By Athena P. Constantinou, APC Sports Consulting Ltd
Professional athletes moving abroad face a number of challenges as they settle and adjust to new realities. Signing a playing contract in a foreign country comes with a new culture, a different language and the change of a team and colleagues. One of the biggest hurdles faced by athletes playing abroad however, is dealing with the tax obligations arising from their foreign playing contracts.
Professional players, as employees of sports clubs, receive salary and success bonuses which are subject to employee tax withholdings and social security contributions in the club’s home country.
A common misconception amongst international athletes is the belief that tax obligations end by paying taxes in the country where they are employed; this is usually not the case. Athletes should be aware they may have a tax liability both in their country of citizenship (where they are from) and their country of tax residence (where they currently live and work). Tax residency in a country is usually established by one’s physical presence there, for a period f 183+ days within a calendar year.
Athletes competing in team sports are taxed in their country of residence; however, when competing in a foreign country, any earnings attributable to the particular foreign country will be taxable in that country as well. Fortunately, most can take a tax credit for the foreign tax paid when filing returns in their country of tax residence. Any endorsement income received by professional athletes is taxed separately and is not subject to employee tax withholdings and contributions.
To optimize the tax burden, athletes who receive sizeable amounts of endorsement revenue, usually channel the income to a personal corporation through which they commercially exploit their image. These entities, however, are highly scrutinized by the tax authorities, making it necessary to support a commercial substance to justify the corporation’s existence. To steer clear of any criminal charges, practices such as having offshore companies and accounts to hide commercial income, should be avoided.
The different ways through which countries apply taxation in terms of residency and citizenship, are:
- Taxing both citizens and residents on worldwide income no matter where they live (ie. the United States);
- Taxing residents on worldwide income (ie. the United Kingdom);
- Taxing citizen residents only on worldwide income and not the foreign residents of their country (non-dom tax regime);
- Taxing residents only on their local source income (territorial tax system).
There are countries 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 which 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% to 43%.
Athletes need to be aware of the tax treatment of their earnings in both their country of citizenship and country of residence. Simple things can make a big difference—like knowing International players who are US Citizens or a US green card holder, must still 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 thus, tax residents of another country. Or, that when filing a U.S. tax return, these athletes are allowed to receive a tax credit for any taxes paid abroad. And… because personal taxation rates in the United States are quite high, in many instances will create an additional U.S. personal tax liability.
Athletes should maintain full tax records when playing abroad; pay slips, earnings statements, proof of tax payments, and invoices of any playing related expenses. Proper record-keeping makes it easier for their CPA to do proper tax planning and legitimately minimize their tax liability.
An understanding of the tax treatment of their contracts and the allocation of the resulting tax burden is helpful to players during contract negotiations with clubs. For example: a common practice with team athletes playing in Europe is to have social security contributions and income taxes arising from the contract paid by the clubs and the athletes paid an agreed upon net amount.
The complexity of tax systems take 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 remain tax compliant wherever they compete. It is vital for professional athletes moving into the international arena, to get help from an experienced tax consultant who will advise them on taking a “best interest” approach to the tax obligations arising from foreign sports contracts. After all, when it comes to tax compliance, the final responsibility and liability lies with the player and no one else!