Spanish buy-out clauses, Legal and tax perspective

The purpose of the present commentary is to provide the reader with a general overview of the legal rationale behind the so-called Buy-Out Clauses regulated under Spanish Law. Similarly, a point of crucial importance -as is its tax treatment- also will be succinctly addressed.

To this end, in the foreground, special attention will be given to Real Decreto 1006/1985 of 26 June, which regulates the special labour relationship of Professional athletes (hereinafter, “RD 1006/85)¹ which is a law of labour nature which specifically governs the employment relationships of professional athletes in Spain.

Successively, we will give a brief response to practical questions and, finally, the fiscal trend -which has been consolidated by a recent tax ruling of great relevance- will be succinctly analysed.

2. Legal basis of the Buy-Out ClausesBuy-Out Clauses are governed by and construed in accordance with Articles 13 i) and 16.1 of the RD 1006/85 which read as follows:
   • Article 13 – Termination of the contract“The employment relationship shall terminate in the following circumstances: (…)
     1. as a result of the professional sportsman’s will. (…)”.
   • Article 16.1 – Effects of the termination for sportsman’s will“The termination of the contract by the will of the professional sportsman without cause attributable to the club, shall confer entitlement to the Club to a compensation that in absence of agreement, will be fixed by the Labor Jurisdiction according to the specific sporting circumstances, the damaged inflicted to the entity, the reasons of the rupture and further elements that the Judge deems appropriate. In case that within one year from the termination, the sportsman enters into a contract with other club or sporting entity, they will be subsidiarily liable of the payment of the aforesaid recompense”². (The bold is ours).
   Both provisions configure an extinguishing regime which guarantees an ante tempus termination of the athlete’s employment relationship, enabling the professional sportsmen to bring their contract to an end prior to its natural (scheduled) date of expiry.In other words, Article 16.1 RD 1006/85 expressly grants the athletes the statutory right to early terminate their contractual relationship with the club upon the payment by the sportsman -or a third club- of a predetermined compensation: (i) stipulated in advance in the employment contract or (ii) defined by a Labour Court (in the event of absence of agreement on this item).In a nutshell, Spanish Employment Law ensures the absolute freedom of the athlete to extinguish his/her employment contract -based on his/her sole will and irrespective of the existence of any cause justifying it- provided that the criteria stabilised in Article 16.1 RD 1006/85 is fully met.
3. Practical questions about the Buy-Out Clauses
   • Is article 16.1 of the RD 1006/85 applicable to foreign players?RD 1006/85 was particularly created to regulate labour relations in professional sports, including -as could not be otherwise- football. At this juncture, Article 1.2 RD 1006/85 establishes its scope of application in the following terms:“Professional athletes are those which, by virtue of a stable relationship, dedicate themselves voluntarily to the practice of sports, within the organisation and under the direction of a club or sporting entity, against the payment of remuneration”.³Accordingly, RD 1006/85 applies to all relationships between football clubs based in Spain and the professional players with whom said clubs have entered into employment contracts, regardless of the nationality of such footballers since Article 13.1 of the Spanish Constitution equates to the foreigners in Spain the same fundamental rights and freedoms laid down by law recognised to Spaniards.
   • Is article 16.1 of the RD 1006/85 applicable to foreign clubs?Theoretically, the RD 1006/85 is not applicable to foreign clubs given that such entities do NOT fall under the jurisdiction of the Spanish Labour law.As a matter of fact, Article 19 RD 1006/85 stablishes the competent jurisdiction⁴ without referring to foreign entities despite that Article 16.1 RD1006/85 expressly states that “In case that within one year from the termination, the sportsman enters into a contract with other club or sporting entity, they will be subsidiarily liable of the payment of the aforesaid compensation”.In that regard, from our point of view, foreign clubs should not be liable pursuant to article 16.1 RD 1006/85. In this sense, the Spanish Supreme Court⁵ delivered a judgement on January 20th, 2015 in which was examined the application of the Spanish Football Collective Agreement to foreign clubs in relation with a compensation which derives from Article 13 a) RD 1006/85⁶. In said pronouncement, the Spanish Supreme Court ruled out that the Spanish Football Collective Agreement is not applicable to foreign sporting entities.Notwithstanding the above, in practical terms, foreign clubs make use of article 16.1 RD 1006/85 in view that the Buy-Out Clause can be paid by the player or even by the buying club. Indeed, usually it is the buying club who pays the compensation stipulated in the Buy-Out Clause to avoid an economic damage to the player.In any case, it should be noted that the footballer (or any representative) must appear before the Spanish Football League in order to drop out his license which allows him to participate in the domestic competition, in accordance with Article 140 of the General Rules of the Royal Spanish Football Association⁷.
   • Is it mandatory to include a Buy-Out Clause in the employmentWhilst the form and content of the employment contract of a professional athlete is regulated in Article 3 RD 1006/85, such provision establishes only as essentialia negotii the: a) identification of the parties; b) object of the contract; c) remuneration; and d) length of the contract.Therefore, it is not compulsory to stablish a Buy-Out Clause in the employment contract whose inclusion will depend on the will of the parties concerned.Nevertheless, it is widespread practice that the clubs and professional footballers agree on a Buy- Out Clause given that in case of lack of a Buy-Out Clause in the labour agreement, the sum should be determined by a Labour Court, which is not always convenient for both parties (i.e., slowness of ordinary judiciary, figure that does not satisfy the parties or does not fit properly to the market value of the footballer, etc.)
   • Is there any limitation in fixing the amount of the Buy-Out Clause?RD 1006/85 does not set an upper limitation to the figure of the Buy-Out Clause. On the contrary, the principle of the autonomy of the parties will and freedom should prevail. Nonetheless, generally the value of the Buy-Out Clause is likely to be outside the affordability range of a player basically because the main objective of the Club-employer is to dissuade the footballer from taking such an initiative.However, it has to be emphasised that a disproportional and abusive sum may be challenged by the footballer and therefore reduced by the Labour Courts.
   • Is lawful the termination of an employment agreement as a result of the exercise of its Buy-Out Clause?As the FIFA Regulations on the Status and Transfer of Players, Buy-Out Clauses have the objective of reinforcing the principle of contractual stability, a cornerstone principle in which is prevalent the autonomous will of the parties.Despite the above, the RD 1006/1985 provides the absolute right of a player to put an end the employment contract on the basis of his/her sole will and irrespective of the existence of any cause justifying it.For the foregoing reasons, the early termination of a contract triggered by the execution of the Buy- Out Clause is fully lawful.
4. Tax perspective of the Buy-Out Clauses
   • Before 2016This financial movements have different tax consequences according to the Spanish law. Before 2016 there were some uncertainties about the tax burdens of thesedeals. The authors were divided in two variants:
     1. On the one hand, some authors assumed that the money received by the player from the buying club is considered as salary income. At the same time, the payment done by the player is considered as a capital loss. According to Spanish income tax law, a capital loss cannot be offset by a salary income. Thereby, this salary income will be charged and such tax cost would entail a relevant barrier for the buyer clubs because of the high increase of the deal costs.
     2. On the other hand, other part of the doctrine understood that there is not in practice a gain for the player. The money that the player received from the buying club was a capital gain and at the same time, the amount paid by the player to the Spanish Football League, shall be treated as a capital loss. Thereby, this capital loss is offset with the capital gain so the final effect in terms of income tax is neutral.
     However, after 2016 “Dirección General de Tributos”⁸ by the legal resolution “V3375-16”, adopted on 18 July 2016, stipulated the correct interpretation in this kind of operations providing legal security to the market.
   • Spanish tax ruling DGT V3375-16Among other issues (corporate income tax, VAT, etc.), the “Dirección General de Tributos” was asked about the tax consequences of this kind of operations in case of the Spanish tax resident, according to Income tax law. These were the conclusions of this Spanish tax authority:“For the purposes of Income Tax, the payment of compensation to the former club or sports entity, which constitutes payment of an obligation of the player and, on the other hand, the delivery of the funds must be distinguished on the one hand, for the payment of such compensation by the club or sports entity with which it will subsequently enter into an employment relationship”.⁹So, there are two actions that Spanish legal authorities highlight in this kind of operations:
     1. Firstly, when the buying club sends money to the player. After October 2016, this action is considered by Spanish tax authorities as a capital gain.
     2. Secondly, when the player deposit the Buy-Out Clause to the Spanish League (in order to be paid to the seller club). This action is considered by Spanish tax authorities as a capital loss.
     “Dirección General de Tributos” also defines it as an indemnity susceptible of being considered as a capital loss according to Spanish income tax law.Thereby, the capital gain which is generated by the payment of the buying club to the player is immediately offset by the capital loss generated by the payment of the buyout clause that the player pays to the selling club.In conclusion, the total effect over the income tax will be none and the buying club will only pay to the player the money which is stipulated in the contract.Nevertheless, it would be necessary to review the eventual tax effects in the case of a foreign buyer club and the tax burdens of that country.Nonetheless, in case the footballer is not resident in Spain, Spanish tax authorities does not specify the treatment of these scenario. However, it may be interpreted that if the player is subject to taxation only to the Spanish source income, the income obtained abroad (such as the payment to play abroad), may not be considered taxable in Spain.
5. Conclusions
   • Spanish Labour Law expressly grants the professional athletes the right to early terminate their contractual relationship upon the payment of a predetermined compensation.
   • The compensation may be stipulated in advance in the employment contract or, in case of absence, will be assessed by a Labour Court.
   • Buy-Out Clauses may be paid by the footballer or directly by the buying sporting entity, regardless the nationalities of the player and the buying club.
   • It is not mandatory to include a Buy-Out Clause in the employment contract. Nevertheless, with an existence of more than thirty (30) years, is a very deeply rooted practice in the Spanish professional football.
   • In recent times the “Dirección General de Tributos” has clarified what happens for Income Tax in this kind of operations:
     • This legal resolution provides legal security over the tax treatment of the buyout clauses’ operations.
     • Because of the legal security the payment of Buy-Out Clauses, such deals have been increased during the last transfer window.
     • It stills being doubts about the tax treatments of this operation when the player is not Spanish tax resident.
     • This resolution only considers the Spanish tax consequences. Also, tax burdens in the another country (if applicable) shall be considered.

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¹ Available in the following link: https://www.boe.es/buscar/act.php?id=BOE-A-1985-12313.

² Our translation.

³ Our translation.

⁴ “Any conflicts arising between a professional athlete and their club or sport entity, as a consequence of their employment contract, will fall under the jurisdiction of the labor justice”.

⁵ The highest jurisdictional instance of the Spanish legal system.

⁶ “The employment relationship will be terminated on the following grounds:

1. By mutual agreement between the parties. If the termination by mutual agreement has as an object the permanent transfer of the athlete to another club or sporting entity, the parties shall agree on the economic conditions for the execution of the contract; in case no express agreement exists, the sportsman shall be entitled to compensation of at least 15% gross of the agreed transfer compensation. (…)”

⁷ Available in: http://cdn1.sefutbol.com/sites/default/files/reglamento_general_2016-2017_web.pdf.

⁸ Spanish General Tax Office

⁹ Translated by ourselves from “V 3375-16” resolution of “Dirección General de Tributos”.