Income Taxation of Athletes and Tax Residency
In the search for ways to lower taxation, athletes often toy with the idea of changing their tax residency. However, such a change is not possible for everyone and will only bring real savings to a fraction of athletes. In today's article, we will look at all the conditions that an athlete must meet in order to get the desired benefits by changing tax residency without unnecessary risk.
When taxing athletes' income, it is essential to answer two questions:
- Which country is he/she a tax resident in?
- What activities can he/she be rewarded for?
How to Determine the Tax Residency of Athletes
In this article, we focus on athletes, but the same rules would apply to artists, programmers, or pendlers from border areas. A taxpayer can only be a tax resident in one state where all their income is taxed. Americans, however, are exempt from the residency determination, as the US requires its citizens to pay tax to the US regardless of which country they are a resident in.
How is residency determined? It is based on the conditions set out in international treaties. These treaties are called Double Taxation Treaties (DTTs), and the Czech Republic has signed them with more than 80 countries around the world. They take precedence, for example, over the Czech Income Tax Act, which has set a limit of 183 days of residency in the Czech Republic as a decisive criterion for determining residency. Therefore, different international treaties apply in different cases, so the answers must be sought specifically for the countries and their legal systems.
Criteria for Assessing Tax Residency
In the most common case, you will come across criteria similar to this model list:
A taxpayer is considered a resident of a country once he/she has a permanent home in that country. This is any form of housing, whether it be a self-owned property or a rented room. It is not a permanent residence registered in the documents, but a long-term residence that is at his/her disposal at any time.
It is proved by an extract from the Land Registry, a lease agreement, and a payment confirmation of rent, utilities, and internet. Living with parents or friends is not considered permanent residency, although it may also be available at almost any time. If the taxpayer is employed in the country, he/she is de facto presumed to have a permanent home there unless he/she proves otherwise, for example, via airline tickets or hotel bills.
Centre of Interests
If residency cannot be determined by the permanence of the individual’s dwelling, the cost-of-living criterion comes into play, which is more loosely defined than a permanent dwelling. This criterion deals with the place where the taxpayer has closer personal and economic ties, where he/she has family and social relations, where he/she has a job, a business, where he/she has bank accounts, where he/she is politically and culturally involved, and where he/she has been issued with a driving license.
Place where the taxpayer usually resides
Failing the above criteria, the taxpayer's usual place of residence is ascertained. Only rarely will this stage be reached when examining tax residence. A common example used to illustrate this criterion is that of a childless programmer who flies around the world and works from various cafés, or a pensioner who spends half the year in an apartment in the Giant Mountains and the other half in an apartment in Croatia.
If residency could not be determined by permanent home or center of interest, and the person, for example, has lived exactly half the year in two countries, their tax residency is determined by their nationality.
Agreement at finance minister level
In extremely rare cases, the residency will be decided by the finance ministers of the countries concerned.
In determining tax residence, the first criterion is followed. If tax residency cannot be unequivocally assigned by the first rule, one proceeds to the second, third, etc. Once residency has been established, no further criteria are applied.
Let us illustrate this process with two examples inspired by our experiences.
A Slovak citizen and entrepreneur/programmer owns property in the Czech Republic and Slovakia. He has a wife in Slovakia, but he does not live with her; they have not yet finalized their divorce. He spent most of the year in the Czech Republic, where he has a partner, but he has been designated a tax resident of Slovakia on the grounds that his wife is more than just a girlfriend. The client was very surprised as he had been paying tax on all of his income in the Czech Republic.
A woman who lives on the border of Austria has an Austrian husband, owns property in the Czech Republic and Austria, works in Austria herself, and takes her children to school there. However, she was designated a tax resident of the Czech Republic because she has a non-profit there, speaks Czech at home, and always returns to her Czech property after work.
Income Taxation for Athletes
In practice, a significant number of athletes routinely receive rewards for activities that are not simply their sporting performance, such as playing a match. As taxation is then subject to different rules, which vary significantly based on the laws of each country, the tax regime must always be assessed individually with regard to the specific type of income, the countries involved, the specific double taxation treaties, etc.
To give you a basic idea, we will illustrate the whole issue with an example from our professional history. Athletes commonly issue invoices for some of the following activities:
- Performance in sports: remuneration for one’s performance in sports most often comes in the form of "prize money" for tournament competitions in individual sports, or in the form of a long-term contract with a club or organization.
- Advertising: a typical example is an athlete wearing a brand's clothing, promoting its drinks, or cutting the ribbon at the opening of a new gym.
- Sports promotions: another common example is participation in lectures in schools and sports clubs, where the athlete talks about his/her experiences, history, victories, etc.
- Honorary visits: famous personalities sometimes participate in honorary visits, for example, on the anniversary of their hometown, where they often moderate part of the event.
- Lecturing: experienced athletes share their know-how in the form of courses and private lectures where they show participants how to exercise, eat healthy, and more.
Case Study on the Taxation of an Athlete's Income
A Czech citizen works as a professional athlete in Italy, where he also rents an apartment. He does not have a permanent apartment in the Czech Republic, he lives with his parents. He is a tax resident of Italy and will travel to the Czech Republic in July and August for two events.
1. Match in the Czech Republic
In July, he will play a public match in the Czech Republic. It is paid by the company SPORT s.r.o., to which the athlete will issue an invoice for 100 thousand CZK for the match. The athlete must notify the company that he is a tax resident of Italy.
Pursuant to the provisions of Section 22, para.1, let. f, point 2 of Act No. 586/1922 Coll. on Income Taxes, as amended (hereinafter referred to as the "ITA"), the athlete will be subject to withholding tax in the Czech Republic at the rate of 15 percent pursuant to Section 36 of the ITA. Therefore, SPORT s.r.o. will only reimburse him CZK 85,000, sending the remaining CZK 15,000 to the tax office, which will issue a tax payment certificate based on the application, and the company will then forward it to the athlete. The athlete can offset this tax against his tax liability, assuming Italian law allows him to do so, or he can file a tax return in the Czech Republic under Article 36, para. 7 of the ITA. This is only available to residents of the European Union and only for certain activities, which include sporting activities.
What to watch out for? Make sure you tell the company your country of tax residency when you invoice them and ask for proof of tax paid in another country. For events with international participation, inspections by the tax authorities are frequent. In the event of a mistake, the company may be liable for a tax assessment that will be even higher than the original amount, as CZK 100,000 is considered to be only 85% of the remuneration paid. In addition, interest on late payment is added. The companies protect themselves against such surprises contractually and pass on any costs incurred to the athletes.
2. Lecture on “How to Keep Fit”
In August, the athlete will come to the Czech Republic for a lecture, where he will advise participants on how to exercise to stay in shape. This income can be classified as income derived from lecturing activities, which falls under the category of Supplying a Service, and will therefore be governed by the provisions of Section 22, para. 1, let. c of the ITA. The athlete issues an invoice for CZK 100,000 to SPORT s.r.o., which pays him this amount, and he then pays taxes on it in Italy.
What to watch out for? Each case depends on the country-specific conditions. Therefore, find out in advance the tax liability in the country where you are resident and the specific wording of double taxation treaties.
In any case, the issue of income taxation in deciding tax residency is influenced by other factors that cannot be generalized. You should always consult with a tax professional when making your decision.
Benefits of Changing Residency for Athletes
Many athletes move their tax residency to countries with lower tax burdens, so-called “tax havens”. The classic reasons for doing so include:
- near-zero taxation in selected jurisdictions (Monaco, Netherlands, etc.),
- near-zero social security and health insurance contributions,
- a simpler tax system,
- the possibility of more favorable flat-rate taxes,
- the possibility to take advantage of social bonuses and tax rebates that are not available or are lower in the Czech Republic.
Petra Kvitová is a well-known case of enjoying the benefits of tax residency in Monaco, however, other Czech tennis players and athletes also use the country for tax purposes. Anyone can achieve certain benefits in this way, for example, Gérard Depardieu became a citizen of the Russian Federation due to the high taxation in France, and many other French people move their residency to the more friendly Belgium.
What to watch out for? In addition to the promise of benefits, there is also a risk in artificially manipulating tax residency. If government authorities become concerned about the truth of the facts declared, tax may be levied in the country from which the taxpayer has left. This is how famous sports personalities, such as footballer Lionel Messi and tennis player Boris Becker, have come across in the past. Therefore, you should always carefully consider whether you actually pass the tax residency test according to the above criteria as you have stated in your tax return.
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Are you interested in the benefits a change to your tax residency can bring you? Or do you have doubts whether you are paying your income tax correctly? Contact us and together we will find the answers to your questions.