Tax Impact of Buy-out Clauses, Transfer Fees and Wages

Marouane Fellaini poses with David Moyes after signing for Manchester United. Photo courtesy of the Mirror.

Marouane Fellaini poses with David Moyes after signing for Manchester United. Photo courtesy of the Mirror.

The transfer deadline for leagues across Europe has passed but not without excitement and further transparency into the market. Each league and nation in which it is based enforces different rules and tax laws. Footballers transferring away from the Barclays Premier League in the United Kingdom to Liga BBVA in Spain will be impacted by the increase in taxes and required to understand the terms of the new contract.

The headlines included Bale, Fellaini, Herrera, and Özil – each for various reasons. Two of the world’s richest leagues – Liga BBVA and Barclays Premier League – were among the common denominators in these transfers (and near transfers) as were some of the world’s richest clubs – Real Madrid (1st), Manchester United (3rd), Arsenal (6th), and Tottenham (13th), as ranked according to revenue for 2011-12 by Deloitte.

The transfer process is not that simple, however. Buy-out clauses, transfer fees and tax laws complicate the global market for footballers.

Buy-out clauses

Contracts allow clubs to retain the rights to a player over the specified duration. Those rights allow clubs to negotiate transfer fees typically to benefit the club, assuming there is a return based on the player’s previous and future wages as well as potential revenue. Buy-out clauses provide players the option for transfer if another club is willing to pay the premium. The buy-out amount is priced higher to deter the frequency that players are released from their respective clubs. Prospective clubs also may gamble with the buy-out option, waiting for the clause to expire in hopes that the player may be transferred for an amount less than the initial buy-out amount.

That gamble did not pay off for Manchester United while negotiating a transfer for Marouane Fellaini from Everton; it is an example where the purchaser waited for the buy-out clause to expire resulting in an inflated transfer fee; the club had hoped the transfer fee would be lower than the buy-out clause once it had expired. Manchester United signed Fellaini for $42.9m (£27.5m), $6.2m (£4m) more than his expired buyout clause. The buy-out clause of $36.7m (£23.5m) expired on July 31.

The exercising of buy-out clauses does not always result in the signing of a player. Multiple outlets reported that Ander Herrera of Athletic Bilbao had received interest from Manchester United. Herrera’s contract included a $47.3m (€36m) buy-out clause. Despite contradicting reports regarding Manchester United’s actual interests in the footballer, the situation shed light on Spain’s rules regarding the option. Essentially, it is the player, not the purchasing club, who is required to deposit the fee with Spanish football authorities. Despite the offers made, Athletic Bilbao was not interested in transferring Herrera unless required to do so had the buy-out clause been met.

It is the requirement that the player pay the buy-out fee that initiates the tax liability in Spain. Had Herrera been released from his contract, he would have become responsible for a tax liability of $7.02m (£4.5m) to repay the tax relief that is granted to players representing clubs in the Basque region of Spain.

Transfer fees

The much discussed highlight of transfer deadline day was Garreth Bale’s world record transfer fee paid by Real Madrid on his transfer from Tottenham $131.7m (£85.2m). Mesut Özil is headed in the opposite direction – from Real Madrid in Liga BBVA to Arsenal in the Barclays Premier League. The clubs agreed to a transfer fee of $59m (€45m); the transfer is a new record for Arsenal and is the third most expensive transfer in the history of the Premier League.

Tax on the transfer fee is the responsibility of the selling club. Whether or not that tax payment is included within the amount indicated by the transfer fee is a gray area, as details of the agreements are not disclosed.

Taxation

Of the five major soccer leagues – France, Germany, Italy, Spain, and the United Kingdom – Italy has the lowest tax for its highest tax bracket at 43% while France maintains the highest tax at 75%.

Bale’s six-year contract at Real Madrid is worth $265,387 (£170,000) per week after tax – nearly $13.8m (£8.8m) annually after tax. Signing with Real Madrid means his tax liability will increase from 45% to 52%. Bale’s pre-tax income will be $552,890 (£354,167) per week and $28.8m (£18.3m) annually with Real Madrid. Had he been transferred to Barcelona, Bale would have had to deal with the increased 56% tax rate for the recently increased top tax bracket in Catalonia.

Under the previous “Beckham Law”, foreign players only paid a 24% tax; the law was passed in 2005 and later lifted in 2010.

Spanish tax law indicates individuals who spend 183 days or more during a tax year in Spain are deemed a resident and income is subject to local taxation. Foreign footballers playing in Spain would automatically become Spanish tax resident on the day count rule. The Liga BBVA season is 271 days long from the first match in August to the final match in May.

The tax brackets provided below are presented in a basic format and do not capture the complexities of each nation’s tax code. Instead, the charts provide a simple way to compare the varying tiers of income and the marginal tax rates within each system.

France

france-2013

Germany

germany-2013

Italy

italy-2013

Spain

spain-2013

United Kingdom

unitedkingdom-2013

United States (for reference) unitedstates-2013

Supporters of each league should consider the implications of rising taxes and the impact on overall player quality and ultimately quality on the pitch. With rising taxes in Spain, the responsibility is placed on the clubs to overcome the tax hurdles to provide players, particularly potential transfers and new signings, with offers and contracts that are competitive after-tax. The rise in wages and transfer fees indicates a more competitive market for footballers globally that is impacted by more than the clubs and leagues.

 

What do you think about the tax impact local nation’s have on football clubs? Let us know in the comments section below or on Facebook and Twitter.

 

Currency conversion via Google Finance on 5 September 2013

Reporting on the business side of the world's game.