Real Madrid criticised over ‘tax haven’ investment deal

A silent partnership agreement between a US private equity and Real Madrid has attracted media criticism in Spain because it involves entities in Luxembourg and the Cayman Islands.

The Spanish press has taken aim at Real Madrid for a private equity investment deal that, according to internal documents and emails, exposed the world’s second largest football club to reputational and tax risks because it involved entities in Luxembourg and the Cayman Islands.

Spanish digital newspaper Info Libre reported that Real Madrid’s chief financial officer Julio Esquerdeiro warned in an email that a EUR200 million investment by US private equity firm Providence Equity Partners would almost certainly be questioned by the Spanish Treasury.

The report was based on the so-called ‘Football Leaks’ files – internal correspondence and contracts of European football clubs – that were handed to several mainstream European media houses.

Under the silent partnership agreement signed in 2017 between the Rhode Island-based private equity firm and Real Madrid, the Spanish club would receive 200 million euros over four years, until 2021, in return for a share of the proceeds from certain sponsorships and online commercial rights.

Real renegotiated the deal last year before the contract expired. According to the club’s annual 2019/2020 financial statements, this resulted in an increase in income and an extension of the arrangement for up to nine years.

Info Libre reported that before inception the structure of the deal was questioned by executives internally as it involved a Luxembourg company, PQ VII Sarl, that is beneficially owned by two subsidiaries of Providence Equity Partners LLC in the Cayman Islands.

The two limited partnerships, Providence Equity Partners VII-A LP and Providence VII Global Holdings LP, are both domiciled at Ugland House in George Town.

Internal documents published by Info Libre show that Esquerdeiro, Real Madrid’s financial director, warned the investment structure could entail reputational and image risks for the club. He recommended that the counterparty should instead be an entity, owned by the investor, that is tax-resident in Spain.

Shortly before the contract was signed, he wrote in an email that the two companies, domiciled together with thousands of other companies in a building in the Cayman Islands, guarantee the payment of 200 million euros by a Luxembourg company that has just 20,000 euros of share capital.

“It seems like a joke, but I’m afraid it’s serious,” he wrote.

Using a company in Luxembourg would enable the investor to legally minimise taxation in Spain through an intercompany loan structure, Esquerdeiro noted, but he added that there was a high likelihood of Spanish tax authorities questioning the economic purpose of the set-up.

If this were the case, Real Madrid would have to withhold taxes of between 10% and 24% depending on whether the ultimate beneficiary is based in the US or in a tax haven.

The Cayman Islands is on the tax haven list of the Spanish Treasury.

In addition, there was a risk that tax authorities could deny the tax deductibility as a business expense of any payments made by the club to the investor.

Because Real Madrid has in the past faced a EUR28 million additional tax bill for payments made to players’ agents between 2011 and 2014, this interpretation led to renegotiations about which party should assume the tax risk.

However, the investment structure remained unchanged.

Although there is no indication of any illegality or regulatory action, media reports in parts of the Spanish and international press contained allegations of tax evasion and calls for tax authorities to investigate.

Providence manages more than US$44 billion in committed capital and has made billion-dollar investments in Spain’s telecommunication and media markets for years.

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