Managing athletes image rights in Italy: Key considerations for structuring and accounting under the new tax regime

Italy Tax
Published 28 February 2019 | Authored by: Elio Andrea Palmitessa

Sportspersons can derive a considerable portion of their income from ancillary activities connected to the sporting performance. Consequently, tax treatment of income deriving from the exploitation of image rights should be placed as a top priority in the tax planning of international sportspersons. This should be front of mind given the increasing number of court rulings on this issue as tax authorities begin to investigate dozens of athletes over image rights irregularities.

Images rights are defined as the “Image rights’, ‘personality rights’, or ‘publicity rights’ all refer to an individual’s proprietary right in their personality and the right to prevent unauthorised use of their name or image or a style associated with them. Athletes will either profit from selling their own image rights or will licence their rights for use by a club for an annual payment, as if they were to agree an advertising contract with the club.1.

In tax treaty law, The Organisation for Economic Co-operation and Development (“OECD”) Model Tax Convention2 (“OECD Model”) is a “model” developed by the OECD countries (35 countries including the UK, France, Germany, Italy, Spain, Switzerland3), which serves as “guideline” for the negotiation and implementation of double tax treaties between contracting states; Italy and UK signed a double tax treaty following the OECD Model Convention. Thus, the Commentary to the OECD Model Convention is provided as an aid to interpretation.

Treatment of income for Sportspersons (Tax Treaty Interpretation)

In the framework of the OECD Model, Article 17 regulates the allocation of income derived by sportspersons (and entertainers).

The rationale behind the introduction of this rule has been that of providing the network of tax treaty laws with an anti-avoidance measure targeted at the possible non-payment of taxes in both the performance state and in the state of residence of sportspersons (sportspersons being individuals who are characterized by an elevated level of international business mobility, considering also the possibility of their moving residence to a low-tax jurisdiction).

Article 17 represents a deviation from the normal allocation rules of the OECD Model - which gives exclusive taxation rights to the individual’s state of residency - providing for primary taxation rights to the state where the performance takes place and secondary taxation rights to the sportsperson’s state of residency, which reduces forms of double taxation through Article 23 of the OECD Model.

Article 17, paragraph 1 of the OECD Model reads as follows:

income derived by a resident of a Contracting State, as (…) a sportsperson, from that resident’s personal activities as such exercised in the other Contracting state, may be taxed in that other State” (emphasis added).

This first paragraph requires that the income be subjectively4 attributable to the taxpayer concerned as well as derived from performances made directly or indirectly by the sportsperson in the course of his/her personal activity. The provision is specifically targeted at hindering those situations where a payment - in respect of specific performances - is made to a “middleman” (such as the sportsperson’s empresarios or agent) instead of directly to the sportsperson5, enabling therefore taxation by the performance state.

The scope of Article 17, paragraph 2 in the OCED Model is rather to prevent forms of tax avoidance whenever:

income in respect of personal activities exercised by a sportsperson acting as such accrues not to the sportsperson but to another person” (emphasis added).

This paragraph stipulates therefore for a “look-through approach”, as long as the source state is allowed to tax any income derived from an activity personally performed by the individual in the territory even if the income is formally accrued to an interposed person. In this case, Article 17 overrules the standard provisions set out in Articles 7 (business profits) and 15 (employment income), guaranteeing the performance state’s rights to taxation.

The application of Article 17 of the OECD Model has historically led to concerns regarding the tax treatment of income derived from ancillary activities to the main performance (the “causal” earnings). This consideration stems from the fact that sportspersons in their activity very often receive remuneration in different forms, such as from:

The OECD Commentary does not provide a clear definition of what constitutes an activity ancillary to the main performance subject to Article 17 of the OECD Model but, rather, clarifies that whenever there is no close connection between the income received and the performance carried out, any remuneration derived by the sportsperson will not fall within the scope of the special distributive rule. In this situation, other distributive rules are to be found, such as Articles 7 (Business Income), 12 (Royalties) or 21 (Other income) of the OECD Model, which give exclusive taxation rights to the state of residence.]

Therefore, from the perspective of the OECD Commentary6, such a close connection between the “casual” earning and the sport performance:

will generally be found to exist where it cannot reasonably be considered that the income would have been derived in the absence of the performance of these activities” (emphasis added).

In other words, it would be evident either from the:

  1. timing of the income generating event; or,

  2. from the contractual arrangements relating to the participation in named events of a number of unspecified events by the sportsperson concerned.

Treatment of Image Rights for Sportspersons (Tax Treaty Interpretation)

The Commentary on Article 17 of the OECD Model, paragraph 9.5, defines image rights – in a non-exhaustive list - as the right of sportspersons “to use their name, signature or personal image”. However, the treaty characterization of this type of income in Article 17 of the OECD Model is not always straightforward since it has historically raised different issues in tax law.

In the author’s opinion, the correct approach requires an in-depth analysis of facts and circumstances of the specific case, aimed at understanding whether:

[…] payments made to a … sportsperson who is a resident of a Contracting State … for the use of, or the right to use, that … sportsperson’s image rights constitute in substance remuneration for activities of the … sportsperson that are covered by Article 17 and that take place in the other Contracting State” (emphasis added). Accordingly, where such payments “are not closely connected with the … sportsperson’s performance in a given State, the relevant payments would generally not be covered by Article 17” (emphasis added).

As mentioned above the characterization of income from image rights under this distributive rule is linked to a number of situations, in consideration of the “close connection” between the payment and the sportsperson’s performance: both states keep wide taxation rights when such nexus is ascertained. Otherwise, payments would qualify, for tax treaty purposes, under different distributive rules such as Articles 7, 127 and 21 of the OECD Model, which assign exclusive taxation rights to the sportsperson’s state of residency unless any business is carried-out in the state of performance through a permanent establishment located therein8.

Treatment of income from image rights for sportspersons resident in Italy

Taxation of resident sportspersons is subject to ordinary tax rules (“IRPEF”). Depending on the nature of the underlying professional sport relationship, regulated by Law No. 91 of 23 March 1981 (hereinafter only “Law No. 91”), income from sporting performances may be treated as:

  1. employment income;

  2. income assimilated to employment income; or

  3. self-employment income.

In accordance with Article 3(1) of Law No. 91, professional sportspersons are deemed to perform their services within an employment relationship if the activity, carried-out on a continuing basis, takes place in exchange for consideration. Article 3(2) of Law No. 91 lists three exceptions to the general rule according to which - sports performances are deemed to fall within an independent service relationship where at least one of the following conditions is met:

Therefore, within the framework of Law No. 91, income from sporting activities can either be classified as:

Instead, outside the framework of Law No. 91 (i.e. when the sportsperson plays a sport within a national Federation not affiliated to the Italian National Olympic Committee - CONI, as for example in the case of tennis players or golfers), income derived by the performance, such as prize money or an award, may qualify not only as income from employment (Article 49 of the Italian Tax Code (”ITC”)) or income assimilated to employment (Article 50 ITC) but also as income from self-employment (Article 53 ITC). In all these cases, the domestic qualification results in the same tax rates but in different deduction rules.

In consideration of the above, income from the exploitation of image rights may assume different qualifications in Italy, depending on whether the individual performs as an employee or as a self-employed sportsperson. Hence, the corresponding tax treatment may change should image rights be assigned to the employer (e.g. a football team) or to a third party (e.g. a sponsor company or an intermediary company). Specifically, athletes may:

  1. assign the image rights (directly) to a sponsor company;

  2. assign the image rights to the employer;

  3. assign the image rights to an intermediary company, which, in turn, will sub-licence to a sponsor company;

  4. assign the image rights to an intermediary company, which contracts with the employer in respect of the use of those rights, separately from the employment contract.

The ITC has yet to provide a specific set of rules aimed at qualifying the tax treatment of income derived from the exploitation of image rights, however prevailing doctrine holds the view that any income received by sportspersons in connection with such activity should be classified in the following categories:

The sportsperson may also decide to exploit his image rights through a foreign entity (e.g. a star/holding company10) without an Italian permanent establishment. In this situation, any payment received by the star/holding company (assignee of the image rights) would not be, in principle, liable to tax in Italy (following the general rule in Article 7 of the OECD Model) while the resident sportsperson would receive the income in the form of dividends (the typical structure considered in this Article is one whereby the image rights are held by a company in which the sportsperson is the sole or main shareholder). Thus, 95% of the dividends received would be tax exempted in Italy (Article 89(3), first sentence of the ITC) unless the overseas entity qualifies under the Italian CFC provision (Article 167 ITC).

The Italian legislator understood to tackle the use of these harmful tax practices through the anti-avoidance rule contained in Article 23(2)(d) ITC, under which - in line with the “look-through approach” set forth by Article 17(2) of the OECD Model - any remuneration derived by a foreign entity from artistic or professional performances carried out on their behalf in Italy is deemed to be Italian sourced. Consequently, payments made by a resident company (e.g. a football club or a sponsor company) to a non-resident entity in connection with the use of the image rights of a resident sportsperson, would be subject to taxation in Italy (the payer would act as Italian withholding agent). Additionally, the use of holding/star companies in the exploitation of image rights may allow the tax authorities to challenge the structure lacking any substance in the foreign entity. Indeed, the latter may qualify as a conduit company of the sportsperson, set up with the sole purpose of avoiding any taxation at source. In this context, Article 37(3) of the Decree of the President of the Republic No. 600 of 29 September 1973, would apply and, by way of the “look-through approach”, any income derived would be attributable to the real beneficiary (i.e. the sportsperson) where it could be demonstrated that the item of income, formally attributable to the legal entity, under an economic and legal point of view was owned by the taxpayer.

How sportspersons’ image right structures can benefit from the special regime for new Italian residents

By way of the 2017 Budget Law11 a special regime was introduced to the Italian tax system12 (“the Regime”), providing domestic legislation with a favourable set of rules targeted at attracting high net-worth individuals willing to transfer their tax residency to Italy. The Regime is available to individuals who have been non-Italian tax residents for at least 9 out of 10 years preceding their transfer to Italy and allows new residents the possibility of applying for a substitute tax of € 100,000 per year on their overall foreign sourced income, while the portion of their income sourced in Italy is subject to ordinary Individual Income Tax (IRPEF13) and calculated by applying the progressive tax rates on the individual taxable income.

The Regime exempts from ordinary taxation (IRPEF) the portion of non-Italian sourced income. Such income is subject to substitute taxation, irrespective of the treaty qualification (i.e. whether Article 17 of the OECD Model is applicable or of any other distributive rule) and regardless of any taxation at source. Therefore, the new provision focuses on the source of the income concerned - “domestic versus foreign” - allowing taxpayers to override the historical conflict of “source versus residence” deriving from the allocation of taxation rights under art. 17 of the OECD Model14.

An analysis of the territoriality of the income derived by sportspersons should be made by “mirroring” the rules set out in Article 23 ITC to identify the items of income deemed to arise in Italy as Italian sourced income for non-resident persons, so that:

  1. remuneration received for performances falls either within the category of employment income (Article 23(1)(c) ITC) or self-employment income (Article 23(1)(d) ITC). Consequently, income is deemed to be foreign sourced if the activity is carried-out outside Italy;

  2. in the case of income from the exploitation of image rights, the analysis is more troublesome. It may qualify as

    1. income from employment where the sportsperson assigns the image rights under an employment relationship,

    2. (self-employment income if the sportsperson exploits his/her image rights acting as a self-employed sportsperson or, lastly,

    3. miscellaneous income where the sportsperson acts under an employment relationship and exploits the image rights outside the main relationship with the employer.

In the case (1) and (2), the income is deemed to be foreign sourced if the activity is carried-out outside Italy, while in the case of (3) the income qualifies its source from the jurisdiction in which the disposed assets are located (if capital gains) or where the activity is performed (if other income), as per Article 23(1)(f) ITC. In other words, if the income from the exploitation of image rights qualifies as miscellaneous income, it is deemed to be foreign sourced where it lacks any territorial connection with Italy.

The evaluation of the territoriality of the income deriving from the exploitation of image rights is not always straightforward, given the objective difficulties in identifying whether the activities are carried-out in Italy or not. In the author’s view, an official clarification from the Italian Revenue Agency would be welcome as the parameters to determine the source of income are unclear and lack consistent guidelines from tax jurisprudence.

In consideration of the foregoing, there could be enough room to stipulate that, by applying to the Regime, substantial tax savings in connection with the exploitation of image rights overseas would be available to sportspersons, since the special provision disregards any conflict of treaty qualification that may arise between contracting states focusing exclusively on the source of the income concerned. Italy, as the sportspersons’ state of residence, would limit its taxation rights to the payment of a substitute tax of €100,000 per year, so that attention should be focused on the characterization between domestic or foreign qualification of the income derived from sporting activities.

The same principles address the exploitation of image rights through entities (i.e. a holding/star company). In this case, if the entity is tax resident in Italy or maintains an Italian permanent establishment through which the exploitation is carried-out, any income would be taxed in Italy as business income. If, on the other hand, the entity would not run a business in Italy, the income may still be subject to anti-avoidance rules (either Article 17 of the OECD Model Convention or Article 23(2)(d) ITC), in consideration of the nexus between the income concerned and the sporting performance. From the Italian perspective, the use of foreign entities is allowed as far as they reflect genuine business activities (i.e. not lacking economic substance) and involves facts, deeds and contracts that are not in conflict with the purpose of the relevant tax provision or of the principles of the Italian tax system.

Circular No. 17/E of 22 May 2017 has clarified that, where entities qualify as fictitious interposed persons under the rules in Article 37(3) of the Decree of the President of the Republic No. 600/1973, any income derived by the entity would be directly attributable to the shareholder. In substance, under the Regime the underlying income would be treated as if it were directly attributable to the sportsperson. Accordingly:

The Regime also gives an interesting opportunity for international tax planning in correspondence of structures located in low-tax jurisdictions, falling under the Italian CFC rules (Article 167 ITC15). Specifically, the application of the CFC rules to newly Italian resident individuals holding a controlling share in entities located in privileged territories would be disregarded and, consequently, the application of the ordinary provision that “looks-through” the foreign entity attributing any income directly to the individual in proportion to the equity interest (irrespective of any profit distribution) would be repealed by the substitute taxation.

Conclusion

In the author’s view, the Regime may allow important tax savings either through a direct holding or structuring image rights deals with a star company aimed at exploiting the commercial value of such rights. In any event, it would be desirable to apply for a preliminary ruling in front of the Italian tax authorities, so as to verify the existence of the necessary requirements to apply for the Regime.

Further Reading

Further reading - Background on new Italian Tax Regime

The following progressive individual income tax rates are applicable in 2019 (in euros):

Income (€)

Income tax

 

up to 15,000

23%

from 15,001

to 28,000

27%

from 28,001

to 55,000

38%

from 55,001

to 75,000

41%

over

75,000

43%

According to Italian law, ‘income’ is deemed to be foreign sourced mirroring the same territoriality criteria used to define any income sourced in Italy (Article 165, paragraph 2 of the ITC). Consequently, in accordance with Article 23 of the ITC, the Regime is available for income from assets located abroad, income from activities performed abroad and income paid by non-resident taxpayers. For example, the new provision would cover (irrespective of the foreign country of origin and regardless of its taxation in the source state):

  • employment income;

  • rental income,

  • capital income;

  • self-employment income;

  • business income and miscellaneous income.

However, the new regime also contains an anti-avoidance provision, according to which for the first 5 years of election (when the regime is comes into force), capital gains deriving from the transfer of substantial shareholdings in foreign entities fall outside the application of the substitute tax. A substantial shareholding is defined as a percentage of voting rights in the ordinary shareholders’, greater than 2% if in listed companies or 20% if in unlisted companies and/or a stake in the share capital greater than 5% if in listed companies or 25% if in unlisted companies. Thus, they are subject to ordinary Italian taxation, even if disposals made after 1st January 2019 will be subject to the new Italian legislation (withholding tax at 26% in place of progressive tax rates).

The Regime has also introduced a number of favourable benefits for applicants. Specifically, they are:

  1. exemption from net wealth taxes (IVIE16 (tax on value of properties held abroad) and IVAFE (tax on value of financial assets held abroad17),

  2. exemption from inheritance and gift taxes on assets and immovable properties located abroad18, and

  3. relief from tax monitoring duties on assets and immovable properties outside Italy.

It is also worth noting that new residents - holding a controlling share in entities located in a zero or low-tax jurisdiction (i.e. star companies) - are not subject to the domestic Controlled Foreign Company (“CFC”) rules (e.g. “look through approach”), to the extent that, under the Regime, the taxation of foreign sourced income (irrespective of its location) is fulfilled by way of the substitute tax and regardless of its taxation in the source state.19

Applicants can benefit from the Regime for a maximum of 15 years (not renewable), however it can be revoked at any time and may be forfeited under specific circumstances, such as the delay in payment of the annual substitute tax. The Regime can be extended to family members, namely: spouse, sons and daughters, parents and their immediate descendants, adoptive parents, sons and daughters-in-law, fathers-in-law and mothers-in-law, brothers and sisters. In such cases, family members would be subject to substitute tax of € 25,000 per year on their overall foreign sourced income, irrespective of the foreign country of origin and regardless of their taxation in the source state. Similarly, any income from domestic sources would be subject to individual come tax (“IRPEF’) and the person would benefit from the same advantages granted to the main applicant in terms of exemption from net wealth taxes and tax monitoring duties.

Substitute tax must be paid by 30 June of the year following the relevant tax year. For example, if the individual migrates to Italy in March 2019 (he would therefore be considered tax resident in Italy for the entire fiscal year 2019), the substitute tax payment must be made by 30 June 2020.

In any event, application for the Regime requires a preliminary analysis of the source of income derived by the applicant and his family members, given that, as a general rule, no foreign tax credit would be granted for taxes paid abroad. However, should individuals wish to benefit from a foreign tax credit for taxes paid abroad, it is possible to exclude specific countries from the Regime through the mechanism of the “cherry-picking” option. In this situation, any income deriving from those selected countries would be subject to IRPEF and the taxpayer would be liable to net wealth taxes, ordinary inheritance and gift taxes on properties and rights set abroad, as well as to tax monitoring duties for assets and immovable properties located in the other state.

A conclusive remark to tax treaty entitlements of new Italian residents: the question arose as to whether the applicant might be considered subject to comprehensive taxation (full liability to tax) or, rather, subject to limited taxation, considering that the second sentence of Article 4, paragraph 1 of the The Organisation for Economic Co-operation and Development (“OECD”) Model Tax Convention20 ( “OECD Model”) clarifies that the term “resident of a Contracting State” for tax treaty purposes “does not include any person who is liable to tax in that State in respect only of income from sources in that State”. In accordance with the standards set out in the OECD Commentary to Article 4, paragraph 8.3, which suggest that “the application of the second sentence has to be interpreted in the light of its object and purpose […] which is to exclude persons who are not subjected to comprehensive taxation in a state, because it might otherwise exclude from the scope of the OECD Model all residents of countries adopting a territorial principle in their taxation, a result which is clearly not intended”, the Italian tax authorities confirmed21 the full liability to tax of new individual residents given that the whole income of the taxpayer is subject to tax: the domestic income is subject to IRPEF while foreign income is subject to substitute tax. 22

Hence, since the Regime can allow important tax savings to individuals willing to migrate to Italy, in the author’s view, preliminary analysis should be carried out to evaluate the feasibility and the potential impact of the new provision on the specific case of sports persons. Such analysis could also consider the filing of a tax Ruling23 to the Italian authorities, with the aim of verifying the existence of the requirements necessary to apply for the Regime.

 

References

2 Reference is made to the version approved by the OECD Council on 21 November 2017.

3 ‘List of OECD Member countries - Ratification of the Convention on the OECD’, https://www.oecd.org/, last accessed 28 February 2019, https://www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm

4 Axel Cordewener, Tax treaty issues related to qualification, allocation and apportionment of income derived by entertainers and sportspersons, in Taxation of Entertainers and Sportspersons Performing Abroad, chapter 6, paragraph 6.2.3, Volume 13 in the EC and International Tax Law Series, Eds. Guglielmo Maisto.

5 Paragraph 8 of Commentary on Article 17.

6 Paragraph 9 of Commentary on Article 17.

7 In this contribution the Author assumes that Article 12 of the relevant Double Tax Convention follows the OECD standards. Italy, for example, entered into a Reservation in the Commentary on Article 12 of the OECD Model. Accordingly, the majority of Italy’s tax treaty network deviates from the OECD standards providing for a (minimum) taxation in the source state.

8 S. Oliva and E. Palmitessa, see above, p. 52.

9 Income derived from the assumption of obligations to do, not to do or to permit.

10 In which the sportsperson is the sole or main shareholder.

11 Law No. 232 of 11 December 2016, Article 1, paragraphs 152 to 159.

12 Article 24-bis of the Decree of the President of the Republic No. 917 of 22 December 1986 (hereinafter also “Income Tax Code” or “ITC”)

13 Imposte sul Reddito delle Persone Fisiche.

14 S. Oliva and E. Palmitessa, see above, p. 52

15 From 1 January 2019 a new CFC provision will repeal the existing one, pursuant to the implementation of the EU Anti-Tax Avoidance Directive No. 1164/2016 (ATAD). The new rule extends the control requirement to the direct or indirect shareholding in the foreign subsidiary profits, so that the CFC test could be met even if the Italian shareholder is entitled to more than 50% of the subsidiary's profit but does not hold the majority of voting rights. With reference to subjective criteria of application of the new rule, it is provided that a foreign subsidiary may be subject to CFC rules if the following two conditions are met: i) the effective tax rate in the other jurisdiction is lower than 50% of the effective tax rate that would have been applicable in Italy should the foreign entity be tax-resident in Italy; ii) proceeds received by the foreign entity originate for more than 1/3 from passive income sources, financial lease income, insurance, bank and other financial activities, income from sale of goods and the provision of low-value services to related parties.

16 IVIE (Imposta sul valore degli immobili situati all’estero) is a tax levied on immovable properties held abroad by an Italian tax resident. It is calculated at the rate of 0,76% on the value declared in the purchase agreement or the fair market value established in the market in which the property is located.

17 IVAFE (Imposta sul valore delle attività finanziarie detenute all’estero) is a tax levied on financial assets held abroad by an Italian tax resident. It is calculated at the rate of 0,2% on the fair market value of foreign financial assets.

18 It is worth noting that Italian tax residents are usually taxed on a worldwide basis with respect to properties and rights transferred by succession or donation wherever located.

19 Let’s assume that the individual A hold a controlling share in company B, located in a low-tax jurisdiction. According to CFC rules, any income earned by company B is taxed directly in the hands of the individual A (look-through approach) as if the company B were transparent. By the way, this is how CFC rules work all over the world.

Instead, under the Regime, the individual A would not be taxed on the income attributed directly to him (as would happen in normal circumstances) but Italy would consider that - by way of the substitute tax of EUR 100,000 – he fulfilled any duty in respect of the income earned by company B in the low tax jurisdiction.

20 Reference is made to the version approved by the OECD Council on 21 November 2017.

21 Circular No. 17/E of 22 May 2017, part II), paragraph 7.

22 In practice, it means that to access the tax treaty benefits between two contracting states (example, Italy and UK), it is required:

  1. To be a resident of one of the contracting states (example Italy);

  2. That that person is not taxed in his state of residence (Italy) only and exclusively in respect of income sourced in that State (Italy) but also in respect of income sourced abroad. This is because the international principles of taxation require that a person is taxed in his state of residence on the worldwide income.

23 Italian tax authorities will have a maximum of 120 days to provide a response (plus an extended period of 60 days should supplemental documentation be required).

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About the Author

Elio Andrea Palmitessa

Elio Andrea Palmitessa

Elio is a chartered accountant in Italy, specialised in EU and International Tax Law. He holds an LL.M. degree (with honours) in International Tax Law at Vienna University of Economics and Business (Institute for Austrian and International Tax Law). He also received the TEP designation (Trust and Estate Practitioner), the top tier of STEP qualification.

He is a member of several Boards of Statutory Auditors, a member of the International Fiscal Association (IFA) and the International Bar Association (IBA).

He has published extensively in international tax journals as well as lectured in courses and conferences in Italy.

The author can be contacted at: elio.palmitessa@gmail.com

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