How Are Cristiano Ronaldo and Lionel Messi Staying out of Jail?

Cristiano Ronaldo and Lionel Messi are not just united by their record-breaking brilliance on the football field. They are also now linked by something far less palatable: public investigations into their tax affairs.

Ronaldo appeared in a Spanish court on Monday to answer questions regarding an accusation by government prosecutors that he had been involved in a €14.7 million tax fraud. Last year, Messi and his father were convicted of defrauding Spain of €4.1 million in taxes, for which he was fined a total of €2.25 million, in addition to an earlier corrective repayment he voluntarily paid.

The two superstars are the highest-profile figures in what has become an ongoing drama in modern football. In Spain, Manchester United manager Jose Mourinho stands accused of committing a €3.3 million tax fraud. Last year, Barcelona midfielder Javier Mascherano received a one-year suspended prison sentence for tax fraud. And earlier this year, a judge ordered Neymar to stand trial over alleged corruption in his move from Santos to Barcelona in 2013. Prosecutors recommended he receive a two-year prison sentence and a €10 million fine.

Why have these cases become so prevalent? And why so much in Spain? As with most things in life, you need to follow the money.

In 1930, Babe Ruth, the iconic New York Yankees player, signed a new contract worth $80,000 a year—more than Herbert Hoover was earning as President of the United States.

"Why not?" Ruth said. "I had a better year than he did."

Sporting salaries that seem obscene are nothing new. But the income of today's elite players is incomparable to previous generations.

Ronaldo banked $93 million over the past 12 months to retain the crown of the world’s highest-paid athlete for the second straight year. Messi came in third, with a $53m salary plus $27m in endorsements.

Published financial records from Ronaldo's management company showed that he declared an income of more than £190 million in 2015, according to Fred Nathan of the Sun. With such unfathomable sums come questions of how to manage the cash — questions that top footballers enlist their representatives to answer. Here, the problems begin.

Elite modern footballers are not paid solely to produce on the field. Rather, they are brands that transcend national borders. In 2015, roughly 90 percent of Ronaldo's assets were held outside of Spain, according to Rik Sharma of the Irish Mirror.

The multinational appeal of footballers is reflected in the growth of image rights. Essentially, clubs and sponsors pay for the right to use a player's image—including everything from his voice to his photograph to his name—in marketing campaigns. Complicating matters is that image-rights income in Spain is taxed at around 20 percent, while income is taxed at around 43 percent (with slight regional variations). Though some stars may perform in Spain, the fact that their image rights cross borders has drawn increased attention from the law.

In the cases of Ronaldo and Mourinho, the sale of their image rights through offshore companies led to accusations that they each did so to avoid taxes on those sales.

Messi and his father have already been found guilty of three counts of tax fraud between 2007 and '09 for essentially using fictitious companies to avoid Spanish taxes on income from companies that used Messi's image. Revenues from Messi's image rights were transferred from Switzerland and the U.K. to Belize and Uruguay, which did not tax companies' foreign income and also allowed the beneficiary's identity to remain secret.

Tax issues may be more complicated than ever for elite athletes, as are the risks for those who seek to manage their tax burdens.

"Lots of agents are likely to advise their players in the most cost-efficient ways of paying taxes, but there's a fine line between tax efficiency and tax avoidance," explains Anna Semens, co-author of the book Sports Agents and Labour Markets. "In many cases, players and agents probably don't know that they're doing anything wrong, but while ignorance is bliss, incompetence isn't a defence."

Under Spanish law, every citizen is ultimately responsible for their own tax arrangements, as is the norm throughout the world. Messi has learned as much.

"I only worried about playing football," Messi said at his trial last year.

His defence—essentially that all of his financial matters were in the hands of his father—was inadequate. When Spain's Supreme Court upheld the verdict against Messi and his father earlier this year, it said, "It defies logic to concede that someone who earns a large income does not know that he must pay taxes on it."

In many ways, the law has been slow to adjust to the reality of the complex tax arrangements of modern elite footballers, who can derive the vast majority of their incomes from image rights.

"Rules in this area have been a bit opaque in the past and can be open to interpretation," Semens says. "There's been debate around what an image right actually is and concern that it's just a way of avoiding paying tax. Typically, a club licenses a player's image rights from their company; the company then pays tax where it's registered. If it's in a low-tax area, that makes for a significant saving."

To be fair, there might be no 'correct' amount of tax for these footballers to pay in Spain. "There are not clear rules to differentiate between Spanish and foreign income," explains Silvia Paternain, a partner at Freshfields law firm in Spain.

Such tax cases are not unique to Spain, but they have become especially common there. In part, that's a reflection of La Liga's unmatched array of elite football talent and their unique earning opportunities. But it also stems from the nation's economic turmoil and how badly Spain needs the cash. The government's debt is more than 100 percent of its gross domestic product, according to Maria Ortega of Express, compared to less than 40 percent before the economic crash in 2008.        

Since the crash, government and public opinion toward the salaries earned by top footballers has changed, a shift embodied by the abolition of the Beckham Law in 2010. Introduced in 2005 as a tax exemption to encourage top foreign talent to play in Spain, the law enabled those players to sign up to a six-year-long tax ceiling of 24 percent per year—about half of what Spaniards on six-figure-plus incomes would pay. By 2010, though, the government's need to locate new sources of revenue prompted a repeal of the provision.

That isn't the only reason. There might be a symbolic element to the crackdown as well.

"Tax authorities target footballers as high profile subjects for a prosecution to show that no one is above their reach and that they are serious about cracking down on tax schemes," explains Tessa Lorimer, a tax disputes lawyer at Withers Worldwide. "Footballers don't come any more high-profile than Ronaldo and Messi, which is why they make such effective examples."

In Spain, some feel there may be another dynamic at work, too: the need to give the impression of political balance between Real Madrid and Barcelona.

"It looks like the Spanish public prosecutor felt they had to go after Real Madrid guys because they had been after Messi," Paternain says.

After already giving one Barcelona player, Mascherano, a suspended prison sentence last year, and investigating the transfer of Neymar, the public prosecutors may have believed that investigating those involved at Real Madrid was necessary to maintain their image as impartial, to keep public opinion even and avoid being attacked for prosecuting one club.

Tax insiders believe that the case against Messi was far stronger than the accusations Ronaldo faces.

Messi's actions were "really horrible," says one industry expert, speaking anonymously. Essentially, Messi was found guilty of assigning his full image rights to a chain of companies based in tax havens like Belize while only receiving $50,000 in compensation—a minuscule sum that bore no relation to the true worth of the rights. Spanish courts concluded that tax fraud existed because Messi intentionally concealed €10.1 million earned in image rights through a complex and simulated contractual structure. The Spanish Supreme Court upheld the ruling.

The case against Ronaldo is based on the accusation that he routed image-rights income through a network of companies to avoid paying the full taxes he owed from 2011 to 2014, thereby committing a tax fraud worth €14.7 million. Ronaldo is accused of using a company in the Virgin Islands to defraud the government. In May, Ronaldo adjusted his tax declarations and paid an extra €6 million for 2014. In court on July 31, at a hearing to determine whether he would stand trial, Ronaldo reportedly declared, "I'm only here today because my name is Cristiano Ronaldo," according to Dermot Corrigan of ESPN FC.

The case against Mourinho, who is accused of committing tax fraud of €3.3 million in 2011/12, is broadly similar. But Paternain views the two cases as very different from that of Messi.

Unlike Ronaldo or Mourinho, Messi has always been a tax resident in Spain, as he moved to the country at the age of 13. Second, Paternain believes that Ronaldo and Mourinho's representatives conducted a genuine intellectual assessment of the value of their clients' image rights generated in Spain and abroad. In Ronaldo's case, his lawyers argue that he paid tax to the treasury on 20 percent of his total image rights—double the percentage of his image rights that are earned in the country. Ronaldo's representatives also can argue that he did try to rectify the situation with his extra payment in 2014 before he was accused of tax fraud.

"With this action, it looks clear Ronaldo did not try to hide any incomes and wanted to comply with Hacienda's rules, which is one of the keys to his legal defence," says Alexander Guede, a Spanish legal counsel and business consultant.

Mourinho, meanwhile, reportedly had settled a prior claim about his taxes while coaching Real Madrid before a new claim was filed, according to Al Jazeera. While Spanish authorities said the settlement was based on incorrect information, Paternain asks, "How is it possible that you have a criminal case when the Spanish authorities have settled?"

That brings us to the Neymar case, which is fundamentally different but no less complicated. DIS, a Brazilian investment company, owned 40 percent of Neymar's sporting rights before his transfer to Barcelona from Santos in 2013. It says that it was denied its proper share because the true transfer fee was concealed. Last year, Barcelona signed an extrajudicial settlement with the prosecutor's office to pay a €5.5 million fine and admitted to a lack of tax planning.

Barcelona allegedly paid N&N (Neymar's family company) to sign him, according to Alex Duff and Taniq Panja of the Guardian. Spanish authorities say Barcelona listed both payments as a provision of services of N&N rather than as part of Neymar's salary as a footballer. By the same logic, they claim Neymar committed tax fraud in not recording the income as a salary taxable at the appropriate rate.

For all of these allegations—and the claims already proven against Messi—none of these players face prison time. Under Spanish law, judgments for non-violent crimes with a sentence of 24 months or fewer against those with no prior criminal convictions do not result in jail time. Messi received only a 21-month suspended sentence (since reduced to a fine). If Ronaldo is put on trial and found guilty, there exist avenues, according to Kieran Canning of the Independent—paying back more of the taxes he is accused of avoiding, sentencing, reaching a deal with prosecutors—by which he would probably avoid prison, too. So would Neymar for his alleged fraud, though he could be barred from playing for the duration of his sentence, which would have a huge impact upon his earning power.

Even if footballers continue to elude prison, expect the tax investigations to continue. The law in Spain has barely changed in recent years, but there has been a seismic shift in "the approach and criteria to enforce tax law," Guede says, and prosecutors are demanding longer prison terms.

"They want to show that the government is very firm with tax, and there's nothing like taking on a few famous people to show how tough the government is," Paternain observes.

The hunt for tax avoidance schemes also has received a boost from international law in recent years. In 2014, the Common Reporting Standard, a multination agreement to automatically exchange information and curb tax evasion, was put into place. The first reporting of the CRS is planned for this September.

Easier access to information on taxes will lead to international requests for assistance in tax cases being more efficient, says Lorimer, who notes that governments previously hadn't been able to find what cash an individual had abroad unless they had a reasonable suspicion to justify receiving the information.

Whatever the final verdicts on Ronaldo, Mourinho and Co., their cases should act as further warnings that greater scrutiny is here. As footballers' salaries soar while government finances tighten, the age of players defending their tax arrangements in court might just be beginning.