The tax treatment of fees paid to intermediaries The French Perspective. Christophe Moreau, Partner and Chris Hannetel, Associate Chammas & Marcheteau

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1 The tax treatment of fees paid to intermediaries The French Perspective Christophe Moreau, Partner and Chris Hannetel, Associate Chammas & Marcheteau The FIFA issued on April 1 st, 2015 new regulations related to fees paid to intermediaries by clubs and players when concluding employment contracts and/or transfer agreements. These guidelines are meant to improve transparency regarding remuneration and involvement of intermediaries, not only at the time of issuing the license, but during the entire period of performance of their activity. The licensing requirement is thus replaced by the FIFA with a registration and declaration system that shall be monitored at every transaction involving intermediaries. This change may be seen as an acknowledgement of the inefficiency of the licensing system, especially since many of its detractors have recently blown the whistle on the increasing number of transactions involving unlicensed agents. National associations remain in charge of the enforcement of these new FIFA regulations. However, the French Football Association (hereafter FFA ) has to combine the new FIFA regulations with the relevant French domestic law (1), altering the tax treatment of fees paid to French (2) and foreign (3) intermediaries. 1. Enforcement of the new FIFA regulations in the light of French domestic law 1.1. Summary of the new FIFA regulations As of the 1 st of April 2015, new FIFA regulations have entered into force. These regulations modify the statute and regime applicable to representatives of players or coaches. The main evolution consists in replacing sport agents by intermediaries. This replacement implies in particular that: - intermediaries are no longer subject to the licensing requirement ; - every transaction between clubs and players involving intermediaries regarding an employment contract or a transfer agreement is recorded in a registration system and is annually published ; Christophe Moreau French attorney, member of the Paris Bar Association. He focuses on taxation, including the tax aspects of mergers and acquisitions, structuring of investment funds, international tax planning for multinational business, estate planning for high net worth individuals, entertainers and sportspeople, tax audit/litigation, in both domestic and international contexts. He is member of the International Fiscal Association (IFA) and the International Tax Entertainment Group (ITEG), an international network of tax advisors from the major European - intermediaries shall fulfil a declaration (the Intermediary Declaration ) every time they intervene in a transaction, stating that they fully consent to regulations provided by the FIFA and the relevant national associations ;

2 - clients of intermediaries (players, coaches or clubs) shall submit the Intermediary Declaration to the relevant associations ; - a representation contract shall always be concluded between intermediaries and clubs or players, specifying the legal relationship they have with their intermediaries (consultancy or job placement for instance). Besides, the new FIFA regulations expressly forbid underage players to make any payment to their intermediaries Enforcement in France of these new international regulations In France, two different types of regulations shall be combined by the FFA: the new FIFA guidelines and the relevant French law. When these new regulations and French domestic law contain opposite provisions on a specific topic, the harsher one should be applied by the FFA, although the severity of the sanctions might be different depending on which regulation should be enforced. National law must be applied by the FFA in case it provides harsher requirements than the FIFA regulations. The removal of the FIFA licensing system, for instance, is directly in contradiction with the relevant French law in force. Indeed, the French Sport Code still provides that sport agents must be licensed if they are remunerated for their involvement in the conclusion of a contract or a transfer agreement of a player 2. As a result, this legal provision introduced in shall still be applied by the FFA in spite of the removal of the licensing system by the FIFA. On this particular topic, the FFA cannot enforce the FIFA regulations. However, this French exception is not a violation of the new international set by the FIFA, since the latest provide that associations still have the right to go beyond these minimum standards/requirements 4. Therefore, as long as the national law provides harsher requirements, associations do not violate the FIFA regulations by applying the law. It should be noted that the French mandatory licensing system only covers employment contracts or transfer agreements of players. Therefore, intermediaries may be involved in the conclusion of contracts related to the exploitation of the name or image rights of players without being licensed. However, intermediaries might not meet the impeccable reputation required by the FIFA 5 when they use tax evasion schemes to maximize their clients profits, as highlighted by the Football Leaks website. On the other hand, the FFA might face sanctions if it does not enforce FIFA regulations when they go beyond French law s provisions. For instance, the new FIFA regulations provide that payments to intermediaries should not exceed 3% of the player s basic gross income for the entire duration of the relevant employment contract. 1 FIFA regulations on Working with Intermediaries, art. 7 Payments to intermediaries, 8. 2 French Sport Code, art Act of Parliament, 9th June 2010, n , art FIFA regulations on working with intermediaries, art. 1 Scope, 3. 5 FIFA regulations on Working with Intermediaries, art 4 Requisites for registration, 1.

3 The French Sport Code also provides that the remuneration of sport agents shall be limited, but the maximum amount is set up at 10% of the player s gross income provided under the relevant employment contract 6. Therefore, even if the French Sport Code provides a cap of remuneration at 10%, this does not prevent the FFA to issue regulations that limit the remuneration to 3%. The FFA would face appropriate sanctions by the FIFA in case the 3% threshold was not implemented Tax treatment of sport agents licensed in France The tax treatment of fees received by French sport agents depends on whether they are paid by players (2.1) or their clubs (2.2) Remuneration paid by players or coaches to their agents The remuneration of agents by players or coaches has tax consequences for both the payer and the recipient (ii). Tax consequences for agents Taxable rules applicable to agents depend on the terms and conditions under which they carry out their professional activity. In case agents perform their professional activity as independent workers or through a transparent company, their revenues are subject to personal income tax under the category of bénéfices industriels et commerciaux 8. As a result, their remuneration is taxed according to the relevant progressive tax rates, with a maximum marginal tax rate amounting to 45%. If agents carry out their professional activity through a corporation, their revenues are subject to corporate income tax at a flat tax rate of 33,1/3%. Agents may deduct their professional expenses if they are incurred in the interest of their business activities 9. (ii) Tax consequences for players As a matter of principle, the amount paid by players to their agents is deductible for income tax purposes, provided they elect to deduct their actual professional expenses and choose not to apply the 10% rebate. 10. The remuneration paid to their agents indeed enables them to receive their income and is incurred in the interest of their professional practice 11. The actual professional expenses are deductible without any maximum amount, provided that they are not excessive 12. In this respect, the new FIFA regulations might create a new cap since they provide that the remuneration paid to intermediaries shall not exceed 3% of players remuneration. As a result, the 6 French Sport Code, article FIFA Regulations on Working with Intermediaries, art. 10 Enforcement of Associations obligations, 1. 8 French Tax Code, art French Tax Code, art. 39, French Tax Code, art. 13, French Tax Code, art. 83, for the portion of income exceeding French Tax Code, art. 81.

4 French tax authorities might refuse the amount exceeding this 3% threshold on the ground that it is excessive compared to the market practice Remuneration paid by clubs to the agents of players or coaches As a matter of principle, an agent must act solely for the account of one of the parties to the contract under French law 13. However, a law enacted on June 9, allowed sport agents to be paid by clubs although they represent players or coaches 15. The FIFA regulations are similar to the French law on this issue, since they allow clubs to pay intermediaries on behalf of their players 16. The tax treatment in France of these remunerations has varied throughout the last decade: a) From the 1 st of January 2010 until the 31 st of December 2010 Since June 2010, clubs may directly remunerate theirs players and coaches agents 17. This payment could have been qualified as a taxable benefit in kind for the player, since his employer was paying a sum initially owed by him. However, a specific provision of the French Sport Code excluded the qualification of this remuneration as a benefit in kind for players 18. This favorable regime was enacted to deter artificial schemes which had been implemented to avoid taxation of players by substitution of mandate just before payment of the remuneration by the football club, or an agreement between the player and the agent of an enterprise contract not governed by the French Sport Code. Therefore the remuneration paid by clubs to sport agents was only taxable at the agent s level, not the player s. b) From the 1 st of January 2011 The exclusion of the characterization of the remuneration paid by clubs on behalf of players from the benefit in kind regime was removed the year after it was enacted 19. As a result, remunerations of agents owed by players but paid by their clubs after 2010 have since then been qualified as benefits in kind and are therefore taxable as an additional salary for the player involved 20. Benefits in kind, being an additional salary for players, are also subject to social contributions owed by clubs 21. However, clubs are allowed to deduct the amount of remuneration paid to sport agents who represent them in a transaction, unless the French tax authorities consider the contract as fictitious and recharacterize the remuneration paid by the football club as a disguised remuneration to the player. 3. Tax treatment of foreign sport agents 13 French Sport Code, Art Act of Parliament, 9th June 2010, n , art French Sport Code, art FIFA Regulations on Working with Intermediaries, 7 Payment of Intermediaries, French Sport Code, art. L French Sport Code, art. L Article 103 of the Law , 29 th December French Tax Code, art Social Security Code, art. L

5 Only some of the foreign sport agents may practice their activity in France (1) and thus be subject to taxation there (2) Practice of foreign sport agent in France For a foreign sport agent, the possibility to practice his activity in France depends mainly on whether he is a resident of the European Union or not (ii). Sport agents established in the European Union In case they have their residence within the European Union, foreign intermediaries may practice their activity in France on a temporary basis as long as they have not been criminally convicted or been bankrupt 22. However, if they want to practice their professional activity in France permanently, foreign intermediaries shall justify that they were qualified to practice in their previous country in accordance with the applicable national regulations. In the absence of such professional regulation of intermediaries in their native country, their qualification is determined by a professional experience as intermediary for at least 2 years during the last 10 years, and a certificate of qualification delivered by their national association. Intermediaries established outside the European Union If foreign intermediaries have their residence outside the European Union, they shall not practice their professional activity in France unless they have acquired a French license 23. As a result, the removal of the licensing system by the new FIFA regulations will not change the conditions for sport agents established outside the European Union. As long as they do not hold a license in France, they have to go through a French licensed sport agent Tax treatment of remuneration paid to foreign sport agents Remuneration paid to foreign sport agents derived from their professional activities in France should be subject to a 33, 1/3% withholding tax according to French domestic law 24. However, according to most of double tax treaties concluded by France, profits derived from a commercial activity performed in a Contracting State shall be taxable only in that State in the absence of a permanent establishment or a fixed base in the other Contracting State. 25. Conclusion The new FIFA regulations shall have a limited legal impact in France since French domestic law provides similar or harsher requirements. However, the French tax authorities are likely to refer to these international regulations as an indicator to determine whether a remuneration paid to an intermediary is excessive or not and is thus deductible. 22 French Sport Code, article French Sport Code, article FTC, art. 182 B. 25 OECD Model Tax Convention, Article 7.