Sportspersons, image rights and European tax regimes: a high-level snapshot

Sportspersons who were not French tax residents for the past 5 calendar years prior to taking up their residence and primary occupation in France are eligible to avail of up to 50% income tax exemption in relation to their employment income (i.e. salary allotted to performances taking place abroad and inpatriation premium subject to the ‘comparable salary test’) for 8 years. Furthermore, foreign-sourced passive income may enjoy a 50% tax exemption whilst assets allocated abroad are exempt from wealth tax.

The French sports code provides sports clubs and employed sportspersons across all sports the possibility to enter into a distinct commercial image rights agreement (governing the licensing of the sportsperson’s image rights to the sports club) alongside the main employment contract. Provided that certain, cumulative conditions are strictly adhered to, the proceeds derived under an image rights agreement qualify as royalties and are not classified as salary and, thus, will not be subject to social security. A minimum threshold in terms of salary, defined in the relevant collective bargaining agreements, should be met for the parties to conclude said commercial arrangement. Royalty payables have a cap, and the cap bandwidth may vary across the different sports disciplines. It is crucial that the image rights agreement is drafted in a perspicuous and comprehensive manner, stipulating the scope of the commercial exploitation of the image rights, the purpose, the duration, and the territory as well as the royalty computation methods and the royalty cap.

No specific tax regime applicable to sportspersons either tax residents or non-tax residents. Income derived by non-resident sportspersons in association to performance taking place in Germany is normally subject to a final withholding tax of 15.825% (levied on the gross income). Notwithstanding, should the sportspersons be EEA nationals, they may opt for a deduction of related expenses, thus, being subject to 30% withholding tax on a net basis.

No specific tax regime applicable to sportspersons either tax residents or non-tax residents. Income derived by non-resident sportspersons in association to performance taking place in Germany is normally subject to a final withholding tax of 15.825% (levied on the gross income). Notwithstanding, should the sportspersons be EEA nationals, they may opt for a deduction of related expenses, thus, being subject to 30% withholding tax on a net basis.

In the event of sportspersons acting in their capacity as employees, income derived by the latter in the context of assignment of their image rights to their employer, is tainted by the employment nature of the agreement and is deemed employment income subject to withholding tax at source. In general terms, in case of non-resident sportspersons employees, said income is considered to have its source in Italy so long as it is associated to the sporting performance of the sportsperson in Italy. If the sportsperson is self-employed and non-tax resident, the income is subject to tax in Italy to the extent that the relevant activity capitalizing on the sportsperson’s image rights is linked to Italy. However, an ad-hoc basis analysis would be recommended especially in case image rights do not directly pertain to the sporting performance of the sportsperson in Italy.

Even though there is no specific tax regime applicable to sportspersons in Portugal, sportspersons may acquire the status of “Non-Habitual Resident” and benefit from a favorable tax treatment for the first ten years of residence (subject to becoming tax residents in Portugal and not having been tax residents in Portugal for any of the preceding five tax years). It confers on them the entitlement to have foreign-sourced income exempt from personal income tax in Portugal provided it is effectively taxed (in case of employment income) or may be taxed (in other types of income) at source under the rules of the applicable Double Tax Treaty and does not derive from a tax heaven or a black-listed jurisdiction (in cases where there is no Double Tax Treaty in force).

In addition, Portugal has a favorable regime for returning individuals (also known as “Programa Regressar”). Under this regime, a 50% exclusion on employment and self-employment income applies to individuals that become Portuguese tax residents between 2019 and 2023 provided that the individuals were not tax residents of Portugal in the three years prior to their return and were tax residents of Portugal prior to 31 December 2015 (for those who become tax residents in 2019 or 2020) and prior to 31 December 2017, 2018, 2019 (for those who become tax residents in 2021, 2022 and 2023, respectively). The individuals must have their tax affairs up to date. This regime is not cumulative with the Non-Habitual Residents Tax Regime and is applicable in the year of the return and in the four following years.

As per the guidance No. 17/2011 issued by the Portuguese tax authorities, income derived from the assignment of a football player’s image rights to a Portuguese football club by the player’s non-Portuguese image rights company is deemed to be sourced in Portugal entailing a levy of a flat-rate 25% withholding tax (a total or partial exemption from withholding tax may be applicable depending on the tax treaty provisions and a case-by-case analysis although an exemption is usually not available), due to its link with the labor agreement. Moreover, income derived by a player when assigning image rights to the football club with whom he or she has concluded an employment contract qualifies as employment income whereas if assigned to a third party qualifies as investment income. As per the latest practice developed by the Portuguese Arbitration Tax Courts, income derived by foreign image rights companies from the assignment of said rights to football clubs qualifies as business profits, likely not subject to tax at source (in Portugal – in the absence of a PE) when there is no direct relation between the amounts paid and the performance/sports activity of the player in Portugal.

No specific tax regime applicable to sportspersons. Sportspersons (when non-tax residents) deriving, directly or indirectly, income from activities in Spain are taxed at a final 24% rate. With respect to income obtained by residents of the EU/EEA the rate is reduced to 19%.

Sportspersons who are tax residents in Spain are taxed up to 50% Income Tax rate on salaries.

In Spain, it is permissible for a football club to exploit the player’s image in the context of the underlying employment relationship. However, there exists a ‘safe harbor’ rule as per which image rights payments made by the employer to a footballer or to his image right company should not exceed 15% of the total remuneration package as established in the employment agreement (in case of non-compliance, the whole fee is classified as employment income, subject to progressive taxation up to 50%).

Regarding the image rights company, the key point resides in determining whether the assignment of the image rights from the player to the company (both qualifying as related parties for transfer pricing purposes), or the exploitation of the image rights, is performed in alignment with market conditions reflecting the price that would have been agreed upon by independent parties under comparable conditions. If the transfer of the right to economically make use of the image rights, or the exploitation itself of the rights, do not comply with the arm’s length standard, a transfer pricing adjustment would need to be performed in the player’s taxable base.

Actually, from a transfer pricing perspective, the player is seen as a related party providing services to the company exploiting the image rights. The player must receive a compensation from the company in exchange of these services. Generally, a transfer pricing analysis is carried out based on the comparison with other companies in the market that are dedicated to similar image rights business activities. The Spanish Law provides a special rule (safe harbor) in order to reduce uncertainty: broadly, a compensation of 75% of the profits obtained by the company will be considered at market value if certain requirements are met. Among others, economic substance (e.g. personal and infrastructure) in the company is needed in order to benefit from this rule. From our experience, the tax authorities are becoming more and more reluctant to accept the application of this safe harbor rule and try to increase the amount allocated to the player (from 75% to 100%).

In any case, solid TP documentation should be in place, demonstrating that the professional services provided by the player to the company are at arm´s length.

The most famed example of consistent use of buy-out clauses is the legal regime in Spain applicable to professional sportspersons who are under a dependent employment relationship. They have a mandatory nature and are embedded in the employment contracts providing the employed sportspersons with the statutory entitlement to terminate the employment relationship on his own will in exchange for compensation. The Spanish Tax Authorities issued a ruling as per which, in the case of football players, when the buying club provides the funds to the player as to execute the buy-out clause, the player is deemed to derive a capital gain as the buying club acquires, in essence the player’s assets, that is, the federative/economic rights. Conversely, the subsequent payment of the buy-out fee to the former club constitutes a capital loss which compensates for the capital gain. Hence, the tax neutral result implies no adverse direct income tax consequences for the player.

Foreign sportspersons moving to the UK, in the context of an employment agreement, may elect to be taxed as resident but non-domiciled taxpayers (with a domicile outside the UK, i.e., broadly no intention to reside on a permanent basis in the UK). Therefore, upon election, they may be taxed exclusively on their UK sourced income/gains, whereas non-UK sourced income/gains would not be subject to UK personal income tax, under the condition that it is retained offshore. Where the related non-UK funds are “remitted” to the UK they will then be brought into UK tax.  Any income derived by the sportsperson prior to arriving in the UK should be treated as so-called “clean capital”, thus, not subject to UK personal income tax. However, if these funds are to be brought into the UK, tax advice should be taken to ensure these are not tainted by other income. The non-domiciled benefit (called the “remittance basis”) is limited to the first 15 years of fiscal residency in the UK.

It is alleged that a deal between the HMRC and the English Premier League clubs has been struck as per which English Premier League clubs are entitled to make a payment only up to 20% of the footballer’s total employment earnings (cap) in the context of the assignment of the player’s image rights to the club (which reflects commercial terms) to the player’s image rights company. Although we note HMRC are now seeking to depart from such deals with an argument that in most instances HMRC view payments referred to as image rights as deriving from the employment and should be treated as employment earnings.  This is a significant shift from the current published HMRC guidance and case law [Sports Club plc and others v Inspector of Taxes; Hull City AFC (Tigers) Ltd v Revenue and Customs Commissioners].

In addition, the HMRC issued a guidance on image rights payments indicating, inter alia, that payments to employees in the context of a labor contract must be taxed under the “pay-as-you-earn” system (deduction at source) and not as payments in association to the exploitation of the image rights. Should a UK image rights company be interposed, it will naturally be liable to UK corporate income tax on its profits.

In principle, Swiss tax law does not provide for any special tax regime applicable to sportspersons, and thus, the general rules in terms of tax residency and scope of taxation for individuals apply. Hence, in case of Swiss tax residency, a sportsperson’s worldwide income is subject to federal and cantonal/communal income taxes and the worldwide wealth is subject to the applicable cantonal/communal taxes (subject to double tax treaties, where applicable) except for real estate, fixed place of business, or permanent establishment located abroad.

In some cases, taxpayers residing in Switzerland may opt for the so-called ‘Lump-sum taxation’ or ‘expenditure-based taxation’ regime both at the federal and cantonal level (with some exceptions) provided they meet a set of strictly defined cumulative conditions [i.e., (i) non-Swiss citizenship, (ii) Swiss fiscal residency for the first time or after an absence from Switzerland of more than 10 years and (iii) non-performance of any gainful business activities in Switzerland be it dependent employment or self-employment]. Therefore, it is to be inferred that in the sports sector the lump-sum taxation can only be applied exceptionally in rather scarce cases. In any cases, it is required to get an advance tax clearance with the relevant cantonal tax authorities prior to relocating to Switzerland to have clarity on whether certain activities compromise the lump-sum taxation regime and, this way, avoid any adverse tax consequences.

Non-Swiss tax resident sportspersons, on the other hand, are subject to source tax on the net amount (compensation after deduction of costs) of the income streams directly derived from their professional physical performance in Switzerland (limited tax liability due to economic affiliation). A special tax rate of up to 7% (federal tax) applies depending on the daily income (cantonal and communal taxes to be added on top – e.g., in Zurich plus 10%). With regard to the deduction of costs incurred with direct nexus to the performance in Switzerland, based on the de jure rebuttable presumption, such deductible expenses amount to a lump-sum of 20% of the gross income. Conversely, should the effective costs be in excess, they would need to be substantiated by compelling evidence.

Royalty payments from Swiss corporations in the context of the exploitation of the sportsperson’s image rights are generally not subject to Swiss withholding tax. Additionally, if the payer is a Swiss tax resident, royalties aligned with the arm’s length principle are tax-deductible as business expenses. In case of Swiss image right companies, foreign-source royalties constitute part of the taxable profits (subject to federal and cantonal/communal corporate income taxes) unless they derive through a foreign PE of the Swiss company, which entails the tax exemption of such income under Swiss law.