Taxing overseas loans: Dutch case raises key points for clubs
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Taxing overseas loans: Dutch case raises key points for clubs
by Daan Buylaert and Mona Vera

Clubs have been warned to ensure full understanding and compliance with tax laws when loaning players abroad, following a recent Court of Appeal ruling in the Netherlands related to three deals conducted over a decade ago.

In case of an outgoing loan abroad whereby the club continues to pay (a portion of) the salary, it is thus crucial to verify where the income is taxable and to fulfil the relevant withholding obligations accordingly.
Daan Buylaert, Partner, and Mona Vera, Associate
Tiberghien

A recent Dutch court of appeal judgement sheds light on the issue of the taxability of signing fees following the transfer of three players on loan from a Belgium club to a Dutch club. The case highlights the importance of aligning the tax position in both countries and contains the key learning points for football clubs when undertaking overseas loans.

 

Cross-border dispute

 

In this case, a Belgian club appeared before the Dutch courts after a dispute with the Dutch tax authorities. 

 

The club had loaned out three Belgian football players to a Dutch club. Under the loan deal, the Belgian club continued to pay the players’ salaries along with instalments of the sign-on fees (in Belgium it is very common that a large part of the player’s remuneration package consists of sign-on or loyalty bonuses). Concretely:

 

Player 1 was loaned to the Dutch club for the 2010-2011 season. He was on a 4 year contract with the Belgian club since 2007. His package was as follows: 

  • a monthly salary of €6,500 for the 2007-08 season;
  • a monthly salary of €12,000 from the 2008-09 season onwards;
  • an amount referred to as "prime de signature" (signing fee) of €75,000 gross for the second half of the 2007-08 season, payable in two instalments of €37,500;
  • €252,684 per season as signing fee as from the 2008-09 season, payable in four instalments of €63,171 gross in August, November, February and May. 

 

In 2010, the contract was amended. Parties agreed that during 2010, the sign-on fee would be reduced to €192,684 gross, to be paid in four instalments of €48,171 gross each. The amendment explicitly referred to the loan to the Dutch club.

 

Player 2 was loaned to the Dutch club for the 2009-10 season. He signed a contract with the Belgian club in 2008. His package was:

  • a monthly salary of €30,250;
  • a sign-on fee of €378,000 gross per season, payable in four instalments of €94,500 gross in August, November, February and May.

 

Player 3 signed his employment contract with the Belgian club in 2009, for a duration of 3 years. He was loaned to a German club for the 2009-10 season and to the Dutch club for the 2010-11 season. His 2009 contract provided in the following remuneration package:

  • a monthly salary of €40,000;
  • a sign-on fee of €388,000 gross per season, payable in four instalments of €97,000 gross each in September, December, March and June.

 

In 2010, a renewal was concluded for the period of 2010 until 2012. Salary and sign-on fee was kept at the same level. In addition, a supplementary sign-on fee of €350,000 net – indicated as "prime de signature complémentaire et unique" – was agreed upon and made payable in 2010.

 

During the loan period, the primary residence of the football players remained in Belgium, and they commuted to the Netherlands.

 

Provisions of Law

 

Key legislation relating to this issue is found in Article 15, § 1 and 2 and Article 17, § 1 of the double tax treaty between Belgium and the Netherlands.

 

Article 15 relates to the taxation of income from private employment in a cross-border context, allocating the taxing rights to the state where the employment is exercised, provided that there is a sufficient link with that state, concretely: 

  • the employee is present in the work state for more than 183 days during any 12-month period, or
  • the remuneration is paid by, or on behalf of, an employer resident in the work state, or
  • the remuneration is borne by a permanent establishment or a fixed base of the employer in the work state.

 

If one of the thresholds is met, the state where the employment is exercised may tax the part of the salary that relates to the employment exercised in that state.

 

Article 17 contains specific rules on the taxability of income derived by sportsmen, allocating the taxing rights to the state where the activities as a sportsman are exercised. In contrast to Article 15, Article 17 does not provide for a certain threshold, meaning that the performing a sports performance abroad for one day is principally sufficient for taxability in the state where the sporting performance takes place. 

 

First instance decision

 

The tribunal of first instance decided in 2019 that:

 

  • The (monthly salary and) periodically paid instalments of the sign-on fees are covered by Article 17 and should be considered as payments for sports performances that are performed in the Netherlands. Hence, these payments are taxable in the Netherlands and the Belgian club were held to withhold Dutch wage tax on these salary components in line with Dutch tax law;
  • The net sign-on fee of €350,000 paid to player 3 on the other hand is covered by the scope of Article 15 (the article on regular employment). The reasoning of the tribunal was that it was made plausible that this fee was agreed in the context of the Belgian employment relationship, before it was decided that the player would be loaned out, and thus unconvincing that this amount forms remuneration for future sports performances in the Netherlands. The tribunal concluded that this fee is thus not taxable in the Netherlands “on the basis of Article 15”.

 

Court of Appeal steps in

 

The Court of Appeal in Arnhem this year agreed with the tribunal’s approach on the regular salary and the periodically paid sign-on fees, but also held that, under the double tax treaty, the sign-on fee of €350,000 paid to player 3 also constitutes remuneration for the (future) sports performances of the player and falls within the scope of Article 17, § 1.

 

The authors agree with this approach of the Court of Appeal, since it must in our view be assumed that sign-on fees are paid in consideration of the exercise of the sportsperson's personal sports activities and must therefore be assessed under Article 17. The court herein joins the predominant view in the international legal doctrine.

 

The Court of Appeal agreed with the tax administration that, based on the factual circumstances, the sign-on fee related to the 2010-11 season, in which the player was loaned out to the Dutch club for 11 months and, hence, that a pro rata amount of the signing fee was taxable in the Netherlands. 

 

Withholding tax

 

As a consequence, under Dutch tax law, the Belgian club was obliged to witthold Dutch wage withholding tax on the relevant portion of the sign-on fee it paid to the player and pay it to the Dutch tax authorities. Since the club had not done so, the Dutch tax administration imposed interest on arrears and a fine.

 

There is also a Belgian side to this story. The club presumably (wrongfully) withheld Belgian withholding tax on these payments, which will have to be recovered by the players through filing their Belgian personal income tax return. In some instances additional difficulties arise in this regard when tax administrations in different countries take a different view on the application of Articles 15 and 17 of the relevant double tax treaties.

 

Avoid paying tax in the wrong country

 

Many jurisdictions have similar tax rules to the Netherlands. In case of an outgoing loan abroad whereby the club continues to pay (a portion of) the salary, it is thus crucial to verify where the income is taxable and to fulfil the relevant withholding obligations accordingly. 

 

Signing fees and loyalty bonuses, very common in Belgium and across football, are often difficult to allocate over the different sport performances in the different countries. The outcome of the analysis often largely depends on the wording of the underlying contracts.

 

Our advice is to anticipate this when drafting the employment contract and to specify the performances and the period to which each bonus relates at the time of conclusion of the contract. This avoids taxes being paid in the wrong country.

 


Daan Buylaert is a partner and heads the Sports & Tax department, while Mona Vera is a tax lawyer, at leading Belgian law firm Tiberghien.

 

This article was written for and first published by LawInSport. The original is available to view here.

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