What Americans should know about Spain's Beckham Law tax regime

More Americans than ever are looking to use the Beckham Law to move to Spain and save on taxes, but is it really as good as it seems and what do you have to be aware of if you're from the US?

Firstly, let's look at what the Beckham Law is. It's a tax regime that essentially allows those who have not resided in Spain for at least the last five years to pay a flat rate of 24 percent on their income up to €600,000 per year. Tax is also only paid on income earned in Spain, instead of a progressive tax on worldwide income. The normal progressive taxes for Spanish residents range from 19 to 47 percent.

It was first introduced in 2004 to attract talent and highly qualified workers to Spain with tax breaks. The law was nicknamed after the footballer David Beckham because he was the first one to take advantage of it when he moved here to play for Real Madrid.

READ ALSO: More Americans than ever look to use Beckham Law to move to Spain

It's important to know that not all Americans will qualify for the Beckham regime. For example, if you're here on the Digital Nomad Visa and are self-employed, then you are not eligible. It will only be for those who are employed by company's abroad.

READ ALSO: How to apply for Spain's Beckham Law tax regime

This initially seems ideal - a flat tax rate and tax breaks - why would you not take advantage if you qualify? But it's important to remember that not everything is as good as seems with the Beckham Law, and there are various factors you have to take into consideration if you choose to go for it.

The first factor is how much you earn. Tax expert Mark McMillan from Sun Lawyers previously told The Local Spain: “The special tax regime will be beneficial for those with an annual income from around €50,000 up to €600,000, so it will depend on your income bracket. Note that there are no allowances for your personal circumstances and as a result, people with spouses and children may find that they will pay less tax if they do not opt for the special regime”.

So, if you earn below or above those amounts the Beckham Law won’t bring you any benefits at all.

READ ALSO: What foreigners in Spain should know about the 'Beckham Law' tax regime

It's also worth noting that Americans have to continue to file their taxes in the US even when they move to Spain.

Therefore, if you pay 24 percent personal income tax in Spain under the Beckham Law, then you will pay the remainder - up to 32 percent - of the federal rate in the United States. This means that while the Beckham Law still has its benefits, it’s less advantageous than it is for those from other nationalities.

You also have to plan carefully and be fully aware of what becoming a Spanish tax resident could mean for you. If you’re an American with IRAs, 401ks or trust funds, it’s important you get advice from financial and tax experts in Spain, otherwise you could end up paying a lot more taxes than you were originally led to believe.

Spain's Treasury has also intensified its scrutiny of those who benefit from the Beckham Law. Javier Vinuesa and Guadalupe Díaz-Súnico, of Gómez-Acebo&Pombo law firm told El Confidencial that “many foreigners do not understand that the same administration that granted them the regime could, years later, question it".

According to them, this leads to greater problems and a higher chance of being audited and investigated.

"If there's no fraud, there's no litigation, but there are many gray areas, especially with Americans," several tax experts told El Confidencial.

They explain that if you have tried to force the conditions to qualify for the regime, but didn't actually qualify in truth, it could have consequences for you in the future that are worse than having paid the normal amount of tax in the first place.

In fact, in recent years, law firms in London have been challenging the Beckham Law claiming that it’s a ‘tax trap’. Some feel the specialist tax regime has not been advantageous for foreigners and that they’ve been treated unfairly by the Spanish tax authorities, subject to more checks and audits.

In addition, the new Social Security agreement between the US and Spain does not factor in Beckham Law complications or solutions for remote workers, meaning that it's unclear what's covered. This could also make it so that Americans are more susceptible to being audited in Spain.

If you don’t qualify for the Beckham Law or you feel it’s not right for you, one option several lawyers advise according to El Confidencial is to the region of Madrid, which allows for a reduction in the regional income tax rate.

Those considering the Beckham Law or any other tax solution, must make sure they speak with a professional as each case is unique and what is best for someone else doesn't necessarily mean it's good for you.

READ ALSO: Spain slams 'insulting' claim that Beckham Law steals from foreigners