France has the reputation of being one of the countries in Europe with the highest tax, which means that Ligue 1 clubs may not appear as the most competitive in order to attract the best international players. However, tax incentive packages are available to foreign talent moving to France for professional purposes, which will benefit football players. Michel Collet, International Tax Partner at CMS Bureau Francis Lefebvre, in this article discusses the impatriate tax incentives granted to international players, the recent improvements to the tax system brought in by France’s 2017 Finance Bill. The incentives may be granted to players and their staff and more broadly to any professional taking up French tax residence for professional purposes.
Wealth tax (‘WT’) and income tax (social taxes aside) apply in France on worldwide assets and income, unless a relevant tax treaty provides otherwise.
Wealth tax planning for players
WT kicks in where wealth is worth €1.3 million or more. Taxable assets include most assets such as bank accounts (savings, checking), financial assets, real estate, substantial shareholdings, and image rights for instance. Short listed assets are exempt such as professional assets (strictly defined) and pieces of art (which may include cars, but only if they are over 30 years old. So the Bugatti Veyron does not count).
The good news for players transferred to a French club from a foreign club is that non-French based assets remain exempt from WT during the five years following the year of settlement in France. This is a strong incentive to leave assets abroad and invest abroad. Also, foreign passive income (dividends, interest, royalties and gains) is subject to income tax in France at 50% of the amount. This income tax allowance applies only if the broader allowance on compensation is claimed, which is generally the case.
The WT exemption only applies if the player has not been a French tax resident for the five years prior to their arrival in France. The same condition applies to the income tax allowance on foreign source passive income.
Nonetheless, WT will apply if the net value of French based assets exceeds €1.3 million. In our experience, with an efficient structuring of assets, WT is barely due. If, for instance, a €6 million Paris apartment acquisition is properly debt financed up to €5 million, no WT is due since the €1.3 million threshold is not met (assuming no other French assets are worth more than €290,000). Also, depending on the outcome of the next presidential election in May 2017, WT may be repealed. If so, investments in France may be worth reconsidering.
Players should be aware that a minimum of assets should be brought and accumulated in France when joining a Ligue 1 club.
Income tax planning for players and clubs
Social taxes and income tax legally due by players are generally assumed by clubs. A fair understanding of the tax treatment proves helpful to players in the course of their negotiations with clubs because in the end clubs consider the overall costs.
Is that not rolling out a red carpet or what?
Following Brexit and the opportunity it has created for France to become the new ‘hot spot’ of the European single market, the French Government has announced that it wishes to implement “the most attractive impatriate regime within the EU.” The 2017 Finance Bill provides for an extension from five years to eight years of the impatriate regime following the year the player is hired by a French club.
The extension should apply to newcomers as of 6 July 2016 which means that an international player who settles in France at any point since 6 July will be granted the extension whereas an international player who was already playing for a French club at that time will not if the draft of the Bill remains unchanged. Such a difference in the treatment of taxpayers may not be reasonably justified. France should also be keen to retain international talent for a longer period. That point is still under discussion and we hope that an adjustment may be introduced. Otherwise, it may encourage current players to see whether the grass is greener elsewhere, should the clubs consider that the extra ‘massive’ tax cost to be suffered in the sixth year affects the net compensation of the player.
An international football player who enters into an employment contract with a French club may be entitled to exemptions until the end of the fifth year (soon eight years) after the year they were hired, provided that they have not been a French tax resident for the past five years and they are acquiring French tax residency at the time they settle in France.
In addition to the salary per se (the latter including base salary and the different layers of bonuses or variable components), the player may receive additional compensation in the form of an indemnity for costs incurred due to settlement in France. This indemnity has to be clearly defined in the employment contract. It is generally determined based on a percentage of the salary per se. However, the authorities set the benchmark allowing an automatic, 30% flat-rate deemed indemnity, based on the salary (base and bonuses) for direct hiring (as opposed to assignment for instance). This possibility is generally retained by clubs which may explain why the indemnity is still mentioned and defined in the employment contract (even if not necessarily needed).
The exemption does come with limitations. A lower limit is set for a de minimis taxable salary: the indemnity or deemed 30% indemnity received by the foreign player should not be fully exempt if doing so leaves them with a lower taxable salary than the one earned by an equivalent employee not entitled to the impatriate regime (‘Comparable Salary’). If so, the difference is added back to the foreign player’s taxable income. The objective of the law is that the impatriate regime, through the xemption of the indemnity, should not lead to a lower actual taxable salary than that of a taxpayer paid for the same activity in France and who does not enjoy the impatriate regime.
Another interesting feature is the additional exemption of the fraction of the salary (as defined previously) corresponding to the professional activity performed abroad under the colours of the French club (whether this is training, exhibition, games abroad etc). Days spent playing abroad as one of the national team or for vacation, for example, are not regarded.
An overall cap applies to both exemptions. Two options are available to the taxpayer:
- either an overall cap: total exempt compensation under the impatriate regime shall not exceed 50% of gross compensation received;
- or a 20% cap applied to compensation received for days spent playing abroad and based on compensation after deduction of the additional part related to performance in France. Our experience shows that the first 50% cap is generally applied, which is a major benefit.
For instance and as a rough estimate, the effective tax rate applied to a net of €12 million in social taxes should be around 25%, assuming that the club is successful and the player spends more than one month abroad. Otherwise, the effective rate would be around 49% without the benefit of the regime. The effective tax rate might go down even further thanks to professional expenses, the main one being the agent fee if properly documented. If the fee is actually paid by the club as the code of sport allows, the deduction should be tax neutral since the payment by the club is treated as a corresponding taxable benefit for social tax and income tax purposes.
The extent of the saving is substantial especially when it comes to big numbers. That is the reason why it remains a constant concern of clubs who are keen on remaining competitive with fellow European clubs and able to hire the very best players.
Attitude of the authorities
It also goes without saying that tax auditors are also keen on checking that all conditions are met. The statute and guidelines issued by the authorities should be construed strictly.
In the case of an audit, the player is in focus since they are the taxpayers. Generally however, the club takes over when it comes to setting up the strategy and providing the defence arguments, as provided in the employment contract. Personal income tax on the compensation paid by the club to a player is generally - if not always for international players - the club’s liability.
Typical questions a player may face include justification for the days spent abroad, which generally is not an issue since clubs are easily able to justify their players’ travels.
Also, the tax authorities may be tempted to challenge the Comparable Salary which sets the cap for the exemption of impatriate indemnity. This may prove to be a complex debate and should be addressed on a case by case basis. The Comparable Salary is to be communicated by the employer, relying on salaries paid in an equivalent position within the club or in the ‘industry.’ One may put forward the lowest amount paid over the past three year period for an equivalent player or an average figure based on Ligue 1 salaries for equivalent players or at least some of the Ligue 1 clubs which may be compared to the taxpayer’s club.
Another and rather new position taken by the authorities may consist of challenging part of the deduction as a professional expense of the agent’s fee paid by the player on the grounds that the player’s compensation is partially thanks to the agent’s role. The professional nature of the expense should not be discussed. The position of the tax authorities would be debatable in light of the statute and the history of the tax treatment applied to the agent fee payment by the club. We are however confident that this type of discussion should be resolved in a favourable manner, providing certainty and confidence in France’s intent to attract the very best.
A Cecile Park Media Publication | April 2017