International Athletes and Tax

By Athena Constantinou, Managing Director, APC Sports Consulting, Nicosia, Cyprus

In the last 25 years, we have seen a tremendous cross border movement in the world of sport.

For example, there have been a number of NBA players moving to Europe near the end of their sports careers to play in the European Basketball League (Euro League); a number of soccer players moving from Europe to the United States to play for the MLS; and so the list goes on.

During the past couple of years, with the growth of the Chinese Super League (Soccer), and the Chinese Basketball League, we have also seen a trend of near-retirement players moving to China to play either in the CSL or the CBL.

Players moving abroad have to face a number of challenges when settling and adjusting to the new reality of things, including:

  • a new culture;
  • a different language; and
  • a change of a team and colleagues.

These are just a few of the things that players have to deal with when signing playing contracts in foreign countries.

One of the biggest hurdles faced by 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 and their foreign contracts may give rise to income tax in their home countries, in addition to the tax paid in the foreign country where they are playing.

Most tax authorities impose tax on visiting sports persons based on the principles of residency and source of income. As a result, professional sports persons competing internationally have be alert to the fact 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 professional sports persons competing internationally vary, depending on whether they are competing individually or in team sports.

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 the particular foreign country will most likely be taxable in that foreign country and athletes can take a tax credit for the tax paid there when filing their tax returns in their country of tax residence.

Any sponsorship or endorsement income received by athletes competing in team sports is taxed separately. Usually, all types of income are structured to be received through a corporate entity owned by the athlete, in order to optimise the tax burden.

It should be noted, however, that such entities are highly scrutinised by the tax authorities of most countries; therefore, these arrangements must have commercial substance to justify their existence. Practices, such as having offshore companies and accounts, which aim at hiding commercial income, should be avoided, in order to steer clear of any penalties or criminal charges from the relevant tax authorities for tax evasion.

A common misconception amongst international athletes is the belief that their tax obligations end by paying taxes in the country where they are employed; this is usually not the case and athletes should be aware that they may have a tax liability in both their country of citizenship and their country of tax residence, that is, where they are currently living and playing. The athlete’s country of citizenship or domicile is the country where they come from; their country of tax residence is the country in which they currently live and work.

In most countries, in order to be considered to be tax resident, one has to live there for a period covering a total of 183 days or more within a calendar year.

There are four different ways in which countries all over the world apply taxation in terms of residency and citizenship and these are as follows:

  • taxing both their citizens and residents on their world-wide income no matter where they live (for example, the United States);
  • taxing their residents on their world-wide income (for example, the United Kingdom);
  • taxing their citizen residents only on their world-wide income and not the foreign residence of their country (in the case of a ‘non-dom’ tax regime);
  • taxing their residents on their local source income but not on their foreign source income (territorial tax system).

There are also a few countries that have specific regulations providing tax incentive packages for foreign sports persons moving into the country. These incentive packages usually differ from the country’s standard tax regulations, like the ‘Beckham’ tax laws of 2005 in Spain. The so-called ‘Beckham law’ basically allowed foreign players living and playing in Spain to be taxed at the rate of 24.75% instead of a progressive tax scale ranging form 24% up to 43%.

It is, therefore, 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 US citizens or US ‘green card’ holders, will still have to file a tax return in the US and pay any applicable taxes on their world-wide income, despite the fact that they are playing abroad and are, thus, tax residents of another country. Usually, when filing their US tax return, these athletes are allowed to receive a tax credit for any taxes paid abroad. In view of the fact that personal taxation rates in the US are quite high, in many instances, an additional US personal tax liability may arise.

It is vital for athletes to make sure that they maintain records of their compensation when playing abroad. These records include:

– pay slips;

– earnings statements and tax returns;

– a copy of their playing contract; and

– proof of tax payments and invoices of any playing-related expenses (such as agents fees).

By keeping a record of these items, athletes make it easier for their tax accountants to prepare their tax returns and take advantage of any deductions that will minimise their tax liability.

A common practice with team athletes playing in Europe is that social security contributions and income taxes arising from the playing contract are assumed by sports clubs and the athletes are paid on an agreed upon net amount.

Therefore, an understanding of the tax treatment of their contracts and the allocation of the resulting tax burden will be helpful to players during the course of their contract negotiations with clubs.

The complexity of tax systems place a heavy toll on professional sports persons competing internationally. Much preventive planning has to be done on the athlete’s part to optimise their overall taxation and be tax compliant wherever they are competing. It is vital, therefore, for athletes moving into the international arena, to get assistance from an experienced professional tax consultant, who will advise them on how to handle the different tax obligations when they sign a sports contract abroad.

After all, when it comes to tax compliance, the final responsibility and liability lies with the player him or herself and no one else!

Athena Constantinou may be contacted by e-mail at ‘athena@apc-sport.com’