The UK’s Spring Budget 20171 announced that HMRC will publish guidelines for employers to enable better compliance with the long established image rights practice in the UK. France on the other hand has introduced a new possibility into the Sports Code on image rights licensing by the employer alongside the employment contract2. Claudia Massa of Avens and Michel Collet of CMS Bureau Francis Lefebvre explore in this article the pros and cons of this new possibility introduced into the French legal and tax environment for sportsmen and women, with a focus on its application within football.
Until March 2017, clubs and employers of sportsmen and women at large could pay their players for playing football only (football being an example). The use of players’ image rights by the club did not give rise to separate compensation: it was supposed to be covered by the salary and the deal set out within the employment contract. The recent development in France concerning the image rights of sportsmen and women is inspired by the twofold arrangement available to artists and models who are employees for the activity that requires their physical presence (such as acting or walking down catwalks) and also licensors of their personal rights.
In France, the social tax applicable to the employer is set at up to 40% before caps on the gross wage of the employee, who in turn also pays up to 20% before caps in social tax based on their gross wage. Social tax in France is a major cost for employers and affects the competitiveness of French companies since in most cases it is set at a higher rate than other European countries.
Payment of royalties however does not trigger any liability for social tax for the licensee or the club in France. In both situations, income tax applies to the recipient of the wage or royalty. If the licensor is an individual, social tax would also kick in at a rate of 15.5%.
This article discusses how the new development in France may be implemented in practice. It is true that the Law does not answer all of the questions that the sports community may have. Before the release of the decree, which should provide such detailed clarification, the first question is whether this new possibility may translate into actual savings for ‘employers’ and additional income for sportsmen/women. Depending on the circumstances, the answer may be nuanced.
Main objective: attractiveness
The stated objective of the reform which applies to all professional sportsmen/women across all sports, is to improve the competitiveness of French professional sport by reducing the social charges that constrain French clubs. It is true that German, UK, Italian and to some extent Spanish clubs face a lower tax burden than French clubs. Therefore, the new amendment is real progress. Whether football is the primary concern, it goes without saying that all sporting disciplines should benefit from the amendment.
The newly introduced image rights agreement
The payment of royalties commands an agreement in a commercial contract governing the licensing of personal rights of the sportsman/woman in addition to the employment contract (‘image rights agreement’). The employer may now enter into such a contract with sportsmen/women. With the licensee being the employer, the tax authorities may be keen to reclassify the licensing agreement as an employment agreement in order to claim social taxes should one or several strict conditions governing the image rights agreement not be met. A forthcoming decree on the matter is expected to provide clarification on the club’s base commercial income that will be used as reference for the image rights remuneration. Also, sports disciplinary organisations will have to set a cap for the royalties as compared to the salary. Therefore, care should be taken in the design and drafting of this new relationship with the employer. We anticipate that such agreements should be implemented on a case by case basis even if best practice rapidly emerges.
Who is the licensor?
International players frequently license their personal rights often with exclusivity to a dedicated company they may control (‘image rights company’). Possible legal and financial combinations with this type of structuring should be anticipated by the licensor (the player and the image rights company) and the licensee (the club for instance) in instances in which separate licensing on image rights is considered. At this stage, the Law is unclear as to whether the contract might be with an image rights company. This point deserves to be clarified even if we can reasonably anticipate its feasibility.
Who is the licensee?
Normally, the licensee will be the employer for the purposes of the Law. However, the wording of the Law does not seem to exclude affiliated entities to the club from being a possible licensee that may be responsible for the ownership and management of the brands and the related rights used by the employer. This question should also be clarified by the decree even if we may also reasonably anticipate that there will be a green light here.
What are the licensed rights?
Royalties can only be paid pursuant to an image rights agreement that is distinct from the employment contract. The distinction between the two relationships and the underlying activities of the employee/licensor should be crystal clear with no room for overlap.
On one hand, the employment contract should remunerate the activity of the player or the coach when their physical presence is required (during games and training sessions etc). On the other hand, the image rights agreement should remunerate the use of the sportsman/woman’s image, his/ her voice or his/her name for which physical presence is not necessary.
For instance, the French Labor Code3 provides that: ‘the remuneration payable to the artist in connection with the sale or commercial use of the recording of his/her performance, execution or presentation by the employer or any other user shall not be considered as a salary when the physical presence of the artist is no longer required for the use of such recording and when such remuneration does not depend on the salary received for the production of his/her performance, execution or presentation, but rather on the proceeds of the sale or use of such recording.’
The same two cumulative conditions (i.e., remuneration not related to the physical presence of the individual and remuneration depending on the proceeds of the sale or use of the image and not the salary) now apply to players and coaches for the newly received royalties not being treated as a salary.
The new Law provides that sportsmen/women may license the rights deriving from the use of their image, voice and name with no further details or exclusions. Royalties will be assessed exclusively on the revenue generated by those rights and the expected decree should list the types of endorsement/commercial income derived by the club thanks to the exploitation of the player’s image and serving as a financial basis for the determination of the royalties to be paid to the player.
Use of a player’s associated image by the club
For the time being, the collective bargaining agreement applicable to the sports industry requires that the use of the collective or individual image of the player once associated with the image of the club shall be governed in the employment contract. The use of the personal image of the sportsman/woman by the club may differ according to whether the image is of just one player or the player is featured with other players (the collective image right). Within a so-called collective marketing campaign for commercial partners of the club for instance, i.e., where the sportsman/woman does not appear alone but amongst other players in the team (a minimum of five players may be required depending on the discipline), the image rights were - until this reform - automatically licensed to the club/ employer against the player’s salary. The use of a player’s personal image associated with the club/employer but not within the frame of a collective image exploitation is not automatically licensed to the employer/club and often gives rise to negotiation on a case by case basis. In any case, the remuneration derived from it is defined within the employment contract automatically as part of the salary. The question is whether the new authorised image rights agreement may include those rights currently automatically licensed to the employer/club. No guidelines have been issued at the time of writing this article.
We may reasonably anticipate that the image rights ‘licensed to’ the club at events where the player is on the field will remain covered by the employment contract. This would cover for instance and for obvious reasons, live broadcasts of games where the player appears. For other uses of associated collective images that do not imply any physical performance as well as any uses of individual associated images, the licensing may be governed by the image rights agreement. For instance, it may be the case where the player appears in marketing campaigns launched by sponsors. The licensing arrangement should precisely list and describe the rights licensed (as well as the scope, purpose, means of exploitation, territory, and duration). Otherwise, the contract would be considered null. The same is also true for the determination of the royalty amount. The contract should provide the calculation method subject to penalising consequences.
Royalty calculation method
Once the licensed rights are defined, the next question lies in the determination of the royalty amount or calculation method. The method should rely on objective and commercial bona fide features. The legislative history of the new Law shows that the eligible base revenue derives from sponsoring, merchandising, and broadcasting contracts with the club. None of these clarifications have been adopted in the statute. Some flexibility should remain on the percentage and basis (out of the income collected by the club) and be defined on a case by case depending upon the ‘commercial resonance’ of the employer and the player. Last but not least, other financial keys may be used to the extent that they may appear as having business substance. The expected decree should enlighten the industry on the accepted base category of income.
For transparency, notably on high profile players’ income, licensing contracts will be communicated to the supervisory body for each sports federation (for instance for football, it should be the DNCG, i.e., the National Directorate of Management Control). The consequences for nullity of the image rights agreement remain to be defined. However, it may appear consistent with the context that royalties should be retrospectively regarded as salary. Employers should take all necessary precautions against being retrospectively liable to employer social taxes on reclassified royalties. Contractual provisions will have to protect the employer in that respect.
Royalty amount cap
The Law stipulates that royalties will be capped and that the salary should not be lower than a minimum amount. The specific threshold and cap remain to be defined in the national collective bargaining agreements to be reached by each sporting discipline. We have no information on the status of the review of such collective agreements. The amounts will therefore be discussed and agreed within each relevant discipline.
How attractive is it really?
One of the answers to the question concerning the attractiveness of the new arrangement lies in the potential tax savings for both the player and the club. France imposes social taxes on employers and the employee’s gross salary at 40% and 20% respectively. For high salaries, the effective social tax burden drops to 20% and 10%. The highest tax rate for personal income tax is 49% without taking into account the social tax of roughly 10-15%. On anything other than salary income such as royalties, reaching the highest tax bracket brings the effective taxation to roughly 62% (including income tax and social tax).
At first sight, the new Law relating to image rights licensing should prove rewarding for the club/employer since it should reduce the employer’s social taxes it would have paid should a corresponding salary have been paid. The player/licensee is still however liable to pay social taxes of 15.5%. The employer/licensor might agree to consequently share its tax savings to compensate for the potential increase in the social tax to be paid by the employee/ licensor. In cases in which a player has agreed a net in the pocket (after tax) package with the club, it is more difficult to draw a definitive conclusion on the tax saving merits of the new Law.
The so-called generous ‘impatriate regime’ which offers savings of up to 50%4 on income tax to a player coming into France may be claimed on salary only and not on royalties under the current Law. In regards to a net in the pocket arrangement, the savings enjoyed by the employer concerning the exemption of the employer’s social tax on the royalties might not compensate for the increased income tax (on the royalties compared to a salary in which the ‘impatriate’ allowance might have been claimed) and the employee’s social tax of 15,5%.
Last but not least, when an image rights company is involved, questions remain on the indemnity for corporation tax (if any) suffered by the image rights company and the personal income tax suffered by the player if anti-abuse tax rules allow the French tax authorities to claim income tax directly from the player when disregarding the image rights company (the low tax jurisdiction of establishment, direct and indirect controlling interests, lack of business and operational substance etc). More anti-abuse tax rules should be anticipated.
Therefore, in assessing the possible benefits of the new Law doing the maths is necessary based on the real figures and on the actual tax status of the player/image rights company to assess the actual tax efficiency created for the parties involved by the new Law. Financially, the image rights agreement should prove to be a step forward. The player should be in a much better position to develop and manage the exploitation of their image. The same should also be true for the clubs vis-à-vis its sponsors relating to the exploitation of players off the field. In regards to the possible tax savings, the combination of the social tax savings for the employer and the potential increase of income tax exposure for the player, such nuances should be assessed and managed carefully.
A development to be followed...
1 HM Treasury Minutes - Government responses to the Committee of Public Accounts - Thirty Sixth report of Session 2016-17 ‘HM Revenue and Customs – Collecting tax from high net worth individuals,’ March 2017, ‘Committee of Public Accounts conclusion: The rules on “image rights” as they are applied in football and some other industries are being exploited. Recommendation: the Government should take urgent action to address image rights taxation. This must be included in the next Finance Bill to ensure this tax revenue is no longer lost.’
2 Law ‘2017-261 of 1 March 2017 aiming to preserve the ethics of sport, strengthen the regulation and transparency of professional sport and improve the competitiveness of clubs,’ inserted a new Article L.222-2-10-1 in the Sports Code.
3 Article L.7121-8 of the French Labor Code.
4 See ‘Taxation of foreign professional football players: France takes the offensive,’ Michel Collet, World Sports Advocate, April 2017.
Cecile Park Media Publication | May 2017