15 minute read 27 May 2022
athlete runs hurdles

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

Authors
Vassilios Koutsogiannakis

Senior Manager, EY Sports Desk Legal Services | Switzerland

Dedicated lawyer who enjoys combining his passion for sports with his profession to provide exceptional legal services to his clients.

Thomas Fisler

Partner, Tax Services | Switzerland

More than ten years of experience in international tax consulting for private clients and their structures, for entrepreneurs and their ventures, as well as for executives and their employers

15 minute read 27 May 2022

This article intends to provide a sneak peek into the tax regimes as well as administrative practices in relation to image rights of specific European jurisdictions where the sports sector is thriving. Please note that this blog does not purport to be exhaustive but rather frames the main features.

In brief
  • The nuances and peculiarities of the advantageous tax regimes being enacted across several countries to induce sportspersons to relocate therein demand an ad-hoc assessment.
  • Image rights structures deployed by sportspersons should have substance and economic rationale.

Taxation is undeniably a momentous factor exerting influence on the mobility of sportspersons and the location of their residence. In this vein, the discussion on favorable tax regimes that have been enacted across several countries in a bid to entice high-profile sportspersons to relocate in their jurisdiction has been at the epicenter of public attention.

Another point not to be overlooked is that, in the sports and entertainment world, image rights agreements are omnipresent. Indeed, image rights constitute part and parcel of the sports industry and their exploitation is crucial to monetize on the sportspersons’ on-field success. Sportspersons invariably have direct or indirect controlling interests in image rights companies that are used as special purpose vehicles to exploit economically their image. Such structures are admissible provided they have operational and business substance, undertake genuine economic and commercial activities and conform to the international standards set by the OECD.

France

  • Tax Regime

    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.

    Foreign-sourced passive income may enjoy a

    50%

    tax exemption whilst assets allocated overseas are exempt from wealth tax.

  • Image rights (licensor – licensee considerations)

    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.

Germany

  • Tax Regime

    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.

  • Image rights (licensor – licensee considerations)

    Income received from the exploitation of a sportsperson’s image rights qualifies as business income unless received by acting in the capacity as employee. Income derived by the assignment of their image rights to their employer is deemed employment income subject to wage tax. There are no specific tax regimes applicable to the renumerations resulting from exploitation of image rights. Where the sportsperson is a non-tax resident, the remuneration is basically subject to a final withholding tax (cf. to the Tax Regime section) whereby the option in terms of the deduction of related expenses does not apply. The exploitation of the image rights through an image right company is basically accepted.

Italy

  • Tax Regime

    Two alternative optional special tax regimes for qualifying professional sportspersons moving their tax residence to Italy are in place, namely:

    • The “Inpatriate Regime” applicable to professional sportspersons that are Italian fiscal residents as from the 2020 fiscal year (non-professional sportspersons will fall under this regime as of fiscal year 2023).
    • The “new-resident high-net-worth-individuals” regime.

    Under the Inpatriate Regime, sportspersons may benefit for five years (with the possibility of extension) from a 50% exemption with regard to personal income taxes and the corresponding local surcharges. Italian-sourced income from employment or from the rendering of independent services fall within the ambit of this exemption whereas foreign-sourced income and gains are captured by the worldwide principle of taxation and remain subject to ordinary taxation. Naturally, for the Inpatriate Regime to be triggered, a set of conditions would need to be observed (pertaining the timing of assumption of Italian fiscal residence and the location of performance of the labor activity or the independent services).

    The “new-resident high-net-worth-individuals” regime grants the option to incoming sportspersons to have their foreign-sourced income/gains subject to a flat income tax equal of

    € 100’000

    per fiscal year.

    The “new-resident high-net-worth-individuals” regime grants the option to incoming sportspersons to have their foreign-sourced income/gains subject to a flat income tax equal of EUR 100,000 per fiscal year (in essence substituting the applicable ordinary income tax rules). Domestic income/gains, however, would be subject to the statutory progressive taxation rules as well as capital gains on foreign shareholdings exceeding certain thresholds are still subject to ordinary taxation if certain conditions are met.

    Which would be the regime that would be more advantageous? This should be assessed on an ad-hoc basis and would depend on the facts and circumstances (such as the location of sporting performance, the source of income and the nature of the income received etc.)

  • Image rights (licensor – licensee considerations)

    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.

Portugal

  • Tax Regime

    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).

    Portugal has a favorable regime for returning individuals. A

    50%

    exclusion on employment and self-employment income applies to individuals becoming Portuguese tax residents between 2019 and 2023.

    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.

  • Image rights (licensor – licensee considerations)

    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.

Spain

  • Tax Regime

    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.

  • Image rights (licensor – licensee considerations)

    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.

  • Buy-out

    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.

United Kingdom

  • Resident non-dom regime

    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.

  • Image rights (licensor – licensee considerations)

    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.

Switzerland

  • Tax Regime

    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. 

    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).

    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. 

  • Image rights (licensor – licensee considerations)

    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. 

Summary

Considering that the sportspersons’ working lifespan is unpredictable due to unexpected contingencies and rather short and that their peak earnings are unlikely to be everlasting, it is all-important to perform an efficient tax planning as well as explore options that would provide funds for retirement. Our team is composed of experts who can advise on a tailor-made approach to tax and financial planning factoring in the planning for retirement by means of investment through pension schemes or insurance products.

Acknowledgements

We thank Panagiotis Roumeliotis and Fabian Bigger for their valuable contributions to this article.

About this article

Authors
Vassilios Koutsogiannakis

Senior Manager, EY Sports Desk Legal Services | Switzerland

Dedicated lawyer who enjoys combining his passion for sports with his profession to provide exceptional legal services to his clients.

Thomas Fisler

Partner, Tax Services | Switzerland

More than ten years of experience in international tax consulting for private clients and their structures, for entrepreneurs and their ventures, as well as for executives and their employers