Multiple news agencies report the football star, who also captains the Croatia national team, admitted to tax evasion in court on Tuesday and has paid €1m to Spanish tax authorities to settle the matter.
Modric reportedly appeared in court for about 10 minutes. His wife, who is also being accused of tax irregularities, appeared alongside him.
Spanish prosecutors had accused Modric of hiding earnings of image rights of around €870,728 in 2013 and 2014 via a shell company set up in Luxembourg. The current overall total had risen to around €1m with interest.
Had the former Tottenham player not settled and opted for court proceedings, he could have faced a jail sentence.
Several other players have recently been targeted by Spanish tax authorities, including Cristiano Ronaldo who is still contesting his case and could be called to appear in front of a judge later this year.
Two years ago Lionel Messi, along with this father, was also targeted by Spanish tax authorities. He was found guilty of defrauding €4.1m from income made from image rights.