “worst-case” scenario for Ronaldo, in which he is convicted and his appeals fail, he probably would not be jailed. Although the amount of money Ronaldo allegedly defrauded exceeds that defrauded by Messi, any jail sentence would likely be to a term of less than 24 months. Since Ronaldo would be a first-time offender under Spanish law, such a sentence would—as explained above in reference to Messi—be suspended and not served unless Ronaldo fails to comply with the terms of the suspended sentence.
Still, a conviction could harm Ronaldo’s reputation and potentially make him vulnerable to losing lucrative endorsement deals. Last year, Ronaldo signed a lifetime endorsement deal with Nike that is reportedly worth about $1 billion. Nike, like other major apparel companies, normally includes “morals clauses” in its endorsement deals. These clauses permit the company to suspend payments or terminate the contract altogether when a player’s conduct causes public controversy.
Chances are that Nike will stand by Ronaldo no matter the outcome of the tax case. He is an extremely popular and recognizable player. Plus, the case against Ronaldo does not contain the kind of disturbing facts that are likely to trigger outrage. Much of the case is about the timing of payments in relationship to an imminent change in Spanish tax law—a serious issue, to be sure, but not one that will likely rile up the public or damage Ronaldo’s marketability as an elite soccer player.
It is also worth noting that Messi has not lost endorsement deals despite the fact that he was convicted of tax fraud. Just the opposite, actually, Adidas in February renewed Messi’s endorsement deal and reportedly both increased the deal’s monetary value and expanded its duration to a lifetime arrangement. Those are positive signs for Ronaldo should he, like Messi, lose his case. But in the meantime, Ronaldo has a legal fight to wage.
Michael McCann is SI’s legal analyst. He is also an attorney and a tenured law professor at the University of New Hampshire School of Law.