Four Tax Systems: What Shakira Should Have Known

Stars make a lot of money. However, they don’t want to pay exorbitant taxes on their income, which sounds quite natural. Just like all of us, celebrities have an opportunity to optimize fiscal payments by obtaining tax residency in jurisdictions that have adopted appropriate tax systems. They actively use territorial tax benefits, opportunities provided by the second citizenship, and various investment instruments.

It may sound surprising, but the desire to avoid taxation (or at least reduce the amount due) is rarely realized. In most cases, it looks like this: the tax service keeps on bugging the celebrity, and he or she agrees to give away a part of the money earned to avoid the worst scenario. Right now, we can observe the “worst scenario” in action in Shakira’s recently publicized case, which seems very interesting for analysis. Let’s look at the details.

The Colombian pop diva drew an unlucky ticket as her lawyers failed to correctly assess the tax systems in different countries and take advantage of territorial tax benefits in a competent way. As a result, the singer risks being forced to pay USD 24 million (the amount of penalties), but that is not all: she may be sent to jail! Spanish prosecutors threaten Shakira with 8 years in prison – and even if the term is reduced, the prospects for the pop diva are not very good.

It is interesting to know that Shakira actually paid all taxes (that were due according to her estimates) in time and in full, and she considers all claims against her to be pretty far-fetched. However, independent analysts and tax experts argue that Shakira’s case is indeed serious. According to Shakira’s lawyers, the singer used Spanish territorial tax benefits and the taxes she paid do not violate the legislation of Spain, but the tax authorities are not so sure.

This is a story of a wrong interpretation of second citizenship, when you have a second passport but still remain a tax resident for the “first” jurisdiction, and consequently face problems. If Shakira is found guilty of tax evasion, it will mean that her lawyers have failed to do their work properly as far as tax residency is concerned. In any case, the tax authorities have spilled the beans, and all we can do is to observe further development of Shakira’s case.

What Happened to Shakira

The essence of the claims filed by the Spanish tax service is easy to understand: Shakira is charged with non-payment of taxes in the amount of USD 15 million. The accusation is extremely serious: if the pop diva is found guilty, she may be sentenced to 8 years in prison. And the celebrity’s status is no excuse here: we all remember some real cases when stars and media persons found themselves behind bars, so Shakira’s prospects look dim.

Let’s try to understand how legitimate the claims against Shakira really are. Here is what happened:

• The singer dated Spanish footballer Gerard Piquet from 2010 to 2022, and their two children were born in 2013 and 2015. Shakira and Piquet lived in Barcelona all this time, but the pop diva considered Bahamas to be her official residence.
• However, in some cases the Spanish tax system automatically gives you the status of a tax resident, which means that you have to pay taxes in Spain regardless of where you are formally registered. And we see that Shakira was highly likely to be considered a Spanish tax resident.

Signs that the individual may be automatically assigned the status of a Spanish tax resident:

• Living in the country for more than 183 days a year
• Spain is the center of the individual’s economic interests
• The person’s spouse and their common children ordinarily reside in Spain

The second point does not apply to Shakira, while the first and the third ones cannot be so easily discarded. The second citizenship in the Bahamas does not exempt Shakira from tax obligations as she stayed in the territory of Spain for much longer than 183 days. In addition, her children are Spanish citizens, like her husband. It seems that the territorial tax benefits and Shakira’s second citizenship failed to convince the Spanish Internal Revenue Service that the singer had paid all the taxes and fees.

Second Citizenship and Choice of Jurisdiction with the Appropriate Tax System

And now – let’s try to figure out where Shakira or her lawyers were at fault. If the factors related to the center of economic interests and the fact of Spanish citizenship/tax residency of Gerard Piquet and Shakira’s two sons are left out of the discussion, the main reason for the claims filed by the Spanish Tax Service is Shakira’s permanent residence in Spain. And since her stay in the country clearly exceeds the maximum of 183 days, she automatically acquired tax obligations and failed to fulfill them.

However, this should not be regarded as evidence of second citizenship being a useless thing: it still allows you to use tax benefits and preferences on absolutely legal grounds if you take care of proper planning and adhere to a number of simple rules. Shakira’s taxes could have been significantly reduced (if not completely zeroed) – with a competent approach. But Shakira’s lawyers did not take into account all the circumstances and misinterpreted the concept of Spain’s territorial tax benefits, which put the singer into an extremely precarious position.

If Shakira had spent less than 183 days a year in Spain, she wouldn’t have had such problems. There is also a probability that the Spanish authorities decided to consider her a local tax resident because of her common-law husband or their children, but this is a very shaky ground for making claims. Anyway, all these threats should have been taken into account by Shakira’s lawyers.

Second citizenship in a suitable jurisdiction could actually reduce Shakira’s taxes – however, many important factors had to be taken into account: the country of real residence, the duration of stay, and the limited scope of territorial tax benefits. But most importantly, Shakira and her lawyers did not have a Plan B to implement if the basic tax minimization option failed. All these inaccuracies resulted in the Colombian pop diva being threatened with a considerable penalty and 8-year imprisonment.

How to Avoid the Status of Tax Resident?

This is a popular question asked by persons who are reluctant to share most of their income with the tax authorities in their country but still want to remain law-abiding citizens. If everything is done competently, the goal will be achieved as some tax systems allow the option of tax optimization. However, Shakira’s taxes and the methods she used to reduce them made the procedure too complicated – and thus hard to control. In such cases, every mistake made will be extremely expensive.

To begin with, let’s note that legal residency and tax residency are different things. 

The first one implies the right to stay in the territory of a particular country, work, study, invest in the economy and conduct business. A legal resident does not possess all the rights awarded to the citizens, but the need for them arises quite rarely and does not affect ordinary life in any way. Simply put, your legal residency will give you privileges, opportunities, and rights – with minimal responsibilities imposed.

Meanwhile, tax residency is a completely different matter. It generates automatic tax liabilities under certain conditions, the most typical of which is staying in the country for 183 days a year or more (as in the case of Shakira). The tax authority does not care about your citizenship, the purpose of stay in the country, or tax obligations you may have in other jurisdictions. If you are a tax resident (more precisely, the fiscal authority considers you to be one), you will have to pay taxes.

The easiest way to circumvent the restriction is to obtain second citizenship in a country where there is no income tax in principle (the Bahamas, Monaco, or the Cayman Islands, to name just a few). The main thing is to comply with the minimum period of stay in the offshore and control possible tax obligations in other countries.

The only exception to this rule is US citizenship: Americans have to pay taxes to the US no matter where they actually live. And although you can find real (and legal!) methods of tax optimization even in such a situation, you should clearly understand that different tax systems provide different tax payment obligations. Therefore, if you want to plan your future properly, let’s take a quick look at the tax systems available in the world.

Tax Systems

As we have found, Shakira (or her lawyers) ignored some factors, which was a huge mistake. It turned out that she fulfilled some conditions in the course of her everyday life that automatically granted her the status of a Spanish tax resident – without her conscious intention to do so! The result? An 8-year imprisonment term looming ahead. A classical demonstration of Ignorance of law is no excuse principle.

Therefore, if you are seeking to minimize taxes or even reduce them to zero, be extremely careful when you choose the jurisdiction for obtaining a second citizenship. One of the main criteria is the tax system of the two countries – the one where you intend to get a second passport and the one where you are a citizen.

Here are the four major tax systems with a summary for each of them:

Citizenship-Based Tax System

This system is adopted in the United States, and partly in Eritrea, Hungary, and Myanmar, and it is the most inconvenient option for those who wish to minimize their tax burden. The citizens of such countries will remain tax residents until they officially renounce citizenship. The most unpleasant thing about this type of taxation is that the country where you generate income does not matter, so moving to an offshore jurisdiction or obtaining a second citizenship will not help you.

Residence-Based Tax System

This system implies that you become a tax resident if you meet a number of formal criteria (the ones we mentioned above: the time of permanent stay in the country, the presence of business interests associated with it, and family status). The tax base includes your worldwide income, and you are not required to renounce citizenship. You will still have to pay taxes in your home country if you generate any profit there – say, from real estate lease. If you cease to be a tax resident at any time, the corresponding status will be withdrawn, and the payment obligations will disappear.

Such a tax system is adopted in most countries, and it allows for different optimization methods. However, Shakira’s example showed that the probability of error is quite high if you fail to properly consider all the factors. In other words, you need to be extremely careful while taking any actions that lead (or may lead) to a change in your tax status.

Territorial Tax System

This is the best option with almost no disadvantages. The only income subject to taxation is the one received by residents and non-residents within the limits of a particular jurisdiction. Therefore, if Shakira lived in Singapore and derived income from concert activities around the world, it would not be subject to taxation as money was made outside the territory of Singapore. However, if the pop diva received her profit from real estate rental or business projects in Singapore, she would have to pay taxes to the Asian country within the limits of her activity.

This format allows you to solve several problems at once: optimize taxation, get additional (and very effective) tax optimization tools, and refrain from contacting offshore jurisdictions whose reputation status is far from ideal. Typical countries where the tax system is based on the territorial principle are Singapore, Georgia, Hong Kong, Panama, and Costa Rica.

No Income Tax System

This is the system usually associated with clean, classic offshores. Tax-free jurisdictions are perfectly adapted for everyday life since the state does not meddle with the income of citizens (subject to a number of conditions), and there is no need to think of tax optimization. Keep in mind, though, that tax-free jurisdictions are not the best option for doing business since their reputation remains uncertain.

On the other hand, if you intend to conduct a transparent and honest business without using aggressive tax optimization schemes, the second citizenship of, say, Saint Kitts or Grenada (along with the status of tax resident) would be a good choice. The main thing is to make sure you broke all taxation ties with the previous jurisdiction, otherwise you may end up in Shakira’s shoes.

Saint Kitts and Grenada: Territorial Tax Benefits and More

If you leave out the story with Shakira and try to solve the tax planning puzzle without focusing on details, you will find out three interesting things. 

First, if the tax system of the jurisdiction where you want to obtain a second citizenship is not suitable for you, you’d better look for a different option – even if you like the potential country. Fitting your specific situation into the existing territorial tax benefits sooner or later results in dissatisfaction with your choice.

Second, when you start planning to change your tax residence, be sure to take into account not only the situation in the country where you intend to move but also the tax system in the jurisdiction you are leaving. Failure to do so could have sad consequences, and Shakira’s story is a good confirmation of that.

Third, choose an offshore jurisdiction with extreme caution – which practically means taking into account all available factors, not only those that seem convenient to you. Shakira’s case can be considered a typical situation to some extent as we know many examples of ordinary people facing the same problems. However, there are more frustrating combinations, when an attempt to protect assets results in serious problems in terms of personal and corporate finances.

This explains why we never give any universal recommendations to our customers on the methods of legal tax optimization. This area requires customized solutions, while typical approaches can do more harm than good, especially if you choose the jurisdiction without going into details.

If you still want a general recommendation that suits almost everyone, we would propose two offshore jurisdictions: Grenada and Saint Kitts/Nevis. Each of them has its own peculiarities, and the tax systems in these countries have their advantages and disadvantages in each situation. If you are still not sure, please contact our experts!

By way of conclusion, if you want to protect your income from taxation using exclusively legal methods, you will need to consider the project carefully and weigh all the pros and cons before starting any real actions. And don’t forget that our experienced specialists are just a click away.

Examples of our services in Saint Kitts and Nevis:

• Citizenship and second passport in Saint Kitts and Nevis (for one person and for family).
• A personal account in Nevis
• A Revocable Offshore Trust in Nevis as an Alternative to the Will

We can also help you invest in Grenada to get a second passport:

• Economic Citizenship of Grenada

The present-day world is a good place to live in if you know the rules of the game and take due care to protect yourself from unexpected events – at least in the legal field. And this is where we can help! Get in touch with us via corporate e-mail (info@offshore-pro.info) or another channel of communication convenient for you.