By Athena P. Constantinou, APC Sports Consulting Ltd
Cross-Border Movement in Sports
In the last 25 years, we have seen tremendous cross-border movement in the world of sports.
A number of NBA players have moved to Europe near the end of their sports careers to play in the European Basketball League (Euro League).
A number of soccer players have moved from Europe to the United States to play for the MLS. 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.
They go to play either in the CSL or the CBA League.
Adjusting to a New Life Abroad
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 they face.
One of the biggest hurdles for athletes playing abroad 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.
Their foreign contracts may give rise to income tax in their home countries, in addition to the tax paid in the foreign country.
Tax Rules for International Sports Professionals
Most tax authorities impose tax on visiting sportspeople based on the principles of residency and source of income.
As a result, sports professionals competing internationally must be alert that they may incur tax obligations.
These obligations include both tax filing and tax liability in the countries where they are competing.
The tax obligations vary, depending on whether they are competing in individual or team sports.
The Importance of Residency
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 that country will most likely be taxable there.
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, this income is structured to be received through a corporate entity owned by the athlete, to optimize the tax burden.
It should be noted that such entities are highly scrutinized by the tax authorities of most countries.
These arrangements must have commercial substance to justify their existence.
Practices such as having offshore companies and accounts to hide commercial income should be avoided.
This is important to steer clear of any penalties or criminal charges from tax authorities.
Tax Obligations in Multiple Jurisdictions
A common misconception among international athletes is the belief that their tax obligations end by paying taxes in the country of employment.
This is usually not the case.
Athletes should be aware they may have a tax liability in both their country of citizenship and their country of tax residence.
The athlete’s country of citizenship or domicile is the country they come from.
Their country of tax residence is where they currently live and work.
In most countries, to be considered a tax resident, one must live there for at least 183 days in a calendar year.
Taxation Systems Around the World
There are four ways countries apply taxation in terms of residency and citizenship:
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Taxing citizens and residents on worldwide income, no matter where they live (e.g., United States).
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Taxing residents on worldwide income (e.g., United Kingdom).
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Taxing citizen residents only on worldwide income, not foreign residents (non-dom regimes).
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Taxing residents only on local-source income, not foreign income (territorial tax system).
Special Tax Incentives for Athletes
Some countries have specific tax incentive packages for foreign sports players.
These usually differ from the country’s standard tax regulations.
For example, the ‘Beckham Law’ of 2005 in Spain allowed foreign players living and playing there to be taxed at 24.75%.
This replaced a progressive tax scale ranging from 24% to 43%.
Taxation for U.S. Athletes Playing Abroad
It is 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 U.S. citizens or green card holders must file a tax return in the U.S.
They must also pay any applicable taxes on worldwide income, despite being tax residents of another country.
Usually, when filing their U.S. tax return, these athletes are allowed to receive a tax credit for taxes paid abroad.
Because U.S. personal tax rates are high, an additional personal tax liability may arise in many instances.
Record-Keeping Is Essential
Athletes must maintain records of their compensation when playing abroad.
These include pay slips, earnings statements, tax returns, a copy of their playing contract, proof of tax payments, and invoices of playing-related expenses (such as agent fees).
Keeping these documents makes it easier for a tax accountant to prepare the athlete’s tax return.
It also helps take advantage of deductions to minimize tax liability.
Net Salaries and Club Responsibilities
A common practice among team athletes playing in Europe is that social security contributions and income taxes are assumed by sports clubs.
Athletes are paid an agreed-upon net amount.
Understanding the tax treatment of contracts and how the resulting tax burden is allocated is helpful.
This is especially useful during contract negotiations with clubs.
The Need for Preventive Tax Planning
Tax system complexity takes a toll on sports professionals competing internationally.
Preventive planning is essential to optimize taxation and stay compliant.
Athletes entering the international arena must get assistance from an experienced tax consultant.
They can help athletes handle the various tax obligations that may arise with international contracts.
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 [email protected]