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. The method of compensation of team athletes and athletes competing in individual sports is different, and so is the method of taxation.
Individual sport athletes are compensated by receiving prize money based on their success in the various tournaments or competitions they attend. Such fees are calculated and paid to the athlete, by the tournament’s or competition’s producer. Additionally, individual sport athletes, especially the famous ones, may receive appearance fees in order to come and play at a tournament or competition so as to raise the prestige of the particular event and attract a large audience. Also, the income of high-rank athletes is quite often supplemented by endorsement/sponsorship agreements from third parties.
On the other hand, team athletes are employees of a particular sports club, most of them have guaranteed salaries and, they are paid on the basis of their employment contract. The salary and success bonuses received by team athletes are subject to employee tax withholdings and social security contributions. Endorsement/sponsorship income received by team athletes is taxed separately and is not subject to employee tax withholdings and contributions.
Athletes in individual sports are taxed on their net earnings, as persons carrying on a trade or profession. Their income usually consists of athlete personal awards, appearance and participation fees, grants, sponsorship and endorsement revenue, merchandising revenue for sale of products, royalties from licensing activities, other fees such as writing articles for various publications, etc. These athletes are allowed to deduct expenses from their gross income and these expenses usually include agent commissions and manager’s fees, travel and accommodation for competitions, touring costs, equipment, clothing, training facility and trainers/coaches costs, etc.
Usually athletes in individual sports have their own companies, through which they provide their individual services. These personal services companies are called sports consultancies in Europe whereas the equivalent in the United States is the “loan-out” corporation through which the athlete ‘loans out’ his/her sports services.
A very important factor in the taxation of both individual sport and team athletes is residency. The individual athlete is taxed in the country of his/her tax residence, usually on his/her worldwide income, depending on the tax laws of his/her tax residency country. However, when the individual athlete is competing in another country and he/she receives income from that particular country, the income from that activity is usually taxed in the country where it arose. If the athlete is a tax resident of a jurisdiction which taxes its residents on their worldwide income, he/she is normally entitled to a tax credit for taxes attributable to foreign source income paid abroad. For example, if a Swiss tennis player is competing at Wimbledon in the UK, any earnings from the particular tournament are taxed in the United Kingdom and he/she can claim the UK tax paid on his Swiss tax return so as to avoid double taxation.
Therefore, sports professionals competing in individual sports should be aware that they will most likely be liable to pay tax and file non-resident tax returns when on tournaments or competitions in foreign countries. In addition, some countries like the United Kingdom, impose tax to visiting individual sport athletes, on their global endorsement income, in proportion to the time they have spent in the United Kingdom during the tax year. For example, if a professional tennis player competes in ten events worldwide in one year out of which two were in the UK, he/she will be taxed in the UK on 20% of his/her global endorsement income. Athletes competing in individual sports should be aware of this type of taxation and they should plan accordingly.
As mentioned above, athletes competing in team sports are employees of the sports club they play for and they receive a salary and bonus from their team which is subject to PAYE and social security withholdings. Normally, they are not allowed any deductions on their income from salaried services. Residency is also important for athletes competing in team sports. They are also 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 these types of entities are highly scrutinized by the tax authorities of most countries, therefore such arrangements have to have commercial substance to justify their existence.
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 athlete’s part to optimize his/her overall taxation and be tax compliant wherever he/she is competing. We are here to help Money Smart Athletes become tax savvy and alert of the way international tax systems affect their income. For assistance and guidance on the subject of taxation of international athletes you may get in touch with us at firstname.lastname@example.org.