Football is a global market where star players often move between countries. Typically, players sign contracts with clubs for fixed terms. If a player transfers before their contract ends, the new club must pay compensation to the old club according to the buyout clause in the player’s contract. Bidding on players with buyout clauses requires careful planning to avoid unexpected tax liabilities on top of the transfer fee.
Buyout clauses act like penalty clauses and are allowed under FIFA’s regulations on player status and transfers. According to FIFA’s commentary, these clauses set a fixed compensation amount the player must pay to terminate their contract unilaterally. This gives the player the right to cancel the contract at any time, even during protected periods, without facing sporting sanctions.
A player transfer involves three parties: the buying club, the selling club, and the player. First, the clubs agree on the transfer fee. Then, the buying club negotiates the player’s contract terms, such as salary and bonuses. Essentially, a buyout clause reflects the club’s valuation of the player.
Each league and country has different rules and tax laws regarding buyout clauses. Transfer fees usually incur taxes paid by the selling club, but details are often confidential. The player’s tax residency is crucial when determining how buyout payments are taxed. If the player is a tax resident in the buying club’s country, the buyout payment might be considered a taxable employment benefit. Players should be careful not to exceed 183 days in that country in the payment year to avoid unintended tax residency.
Double Tax Treaties between countries generally prevent double taxation, but players often manage their time between countries to minimize tax. Article 17 of the OECD model tax convention states that income from sports activities is taxed in the country where the sports performance occurs, assigning full taxing rights to that source country, while the athlete’s country of residence has limited taxation rights.
Buyout clauses are rare in the UK because English courts tend to invalidate them. In contrast, Spain mandates buyout clauses in all player contracts. In Spain, the buyout money is deposited with La Liga, which forwards it to the selling club to release the player. Usually, the buying club pays the player upfront to cover the buyout fee.
Until October 2016, the buyout amount received by the player was treated as personal income and taxed up to approximately 50%. Under current Spanish law, the player recognizes the buyout payment as a capital gain and the payment to the selling club as a capital loss. Since both amounts match, the player incurs no tax liability in Spain.
It is obvious that buyout transactions require systematic planning in view of their potential tax implications. From a tax point of view it is not crystal clear whether a tax liability will arise in the selling or buying club’s country or in both. The tax advisors of the parties involved will need to look into tax residency and double tax treaty provisions of the countries involved in order to ensure tax optimization of the entire buyout transaction. For more information on the tax planning involved in football contract buyout transactions, you may contact us at [email protected].