Managing athletes image rights in Italy: Key considerations for structuring and accounting under the new tax regimeElio 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:
sponsorships (i.e. duty to wearing a shirt with the sponsors’ logo during a match);
advertising fees (i.e. promotion of a major tournament in which the sportsperson may participate);
merchandising payments (i.e. the sale of a line of products branded with the name or logo of the sportsperson); or,
disposal of image rights (i.e. granting of the use of the person’s portrait).
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:
timing of the income generating event; or,
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:
income assimilated to employment income; or
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:
the activity is carried out either within a single, or several interconnected sporting events, over a short period of time;
the sportsperson is not contractually bound with regard to the frequency of preparation or to the number of training sessions undertaken;
the sporting service, while being continuous, does not exceed eight hours per week, five days a month or thirty days a year.
Therefore, within the framework of Law No. 91, income from sporting activities can either be classified as:
income from employment (if the performance is carried-out within a contractual relationship); or,
as income assimilated to employment income (in all other cases).
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:
assign the image rights (directly) to a sponsor company;
assign the image rights to the employer;
assign the image rights to an intermediary company, which, in turn, will sub-licence to a sponsor company;
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:
images assigned to sponsor company or intermediary company, which, in turn, will sub-licence to a sponsor company - where the income is derived by an employed sportsperson, the income qualifies as miscellaneous income (Article 67(1)(l) ITC9); whereas, if the income is derived by a self-employed person, it qualifies as self-employment income under Article 54(1-quarter) ITC (this interpretation has also been confirmed by Resolution of the Italian Revenue Agency No. 255/E of 2 October 2009 in a case involving a non-resident artist disposing of his image rights in favour of an Italian resident company);
image rights assigned to employer - income derived by the employed sportsperson qualifies as income from employment (Article 49 ITC), since this category of income includes any remuneration directly or indirectly paid by the employer in the framework of the contractual relationship (according to the “all-inclusive-income” principle, Article 51(1) ITC);
image rights assigned to an intermediary company, which contracts with the employer in respect of the use of those rights, separately from the employment contract - income or miscellaneous income, given that the parties involved (i.e. the sportsperson and employer) agree to undertake a contractual obligation in which both the sporting performance and the exploitation of the image rights are included or, vice-versa, only the terms for the use of image rights are agreed. Any income connected with such exploitation would qualify, in the first case, as employment income (Article 49 ITC) in consideration of the employment relationship in place and, in the second case, as miscellaneous income (Article 67(1)(l) ITC).
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:
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;
in the case of income from the exploitation of image rights, the analysis is more troublesome. It may qualify as
income from employment where the sportsperson assigns the image rights under an employment relationship,
(self-employment income if the sportsperson exploits his/her image rights acting as a self-employed sportsperson or, lastly,
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:
if the income attributable to the fictitious entity was domestic sourced, it would be taxed to the sportsperson in accordance with ordinary rules (IRPEF);
if the income attributable to the fictitious entity was foreign sourced, it would be exempt from ordinary rules and subject to substitute taxation of €100,000 per year. Taxation of foreign sourced income would therefore be fulfilled by way of the substitute flat tax.
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.
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.
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About the Author
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: firstname.lastname@example.org