International transfers of professional football players

Introduction

An international transfer of a football player from one professional club to another may cause various financial streams with specific tax ramifications with sometimes doubtful solutions. Due to the fact of the globalization effects and the freedom of movement into the EU, the number of international transfers has been extremely increased.

The purpose of this comparative survey will be to analyze the most common tax ramifications and how these are dealt with in the national systems of different countries. The survey shall cover the tax treatment of the income paid to the player and other payments, such as agent’s fees or commission fees, from the point of view of the player and agent. There may also be consequences for other parties involved.

In a later issue, we will also look at the position of the clubs and the VAT consequences.

Player X’s tax ramifications

Suppose player X, resident for tax purposes in Spain, is transferred end of July on a definitive basis from club B in Spain to club C located in state C.

1Will player X cease to be a resident of Spain upon the transfer to state C for the fiscal year in which the transfer occurs? Will player X acquire state C tax residence in the same fiscal year in which the transfer occurs?

Spanish tax regulations have a different tax treatment for the individuals, depending on his/her tax residence.

• If an individual is considered as resident for tax purposes in Spain, he/she must pay taxes on his/her worldwide income, at rates that may vary from 43,5% to 52%, depending on the region where the taxpayer habitually lives, and according to the regulations in force. Also, the individual must pay taxes on his worldwide wealth.
• However, if an individual is considered as non-resident for tax purposes in Spain, he/she must pay taxes solely on the Spanish income that he/she receives, at rates that generally may vary from 19% to 24% (certain exemptions may be applicable according to Spanish regulations, or a lower tax rate depending on the tax treaty that may be applicable). Also, the individual must pay taxes on his/her wealth located in Spain.

There are two criteria that may cause that an individual is resident for tax purposes in Spain:

• to spend more than 183 days in Spain in one calendar year. To determine that period, sporadic absences count as days in Spain, unless the taxpayer proves his/het tax residence in other territory. In case of territories considered as tax havens, the Spanish Tax Authorities (STA) may request that the taxpayer proves each of the 183 days of physical presence in Spain required by the Spanish regulations.
• to have in Spain the centre of economic interests (to have the main base of the economic or professional activities in Spain).

If any of the two previous criteria are met, an individual may be considered as resident for tax purposes in Spain.

STA will presume, unless proven otherwise, that the taxpayer has his/her tax residency in Spain when his/her spouse and the dependent minor children live in Spain. If that is the case, the taxpayer would be considered as resident for tax purposes in Spain even if he/she spends less than 183 days in Spain, unless he/she is able to prove his/her tax residency in the other country/territory. According to the previously referred criteria, player X who leaves Spain at the end of July, and if he has been living in Spain on a permanent basis from 1 January of the same year, would be considered as tax resident in Spain for the whole calendar year (in Spain, the split tax year does not exist) because he has spent at least 183 days in Spain.

If player X acquires state C tax residence in the same fiscal year in which the transfer occurs, the tax residence regulations of state C should be reviewed to determine if the player acquires state C tax residence in the same fiscal year in which the transfer occurs. If that is the case, the tax treaty signed between the two countries (if one exists) should be analysed to determine the tie- breaker rule that may resolve the residence conflict.

1.1What is the tax treatment for income tax purposes in Spain of any payment made by club B to player X upon the termination of the employment relationship?

That payment should be considered as employment income, and, therefore, taxed in Spain at a tax rate that may vary from 43,5% to 52% (according to the regulations in force and, as it has been stated previously, assuming that player X is resident for tax purposes in Spain). It is not important if the payment is made before or after the termination of the employment relationship, because Player X would be resident for tax purposes in Spain in the whole calendar year.

1.2What is the tax treatment for income tax purposes in state C of any payment made by club B to player X upon the termination of the employment relationship?

If player X acquires tax residence in state C, and if the tie-breaker rule of the tax treaty between Spain and state C determines that state C is the territory where the taxpayer is resident for tax purposes, the regulations of state C in force should be considered. If no tax treaty is applicable, state C regulations should be reviewed as well.

However, if player X does not acquire tax residence in state C, and, as stated previously, he is resident for tax purposes in Spain, the income would presumably be taxed solely in Spain.

1.3What is the tax treatment of one time payments once re-transferred? E.g. player X is entitled to a percentage of any transfer sum in the event of a future transfer. Which country is entitled to tax such payment?

For Spanish tax purposes, the tax treatment would depend on:

1. the tax residence of player X when that fee is claimable, and
2. the tax source from where the payment comes.

If the fee is claimable in a year that player X is resident for tax purposes in Spain, that payment should be considered as employment income, and, therefore, it would be taxed in Spain at a tax rate that may vary from 43,5% to 52%, according to the regulations in force. However, if player X is not resident for tax purposes in the year where the payment is claimable, it may only be taxed in Spain if:

1. the income derives from a Spanish source (i.e. the club entitled to pay to the player that amount is a Spanish club), and
2. if the tax treaty in force between Spain and the territory where player X is resident for tax purposes allows it.

In case player X is resident for tax purposes in a territory without any tax treaty in force with Spain, each specific situation should be analysed, but, generally speaking, the payment may be taxed in Spain if the income derives from a Spanish source.

1.4What is the tax treatment of the payment of the agent fees by club B or club C on behalf of player X and in which country will the payment be taxed?

According to the STA current standpoint, the income would be fully taxable in Spain if player X is resident for tax purposes in Spain, or if the income is considered as Spanish- source income (in case of the Spanish non-residents).

1. If the player is resident for tax purposes in Spain, the income would be considered as a benefit in kind and, as a consequence, fully taxable under the personal income tax return of the player (including the eventual VAT paid by the club to the agent), at a tax rate that may vary from 43,5% to 52%, according to the regulations in force. If the player is not resident in state C, the tax treaty between the two territories (if applicable) and state C regulations should be analysed to determine if any withholding or taxation may be applicable in state C.
2. If player X is not resident for tax purposes in Spain, two different situations may exist.
   • Player X is resident for tax purposes in a territory with a tax treaty with Spain. The payment may be taxed at a rate in any case higher than 24% only if the tax treaty allows Spain to tax that income. The corresponding tax treaty should be analysed to decide about the specific tax liabilities.
   • Player X is resident for tax purposes in a territory without a tax treaty with Spain. The payment would incur taxes in Spain at a rate in any case higher than 24%.

Suppose player X, resident for tax purposes in Spain, is transferred end of July on a loan basis from club B in Spain to club C located in state C.

2Will player X cease to be a resident of Spain upon the transfer to state C for the fiscal year in which the transfer occurs? Will player X acquire state C tax residence in the same fiscal year in which the transfer occurs?

Please see the explanation provided in paragraph 1 above.

2.1Should player X continue to be paid by club B, what is the tax treatment in Spain and state C of such payment for income tax purposes?

In Spain, that payment should be considered as employment income, and, therefore, it would be taxed in Spain at a tax rate that may vary from 43,5% to 52% (according to the regulations in force and, as previously stated, assuming that player X is resident for tax purposes in Spain).

As regards the treatment in state C, it may be taxed there if player X is resident for tax purposes in state C and the tie-breaker rule of the tax treaty between Spain and state C determines that state C is the territory where the taxpayer is resident for tax purposes. In that scenario, state C tax regulations should be taken into account and would determine if the payment must be taxed in state C. Spain may tax the payment if the tax treaty allows to do so, at a rate in any case higher than 24% (maximum non-resident tax rate).

2.2Should player X be paid by club C, what is the tax treatment in state C and Spain of such payment for income tax purposes?

In Spain, that payment should be considered as employment income, and, therefore, it would be taxed in Spain at a tax rate that may vary from 43,5% to 52% (according to the regulations in force and, as previously stated, assuming that player X is resident for tax purposes in Spain). Considering that the income derives from state C, and assuming that player X is not resident for tax purposes in state C, thetax treaty between state C and Spain, as well as state C regulations, should be analysed in order to determine if the income is taxable in state C as a non-resident.

If player X is resident in state C, the payment may be taxed there if the tie-breaker rule of the tax treaty between Spain and state C determines that state C is the territory where the taxpayer is resident for tax purposes. In that scenario, state C tax regulations would be considered and would determine if the payment must be taxed in state C. Spain may tax the payment if the tax treaty allows to do so, at a rate in any case higher than 24% (maximum non-resident tax rate).

2.3What is the tax treatment of the payment of the agent fees by club B or club C on behalf of player X and in which country will the payment be taxed?

Please see the explanation provided in paragraph 1.4 above.

Players’ agent’s tax ramifications

Introduction

If the player´s agent is an individual Spanish tax resident, worldwide basis taxation would be applied. The effective tax rate would rely on the region where the agent is Spanish tax resident (from 43,5% up to 52%).

A player´s agent might be a legal entity, in which event the company would be subject to the corporate income tax (CIT). Besides, in case the representation activity is carried out through a company, the related-party’s rules would apply between the agent and the company. In this sense, the relationships between partner and corporation are subject to the arm-length principle.

For this purpose and following the CIT law, the services rendered by the professional to the company shall be valued consistent with the market price.

In the event of professional services, the Spanish law considers that at least the 75% of the company revenue from the professional activities shall be allocated into the individual´s Personal Income Tax Return. In that case, the company should have, between other requirements, adequate material and human resources for the development of the activity.

1What is the tax treatment for income tax purposes of fees paid to the agent involved in the negotiation of the transfer?

1.1Where the agent is resident in a treaty jurisdiction.

Generally, the agency fee would not be subject to taxation in Spain according to art. 7 or 14 of the OECD Model. However, in case the activity is carried out through a permanent establishment, the OECD Model grants the right to tax to Spain. Such grant has already been exercised by Spain and, in the case of permanent establishment, would be subject to CIT as a Spanish company.

1.2Where the agent is not resident in a treaty jurisdiction.

The Spanish law has included in its internal non-resident legislation that the services used in the Spanish territory may be subject to taxation in Spain. Effectively, the non- resident Spanish law stipulates that, when such services serve partially to economic activities carried out in the Spanish territory, it would be considered obtained in Spain only by the part that serves the activity developed in Spain.

In that case, Spanish non-resident tax law establishes that the taxable base would be deducted by the expenses related to salaries, provisioning and supplies. EU residents may deduct additionally the expenses related to the income obtained.

The tax debt would be determined by applying the tax rate which would be 24% (19% in case of EU, Iceland and Norway residents).

1.3Where the fee is paid by club B in Spain.

If the agent (or the company through which the agent develops his professional activity) is resident for tax purposes in Spain, the income would be taxable in Spain, according to the explanations provided in the introduction to this chapter.

However, if the agent (or the company through which the agent develops his professional activity) is not resident for tax purposes in Spain, the main issue would be to determine if, according to 1.1 and 1.2, the services may be allocated in Spain, regardless the place of payment. If that is the case, the 1.1 and 1.2 section should be applied.

1.4When the fee is paid by club C in state C.

Please see the explanation provided in the previous paragraph.

1.5Where the fee is paid by player X.

Please see the explanation provided in paragraph 1.3 above.