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Thursday, January 31, 2013

Bank: Kaka, Beckham, and Taxes

BankSteven Bank (UCLA), Kaka, Beckham, and Taxes:

With the transfer window winding down, Kaka, a favored target of both the New York Red Bulls and the Los Angeles Galaxy in MLS, as well as AC Milan in Serie A, appears to be staying put. At the same time, David Beckham, formerly of the Galaxy, has reportedly been dubbed an “MLS Recruitment Officer” and has been trying to persuade English stars such as Frank Lampard, Steven Gerrard, and Ashley Cole to ply their trades in America. Ironically, the difficulty in moving Kaka in part ties back to Beckham. Kaka may still move, but if he doesn’t it could be because of taxes.

When Beckham was signed by Real Madrid, Spain enacted a provision now referred to as the "Beckham Law," which provided a flat 24% rate for foreign residents. The law wasn't specifically enacted for him, but he was one of the first and certainly the most prominent individuals to utilize it after it was enacted in 2005. It permitted non-residents who moved to Spain as a result of a signed labor contract to choose to be taxed under resident rules or non-resident rules for a period of five years, with the non-resident rules carrying the low flat rate instead of the high progressive rate applicable to residents and exempting income earned abroad from Spanish taxation. The goal was to induce high income CEOs to relocate their businesses to Spain. The Beckham Law became a bit of a failure, though, since it primarily attracted footballers to La Liga from the EPL (where the UK had increased its rates on high income individuals around the same time).

For players currently thinking about a move to La Liga in this transfer period, the Beckham Law is no longer available. It was amended in 2010 to limit its effect to those making no more than €600,000 and was finally repealed in 2012. Kaka, though, signed with Real Madrid before 2010 and is still grandfathered into the old tax rate under his existing contract. If he moves or amends his contract, he will no longer enjoy the low flat tax rate. For a club seeking to match his after-tax compensation, the Beckham Law is soccer’s version of a poison pill.

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