Colombian pop singer Shakira recently became the focus of the Spanish tax authorities in a tax fraud case with a maximum penalty of €23.7 million and up to eight years in prison. The case demonstrates the key tax risks for internationally mobile Ultra-High Net Worth individuals who might consider themselves ‘nomads’ for tax purposes.
In the case, Spanish prosecutors argued Shakira had been a tax resident in Spain between 2012 and 2014, while visiting her then-boyfriend and former Barcelona player Gerard Piqué. During the period the pop star was, on paper, tax resident in The Bahamas where the tax regime is more favourable than Spain. Shakira’s defence team portrayed the singer as a ‘nomad’ since she was travelling extensively on tour and co-judging The Voice in the US. Shakira maintained that at no point had she breached the 183-day threshold for Spanish tax residence, nevertheless she agreed to a deal with the Spanish tax authorities to pay a €7.3 million fine and serve a three-year suspended prison sentence to spare herself and her family the challenges of a lengthy court trial and the ensuing media attention.
This is not the first time the Spanish tax authorities have made headlines across the world: internationally renowned football players Lionel Messi and Cristiano Ronaldo have both fallen foul of the somewhat nebulous tax residence rules in Spain and accepted heavy fines. Spain isn’t the only jurisdiction coming down hard on Ultra-High Net Worth nomads: in the UK, the business magnate Alan Sugar was in recent years pursued aggressively by HMRC, having been tripped up by the UK’s residency rules. Meanwhile in the USA, Wesley Snipes and Nicholas Cage have both been hit with penalties by the IRS for incorrect tax reporting.
The taxation of High-Net-Worth ‘nomads’
These cases demonstrate the need for proper tax advice for internationally mobile High and Ultra-High Net Worth clients who spend time in multiple jurisdictions or between multiple homes. As the rules differ in each jurisdiction, it is important that these individuals take proper advice for every country in which they spend time living or working.
The UK, for instance, has a well-defined Statutory Residence Test, which sets out the thresholds for UK tax residence in any given tax year. These rules take into account multiple factors to determine the number of days one can spend in the UK before becoming UK tax resident – including whether the individual works in the UK, has a home in the UK or has family in the UK. By contrast, the USA taxes all US citizens and green card holders as US tax residents regardless of where they are living, and individuals can become tax resident in France if they have their family home or centre of economic interests there.
Due to the inconsistencies in the tax residence regimes between different jurisdictions, it is possible for an individual to become liable to tax on worldwide income and gains in multiple countries at the same time – for instance, a US citizen, who lives and works in the UK and has their family home in France could potentially become tax resident in all three jurisdictions. This will result in a requirement to file tax returns and potentially pay tax in multiple jurisdictions. In this scenario it may be necessary for the taxpayer to consider the application of any double tax treaties that might be relevant, in order to obtain relief from double taxation. Some countries, such as Germany, can continue to tax you as if you were a resident for a number of years after you have relocated away unless certain definitive steps are taken.
Common Pitfalls
Each individual’s circumstances will be unique and require tailored advice, however we have included below some of the most common pitfalls that our clients experience:
- The 183-day threshold – many individuals take the view that they are safe from being taxed in a country if they spend less than 183 days there. However, in many jurisdictions the rules are not so simple and additional factors must be taken into account, such as the family, accommodation and work connections that the taxpayer has in the jurisdiction, as well as how much presence they have had there in previous years.
- Some jurisdictions use different definitions for day-counting purposes. For instance, the UK uses the ‘midnight rule’ which, broadly speaking, means that a day will count as being spent in the UK if the taxpayer is present in the country at midnight at the end of that day. By comparison, in the USA, the IRS will consider an individual to have spent a day in the USA if he has spent any amount of time in the USA on that day.
- Similarly, different countries have different start and end dates for their tax years, so it is important to track an individual’s tax residence in each jurisdiction according to the correct reference period. The tax year in the UK runs from 6 April in one year to 5 April in the next year, but the tax year in the USA, Spain and Italy runs concurrent with the calendar year (from 1 January to 31 December).
As seen in Shakira’s tax case in Spain, tax authorities can be ruthless in imposing financial penalties (and even prison sentences) for individuals who fail to track their residency position carefully. Therefore it is crucial that internationally mobile ‘nomads’ take proper legal advice on their tax exposure for each jurisdiction they spend time in.
Our recommendations
Even though the rules differ from country to country and each individual’s tax position is case specific – there are certain recommendations that every ‘nomad’ should be alive to:
- Record-keeping: it is essential that any individual spending a significant amount of time in multiple jurisdictions should maintain detailed records of where they are living and working, with documentary evidence to support this (including flight receipts and boarding passes).
- Timesheets: where individuals are working in multiple jurisdictions (including business trips abroad and attending work-related events/conferences), they should keep accurate timesheets showing exactly what kind of work was carried out on each day and for long.
- Proper advice: if the high-profile tax cases of Shakira, Wesley Snipes and Cristiano Ronaldo have taught us anything, it is evident that there is no substitute for obtaining proper legal advice for each jurisdiction in which the individual has a nexus.
First published by eprivateclient on 27th February 2024
For further information, please contact:
Phineas Hirsch, Withersworldwide
phineas.hirsch@withersworldwide.com
