How footballers transferring to Italy can benefit from the country’s new income tax regime for sportspersons

Published 28 August 2019 By: Dr Mario Tenore

Italy Football

Italy has recently introduced attractive tax measures aimed at fostering professional sports. In particular, the so called “Decreto Crescita1 (the Decree) has reshaped existing rules for inbound workers, introducing a specific regime for professional sportspersons (which in Italy means participants in football, cycling, golf and basketball2) who are willing to work and transfer their tax residence to Italy from 2020 onwards (the Regime).

The Regime should help foster the inbound transfers of players. Italian clubs negotiating players’ remuneration on a net basis are also taking advantage of a cost saving as a consequence of the reduced tax burden. Because of the Regime, clubs will be able to offer a lower gross salary and are thus incentivized to acquire foreign players rather than players who are tax resident in Italy or those who are not eligible for the application of the regime.

This article takes a closer look at the practical application of the Regime within the context of an overseas footballer signing for an Italian club. Specifically, it looks at:

  • When and how the Regime applies;

  • Why “tax residency” is a crucial element and how it is determined;

  • The three key conditions for applying the Regime; and

  • What happens if the conditions are not met (if, for example, the player’s contract is terminated early).

For readers wanting a general introduction to the new Regime for inbound workers (and the corresponding regime for high net worth individuals willing to relocate to Italy) please read this article first: How Italy’s favourable new tax regimes can benefit the sports industry3.

When and how the Regime applies

Under the newly introduced Regime, the income of professional sportspersons will benefit from a 50% exemption for purposes of personal income tax (and local surcharges). The tax benefit has a minimun duration of five tax periods (the year of transfer of tax residence and the subsequent four years) and, subject to certain conditions, could be extended up to a maximun of ten tax periods.

The Regime applies to income paid by the Club as from 12 January 2020. The Player must request the application of the Regime either directly to the Club or, alternatively, by filing a refund request to the Italian tax authorities. In case the request is submitted to the Club prior to the aforementioned date4, the Club would apply the withholding taxes on half of the remuneration paid.

The Regime covers any Club remuneration (which qualifies as employment income), including payments received for the use of the image rights of the player. The Regime also applies to benefits in kind, which may arise, for example, if the Club undertakes the obligation to pay the agent’s commission on behalf of the Player. Interestingly, the Regime should also be applicable to additional income tax claimed by Italian tax authorities in connection with tax audits regarding the existence of a benefit in kind for the Player.

The request of application of the Regime triggers the payment of a special levy that is aimed at strengthening the formation of youth football sector. The special levy is calculated as 0.5% of the Player’s taxable base. At present, it is unclear whether the levy should be paid by the Club or by the Player. From a commercial point of view, the parties may agree on a net remuneration inclusive of the levy.

Tax residence is a crucial element

The application of the Regime is subject to three cumulative conditions which rely on the tax residence of the beneficiary. In Italy, similarly to several other jurisdictions, the tax residence of individuals relies on the 183-day threshold in the calendar year. In brief, an individual is considered Italian tax resident if, either:

  1. The individual is registered in the official register of the Italian resident population (anagrafe della popolazione residente). This criterion relies on a formal condition, i.e. registration in the above-mentioned register for at least 183 days in a given tax period.5,6

  1. The individual has a “domicile” in Italy according to Article 43(1) of the Civil Code, which is identified as the place in which a person has the centre of his personal and economic interest. Article 43(1) of the Civil Code refers to domicile as “the place where the individual has established the main seat of her/his business and interests”.7; or

The concept of domicile relies on a subjective element, i.e. the person’s intention to establish and maintain the main seat of his business and interests at a certain place, being not relevant whether the individual is actually present therein. Both economic (e.g. where employment, self-employment or entrepreneurial activities are carried on) and family/social ties (e.g. availability of a home, physical presence of family members, place where children attend school) are relevant to assess the place where an individual has his domicile and have to be taken into account.

Over the past years, the Supreme Court has maintained that for the assessment of domicile,8 personal ties to a certain location (e.g. availability of a home, physical presence of family members) should prevail over business or economic ties.9 Accordingly, the Italian tax authorities (hereinafter ITA) have held that the mere presence of the family of the individual in Italy may be sufficient, as such, to locate the domicile in Italy (re the tax residence), despite the existence of foreign business or economic ties.10

Relying on the judgment issued by the Court of Justice of the European Union (ECJ) in Loloudakis,11 the Italian Supreme Court held that it is necessary to assess all the relevant circumstances and that personal ties prevail. In a recent decision, the Supreme Court took an opposite approach, holding that personal interest should not by itself prevail over economic and business interest.12 This decision is nonetheless isolated and it is difficult to predict whether the Supreme Court definitely abandoned the principle pursuant to which personal ties prevail over business ties. In this particular case, the Supreme Court’s decision may have been biased by the fact that the economic and business interests were located exclusively in one single foreign state.13; or

  1. The individual has his residence in Italy for civil law purposes, namely the place in which the person has his habitual abode according to article 43(2) of the Civil Code, which defines such term as: “the place where the individual has his habitual abode”. In the assessment of residence, two factors must be considered:

    • the mere fact of living at a certain location (objective element); and

    • the intention to live there on a steady basis, i.e. not temporarily (subjective element), although not necessarily on a continuous or final basis.

The concept of residence relies on factual circumstances, such as the presence of the family or the existence of business and social ties.14 An abode can be habitual without necessarily being continuous or final. This could be the case if the person also lives in other countries, provided that the stays in such countries are merely incidental and of a temporary (although not necessarily short) nature.15 In particular, this principle was clarified in a landmark decision of the Supreme Court (no. 1738 of 14 March 1986), according to which an abode can still be habitual if an individual works abroad as long as he retains the dwelling in Italy, returns there whenever possible and shows the intention to maintain there the centre of his family and social relations (relevant circumstances to prove such intention may include, for example, enrolment in clubs and associations, enrolment with the national health system, the availability of a general practitioner and the availability of a car).

The three key conditions for applying the Regime

That stated, the application of the Regime is subject to the following three cumulative conditions:

  1. The player must take up the Italian tax residence as from the fiscal year (FY) 2020. This condition should be satisfied by players transferred to Italian clubs in August 2019 who shall become Italian tax resident in the fiscal year 2020 (subject to a careful review of the personal facts and circumstances). Accordingly, income paid in the FY 2020 shall benefit of the tax reduction, whereas income paid in the FY 2019 shall be subject to ordinary income tax;

  1. The player must not qualify as Italian tax resident in the previous two FYs prior to that of acquisition of the Italian tax residence. For players transferred to Italian clubs in August 2019, who qualify as Italian tax resident as from the FY 2020, they must not be Italian tax resident for the FYs 2018 and 2019. In case the player returns to Italy, the condition would be satisfied if the latter left Italy in August 2017 (summer transfer window) or in January 2018 (winter transfer window), as in both cases the 183-day threshold would not be met for the FY 2018. In all these cases, however, the residence status must be tested against a careful review of the personal facts and circumstances). In the request to the Club the player must declare under his own responsibility the existence of this condition.

  1. The player must remain Italian tax resident for at least two FYs. Such requirement should be met to the extent the player remains in Italy up and until the entire sport season 2020/2021. Indeed, if the player leaves Italy in August 2021, he would still qualify as Italian tax resident in the FY 2021 being the 183-day threshold met (again the conclusion must be tested against a careful review of the personal facts and circumstances). The application of the Regime should rely on the residence criteria which have been indicated above. Therefore, in principle, it would be sufficient for the player to remain registered in the official register of the Italian resident population (anagrafe della popolazione residente) provided that for the FY 2021 the Player would file a tax return declaring himself as Italian tax resident.

What happens if the conditons are not met?

The benefits of the Regime may be withdrawn, for example, in the event the player’s contract is terminated and they leave Italy at the end of the first sport season and therefore do not qualify as Italian tax resident for two fiscal years (see condition 3, immediately above).

The withdrawal from the Regime triggers the claw-back of the unpaid taxes (on the assumption that the withdrawal occurs once the player already received income for which the partial exemption applied) as well as the possible payment of administrative penalties which, depending on the case, could apply to the Club (in its capacity as withholding agent) or to the player had he declared a lower taxable income. In both cases, the risk of tax penalties is yet uncertain and clarifications from the Italian tax authorities would be welcomed.

Players and clubs may agree in the employment contract that the Club shall bear the consequences of the early withdrawal from the Regime.

As stated above, in the event of withdrawal from the Regime, the player and the club may agree that the latter undertakes the obligation to indemnify and keep harmless the player from the negative consequences of the withdrawal from the Regime (namely higher taxes due and penalties).

The indemnification covers the player’s withdrawal from the Regime. Therefore, in the contract the parties have agreed on the basis of the net figures16, two options may be pursued, either:

  1. in the employment contract the parties can indicate two gross amounts, respectively one that does take into account the application of the special tax regime and one that does not, so that latter gross amount would be due by the Club in the event the Player is transferred to a foreign Club after one sport season; or

  1. in the employment agreement the Club may undertake the obligation to pay to the player an increase of the agreed gross remuneration (initially calculated taking into account the application of the Regime) in the event of the player’s withdrawal from the Regime. The increase of the gross remuneration should be such that the after tax amount must correspond to the taxes due by the Player as a consequence of the early termination.

It should be noted that the Club (as withholding tax agent) could settle the consequences of the early termination of the Regime and pay the taxes which are due by the player. However, if the Club does not recharge to the Player the taxes paid to the Italian tax authorities, the Player would be deemed to receive a benefit in kind which is taxable for income tax purposes (and would be subject to Italian income tax and local surcharges ordinarily due). Therefore, the Club must still ensure that the Player receives an increase of the agreed gross remuneration in the event that the regime could not be applicable, e.g. because the Player is transferred abroad after on sport season.


Key takeaway points for clubs and players

In summary, the most important points for clubs and players to take-away from this article are:

  1. The Regime provides a substantial tax reduction and certainly helps foster inbound transfers of football stars into Italy.

  1. The Regime is subject to strict requirements related to the tax residence of the players, which is a crucial element that must be subject to careful examination on a case-by-case basis.

  1. The Regime is still surrounded by a number of uncertainties, most notably in connection with the application of administrative penalties in case of early termination of the employment contract.

  1. The Regime must be properly reflected in the employment contract and/or other related arrangements through the use of contractual techniques which ensure, for example, that the Player is guaranteed a net remuneration regardless of whether the benefits of the Regime are applied or not (e.g. in the event the player leaves Italy after one sport season).

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Dr Mario Tenore

Dr Mario Tenore

Dr. Mario Tenore practices at Maisto e Associati (Milan office) and is member of the International Tax Entertainment Group (“ITEG”). He obtained a PHD in tax law (cum laude) from the II University of Naples (Italy) and an LL.M. Degree (cum laude) in international tax law from the University of Leiden (The Netherlands). One of his areas of expertise is taxation of entertainers and sportspersons. In football matters, he provides advice to clubs, players and their agents in relation to tax issues on domestic and international transactions. He has gained in particular experience on tax issues arising in respect of international transfers, management of image rights, payments to agents and others.He has extensively published in international tax journals and books and he is lecturer on international tax law matters at several academic masters and programs in Italy and Europe.

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