Football finance survey: The Foreign Legion

The football transfer season is now in full swing following the end of Euro 2004. The performances of players have attracted interest from clubs all over Europe, and interest has been particularly keen from the Premiership. During the championships, a commentator remarked that more than 50 of the players involved in the quarter-final stages were from Premiership clubs. Clearly, there are many reasons for this.

The attractions of London, the merchandising opportunities at Manchester United and the seemingly endless billions of Roman Abramovich (though his CFO Eugene Tennenbaum claimed in an interview that the Russian has said he wants to run the club as a business), indicate the more obvious factors.

On the other hand, the UK tax system presents foreign footballers with serious tax advantages compared with the situation in other European countries. In turn, this provides a competitive edge to UK clubs, even when negotiating with agents, as net figures are the main interest.

Generally, foreign footballers are non-domicile and consequently would only be taxed on foreign investment income and capital gains on a remittance basis. The advantages of this became apparent in the Platt and Bergkamp cases.

Both Arsenal players had played in Italy before their transfer to Highbury. Platt, under the old rules, and Bergkamp under continuing arrangements, set up offshore structures to deal with their image rights. Evidently, for the likes of Bergkamp and other non-domiciles, this presented a huge tax advantage. There is no tax unless you bring the money in – what a great deal! If these players were anywhere else in Europe, they would be taxed on their worldwide income.

Of course, it is vital that these arrangements are put in place before the players arrive in the country, but the benefits are self-evident. In France, as in most European countries, the level of tax combined with high social security costs make any employment extremely expensive. In the UK, we can split image rights from income and, in that way, give players a huge tax advantage.

From the point of view of the average Premiership manager, when confronted with the demands of a foreign agent he can assure a significantly higher net income for a lower gross income. The negotiation does not rest entirely on image rights; there is also the question of ordinary residence.

For an individual coming to the UK, their ordinary residence status depends on their intentions on arrival. This presents a conflict between the interests of an individual player and the aspirations of the club and, more importantly, its fans. The fans want long-term commitment and so do the management. A five-year deal gives them a chance to sell the player after three years with absolutely no chance of a Bosman ruling.

The dynamics of the deal, however, are pushing for three years or less. This relates to the costs associated with the UK tax system.

Here we it is necessary to consider the nature of residence and ordinary residence, both of which affect the views of the player, his agent and the club.

Those who are resident, but not ordinarily resident, are taxed on their UK earnings and on their foreign emoluments only to the extent that they are remitted to the UK. This provides a huge tax advantage for foreign footballers as they can have earnings in their own countries unrelated to their UK tax position.

Although the law in the UK is quite ambiguous regarding these matters and, indeed, based on complex case law, the Inland Revenue takes a relatively straightforward view of the situation. If a footballer is intending to come to the UK for three years or less, he will generally be regarded as resident but not ordinarily resident. Foreign earnings will not be taxed in the UK.

How far players would go to avoid the intention of remaining in the UK and, therefore becoming ordinarily resident is unclear. Fans might wonder whether a player is happy to stay resident, but not ordinarily resident. Fabien Barthez left Manchester United after three years at the club, while other players have experienced dips in form around the three-year mark that suggest they have other matters on their minds.

These arrangements can work well for the elite and for those whose potential is identified at an early age. The sooner the image rights can be placed in an offshore location the better. The use of intermediate foreign structures through, for example Belgium or Ireland, can also prove effective. It is important to establish a jurisdiction to which royalties can be paid without deduction of withholding tax.

For the managers, it is a different story. Arsene Wenger and other foreign managers will find it difficult to establish foreign earnings. It would be difficult to imagine that working at Arsenal could be two separate jobs. Their image rights would also be difficult to establish in an offshore jurisdiction, particularly when their UK success has brought them such fame.

For UK players going abroad, the establishment of image rights in relation to the approach of most foreign fiscal systems would put serious pressure on them to declare their worldwide incomes, as this is the normal approach adopted by most countries. In effect, the financial benefits of UK players joining foreign clubs relates entirely to the payments received and not to any tax break.

  • Richard Rhodes is a director of Feltons.

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