Switzerland: International transfers of professional football players

by prof. xavier oberson[1] and Frédéric eptaux[2]

 

Introduction

An international transfer of a football player from one professional club to another may cause various financial streams with specific tax ramifications with sometimes doubtful solutions. The purpose of this comparative survey will be to analyse the most common tax ramifications and how these are dealt with in the national systems of several countries. The survey will cover the tax treatment of the income paid to the player and other payments, such as agent’s fees or commission fees, from the point of view of the player and agent. There may also be consequences for other parties involved, e.g. parties owning part of transfer rights etc. In a later issue of GSLTR we will also look at the position of the clubs and the VAT consequences.

 

Player X’s tax ramifications

Suppose player X, resident for tax purposes in Switzerland, is transferred end of July on a definitive basis from club B in Switzerland to club C located in state C.

1  Will player X cease to be a Swiss resident upon the transfer to state C for the fiscal year in which the transfer occurs? Will player X acquire state C tax residence in the same fiscal year in which the transfer occurs?

Under Swiss domestic tax law, a person is deemed to be tax resident in Switzerland and, therefore, subject to unlimited taxation, if one of the two following criteria is met.

–  The person has his domicile in Switzerland. The concept of domicile includes two elements, namely:

1  the residence, and

2  the intention to remain in a given place on a long-term basis.

As regards this second aspect, tax law puts more weight on the actual circumstances than the formal aspects (e.g. the exercise of voting rights, the possession of a residence permit, the announcement of departure to the competent authorities, etc.).

 

–  The person has his residence (sojourn) in Switzerland. Residence arises if a person alternatively resides in Switzerland.

1  for 30 days while performing a professional activity, or

2  for 90 days without performing any professional activity.

 

Full tax liability in Switzerland is triggered as from the beginning of the domicile, respectively the residence, in Switzerland if the conditions are met. This means that the tax liability is triggered retroactively as from the first day of residence if the 30-day, 90-day, periods, respectively, are met.

The same rule goes for the reverse situation, i.e., in case of departure from Switzerland, whereby the tax liability will cease on the day of departure from Switzerland. According to Swiss case law, the person will remain taxable in Switzerland, however, as long as this person has not created a new domicile abroad. In case of questions from the tax administration, the taxpayer has a duty to collaborate and must provide (sufficient) elements relating to his new domicile abroad, failing which the tax administration will consider that he has maintained his Swiss tax residence.

In this case, player X will cease to be a Swiss tax resident as from the date of his effective departure from Switzerland, provided that he creates a new domicile in state C. This means that he will remain fully liable to Swiss taxes for the portion of the year where he was still resident in Switzerland (split tax year), that is, at least until the end of July. Player X will have to provide elements relating to his new domicile in case of questions from the Swiss tax administration.

Whether player X becomes a tax resident of state C will depend upon the tax law of that jurisdiction. If state C considers player X as a tax resident for the whole year (for instance if the split tax year does not exist in that state), the tax treaty signed between the two countries should be examined to determine the tie-breaker rule that may resolve the residence conflict for the relevant year. Several tax treaties concluded by Switzerland contain an express provision to address this specific timing issue (e.g. the tax treaties with Austria, Denmark, France, Italy, Norway, Portugal, Sweden).

If Switzerland were in the position of state C (state of arrival), player X would be fully taxable in Switzerland, as from the date of his arrival in Switzerland, provided that he takes up residence in Switzerland with an intention to stay on a long-term basis or that he fulfils the conditions of a qualified residence (sojourn) as stated above.

 

1.1   What is the tax treatment for income tax purposes in Switzerland of any payment made by club B to player X upon the termination of the employment relationship?

Under domestic law, a severance payment is considered as an income ordinarily taxable at the level of the employee (employment income). Swiss tax law provides for an exception when the payment has a pension character, that is, when such payment can be assimilated to a payment from a pension fund. According to Swiss practice, this can only be the case if, among other conditions, the payment is made to an employee who is at least 55 years old upon leaving the employer. In this case, the severance payment to player X would probably not have a pension character and, therefore, would be taxed ordinarily as an employment income.

The timing of the payment is not directly relevant. This means that the payment is also taxable in Switzerland if it is made after the departure of player X from Switzerland, since it is linked to the Swiss past employment. The tax assessment procedure will, however, depend on whether player X is still tax resident at the time of the payment or whether he is tax resident abroad. In the first case, the tax will be assessed in the ordinary taxation of player X based on his Swiss tax return; while in the second case the tax will be levied at source by club B.

1.2   What is the tax treatment for income tax purposes in Switzerland of any payment made by a foreign club to player X upon the termination of the employment relationship?

If the payment is made by the foreign club prior to player X’s arrival in Switzerland, the payment will be taxable in Switzerland if it is made after the transfer of domicile of player X from state B to Switzerland. In that case, player X will indeed become subject to unlimited tax liability in Switzerland as from the date of his arrival in Switzerland, provided that the conditions of domicile or residence are met (see question 1 above).

Switzerland will, however, have to waive its right to tax based on the applicable tax treaty if the payment is linked to an effective employment in the foreign state. According to Swiss case law, this would, however, not be the case if the payment was made in relation to an non-competition clause or for the early termination of the employment contract. From the Swiss perspective, such payment would indeed qualify as “other income” which would be taxable in the residence state only (art. 21 OECD Model Tax Convention).

 

1.3   What is the tax treatment of one-time payments once re-transferred? E.g. player X is entitled to a percentage of any transfer sum in the event of a future transfer. Which country is entitled to tax such payment?

Switzerland will, in principle, have no right to tax such one-time payments, unless:

1  player X is resident in Switzerland when he obtains a claim towards such payments (unlimited liability to tax), or

2  if such payments relate to a former employment in Switzerland (limited liability to tax).

In both instances, the right of Switzerland to tax, based on the applicable tax treaty, will ultimately depend on whether the one-time payments relate to a previous employment in Switzerland (which could be taxed in Switzerland based on art. 15 OECD Model Tax Convention); or, in the case where player X is tax resident in Switzerland, whether such payments could qualify as “other income” in the sense of art. 21 OECD Model Tax Convention (see question 1.2 above).

 

1.4   What is the tax treatment of the payment of the agent fees by club B or club C on behalf of player X and in which country will the payment be taxed?

The payment would probably qualify as an employment income (benefit in kind) of player X and, as such, would be fully taxable in Switzerland if player X has his tax residence in Switzerland. This would be the case irrespective of whether the payment is made by club B or by club C.

If club B or club C makes the payment when player X is not a Swiss tax resident, such payment could only be taxed in Switzerland if it is linked to his past employment in Switzerland. This might be the case for the payment made by club B in Switzerland, which is likely to relate to player X Swiss employment. It is, however, unlikely that the payment made by club C, in state C, could be regarded as relating to player X’s past Swiss employment.

Suppose player X, resident for tax purposes in Switzerland, is transferred end of July on a loan basis from club B in Switzerland to club C located in state C.

2  Will player X cease to be a Swiss resident upon the transfer to state C for the fiscal year in which the transfer occurs? Will player X acquire State C tax residence in the same fiscal year in which the transfer occurs?

 

Player X will cease to be a Swiss tax resident upon his transfer to state C on the express condition that he creates a new domicile in state C. This means that his move must be effective and that he must leave Switzerland with an intention to create a new domicile in state C (see question 1 above).

In this case, player X is transferred on a loan basis. Depending on the terms and conditions of the loan, notably as regards the period of the loan, Switzerland might argue that player X remains domiciled in Switzerland for the period of the loan. Player X should be able to argue the contrary if he is effectively taxed in state C as a resident of that state. In case of a residence conflict with state C, the applicable tax treaty signed between the two countries should be examined to determine the tie-breaker rule that may resolve this conflict for the relevant year(s).

If Switzerland were in the position of state C (state of arrival), player X would be fully taxable in Switzerland as from the date of his arrival in Switzerland, provided that he takes up residence in Switzerland with an intention to stay on a long-term basis or that he fulfils the conditions of a qualified residence (sojourn). The second condition would be met, at least, if player X stays in Switzerland for 30 days without notable interruptions. In case of residence conflict with the state of departure, the applicable tax treaty signed between the two countries should be examined to determine the tie-breaker rule that may resolve this conflict for the relevant year(s).

 

2.1   Should player X continue to be paid by club B, what is the tax treatment in Switzerland and state C of such payment for income tax purposes?

The tax treatment will depend on whether player X remains Swiss tax resident in that case (see question 2 above). If player X remains fully liable to tax in Switzerland, he will be taxed on the payment received from club B. If, however, he is no longer Swiss tax resident (or if the tie-breaker rule allocates the taxing rights to state C), player X can be subject to a limited taxation in Switzerland for his work (physically) exercised in Switzerland. The source of the payment is not relevant. In this case, player X exercises his working activities in state C rather than in Switzerland, so that payments received by club B should not be taxed in Switzerland.

If Switzerland were in the position of state C, the payments made by club B would be taxed in Switzerland based on the unlimited liability to tax of player B in Switzerland, because of his domicile or qualified residence (see question 2 above). The payments would also be taxed in Switzerland, even if player X were not a Swiss tax resident, since such payments relate to a work physically exercised in Switzerland. Again, the source of the payment (in this case, from a club abroad) is not relevant.

 

2.2   Should player X be paid by club C, what is the tax treatment in State C and Switzerland of such payment for income tax purposes?

Since the source of the payment is not relevant for Swiss domestic tax purposes, the answer would be the same as in question 2.1. above.

 

2.3   What is the tax treatment of the payment of the agent fees by club B or club C on behalf of player X and in which country will the payment be taxed

The payment of the agent fees on behalf of player X would constitute an employment income of player X (see question 1.4 above).

 

Commission agent’s tax ramifications

 

1  What is the tax treatment for income tax purposes of fees paid to the agent involved in the negotiation of the transfer?

From a general perspective, the fee paid to an agent involved in the negotiation of a player’s transfer will be taxable, based on Swiss domestic law, as follows.

–  In case of an individual agent, the fee will be taxed as a business income for income tax purposes:

 

1  if the agent is a Swiss tax resident; or

2  if the fee is linked to a professional activity exercised in Switzerland

 

–  In case of a corporate agent (legal entity), the fee will be taxed as a profit for corporate income tax purposes:

 

1  if the corporation has its seat in, or is effectively managed from, Switzerland; or

2  if the fee is attributable to a Swiss permanent establishment of the foreign company.

 

1.1   Where the agent is resident in a treaty jurisdiction.

In case the agent is resident in a treaty jurisdiction, and, therefore, not in Switzerland, the right to tax of Switzerland will be limited to the situation where the fee is linked to a professional activity in Switzerland (individual agent) or to a Swiss permanent establishment (corporate agent). This could also be the case if the company (corporate agent) has its seat abroad but is effectively managed in Switzerland (i.e. the day to day management of the company is carried out from Switzerland).

 

In principle, Switzerland’s right to tax should be confirmed by the applicable double tax treaty, based on art. 7 or 14 OECD Model Tax Convention, if the fee is linked to an activity performed by the agent in Switzerland. Switzerland’s right to tax should also be confirmed by the applicable double tax treaty, based on art. 4 para 3 OECD Model Tax Convention, in the case that the legal entity, while having its seat aboard, is effectively managed from Switzerland. The double tax treaties concluded by Switzerland do, indeed, usually provide for a tie-breaker rule (company residence) based on the place of effective management rather than the place of incorporation.

 

1.2   Where the agent is not resident in a treaty jurisdiction.

If the agent is not resident in a treaty jurisdiction, the right of Switzerland to tax will remain the same as illustrated under question 1 above.

 

1.3   Where the fee is paid by club B in Switzerland.

The source of the payment is not relevant for the taxation in Switzerland.

 

1.4   Where the fee is paid by club C in state C.

The source of the payment is not relevant for the taxation in Switzerland.

1.4   Where the fee is paid by player X.

 

The source of the payment is not relevant for the taxation in Switzerland.

 

[1] University of Geneva, Switzerland.

[2] Attorney-at-Law, Swiss certified tax expert, LL.M, associate at Oberson Abels SA, Lausanne. Email: fepitaux@obersonabels.com