By Athena P. Constantinou, APC Sports Consulting Ltd
In the last 25 years we have seen tremendous cross border movement in the world of sports; a number of NBA players moving to Europe near the end of their sports careers to play in the European Basketball League (Euro League), a number of soccer players moving from Europe to the United States to play for the MLS and the list goes on. During the past couple of years, with the growth of both the Chinese Super League (Soccer), and the Chinese Basketball League, we have also seen a trend of near-retirement players moving to China to play either in the CSL or the CBA League.
Players moving abroad have to face a number of challenges when settling and adjusting to the new reality of things. A new culture, a different language and the change of a team and colleagues, are just a few of the things that players have to deal with when signing playing contracts in foreign countries. One of the biggest hurdles faced by athletes playing abroad though, is dealing with the tax obligations that arise from their foreign playing contracts. The fact that athletes are playing in foreign countries does not relieve them from their tax obligations back home and their foreign contracts may give rise to income tax in their home countries, in addition to the tax paid in the foreign country where they are playing.
Most tax authorities impose tax on visiting sports people based on the principles of residency and source of income. As a result, sports professionals competing internationally have to be alert that they may incur tax obligations, both in terms of tax filing and tax liability, in the countries where they are competing. The tax obligations of sports professionals competing internationally vary, depending on whether they are competing in individual or team sports.
Residency is important for athletes whether competing in individual or team sports. Athletes are taxed in the country of their tax residency, however, when they compete with their team in a foreign country, any earnings attributable to the particular foreign country will most likely be taxable in that country and athletes can take a tax credit for the tax paid when filing their tax return in their country of tax residence. Any sponsorship or endorsement income received by athletes competing in team sports is taxed separately. Usually, these types of income are structured to be received through a corporate entity owned by the athlete, in order to optimize the tax burden. It should be noted though, that such entities are highly scrutinized by the tax authorities of most countries, therefore these arrangements have to have commercial substance to justify their existence. Practices, such as having offshore companies and accounts which aim at hiding commercial income should be avoided, in order to steer clear of any penalties or criminal charges from the relevant tax authorities.
A common misconception amongst international athletes is the belief that their tax obligations end by paying taxes in the country where they are employed; this is usually not the case and athletes should be aware that they may have a tax liability in both their country of citizenship and their country of tax residence, where they are currently living and playing. The athletes’ country of citizenship or domicile, is the country where they come from; their country of tax residence is the country where they currently live in, and work. In most countries, in order to be considered as a tax resident one has to live there for a period covering a total of 183 days or more within a calendar year.
There are four different ways through which countries all over the world apply taxation in terms of residency and citizenship and these are:
- Taxing both their Citizens and Residents on their Worldwide Income no matter where they live (for example the United States)
- Taxing their residents on their worldwide income (for example the United Kingdom)
- Taxing their citizen residents only on their worldwide income and not the foreign residents of their country (in the case of a non-dom tax regime)
- Taxing their residents on their local source income but not on their foreign source income (territorial tax system)
There are also a few countries which have specific regulations providing tax incentive packages to foreign sports players moving into the country. These incentive packages usually differ from the country’s standard tax regulations, like the ‘Beckham’ tax law of 2005 in Spain. The so called ‘Beckham law’, basically allowed foreign players living and playing in Spain to be taxed at the rate of 24,75% instead of a progressive tax scale ranging from 24% up to 43%.
It is therefore quite important that athletes are aware of the tax treatment of their earnings in both their country of citizenship and country of residence. For example, international players who are US Citizens or a US green card holders, will still have to file a tax return in the U.S. and pay any applicable taxes on their worldwide income despite the fact that they are playing abroad and are thus tax residents of another country. Usually, when filing their U.S. tax return, these athletes are allowed to receive a tax credit for any taxes paid abroad. In view of the fact that personal taxation rates in the United States are quite high, in many instances, an additional U.S. personal tax liability may arise.
It is vital for athletes to make sure that they maintain records of their compensation when playing abroad. These records include pay slips, earnings statements and tax returns, a copy of their playing contract, proof of tax payments and invoices of any playing related expenses (such as agent fees). By keeping a record of these documents athletes make it easier for their tax accountant to prepare their tax return and take advantage of any deductions that will minimize their tax liability.
A common practice with team athletes playing in Europe, is that social security contributions and income taxes arising from the playing contract are assumed by sports clubs and the athletes are paid on an agreed upon net amount. Therefore, an understanding of the tax treatment of their contracts and the allocation of the resulting tax burden is helpful to players during the course of contract negotiations with clubs.
The complexity of tax systems have a heavy toll on sports professionals competing internationally. A lot of preventive planning has to be done from the athletes’ part to optimize their overall taxation and be tax compliant wherever they are competing. It is vital for athletes moving into the international arena, to get assistance from an experienced tax consultant who will advise them on how to handle the different tax obligations which may arise when they sign a sports contract abroad. After all, when it comes to tax compliance, the final responsibility and liability lies with the player and no one else!
For more information on the subject of international taxation of athletes and the proper tax structuring of an athletic international career you may contact us at firstname.lastname@example.org