It is recognized that sportspersons derive a considerable part of their remuneration from international performances, and therefore the enormous revenues involved are subject to taxation in a relevant number of States. Allocation of taxation rights of sportspersons is generally established by Art. 17 of relevant treaties entered into by Contracting States, reason being such persons enjoy high mobility and that such income could easily escape taxation if special conditions were not present in treaties. The following offers readers selected principles on the taxation of non-resident sportspersons in Italy. Part 1 focuses on the tax treatment under international tax law, while part 2 analyses the main domestic tax implications for non-resident athletes performing in Italy.

Summary: 1. The OECD Model Tax Convention: the most relevant allocation rules for sportspersons – 2. A closer look at the taxation of sportspersons on an international level – 3. Summary on Art. 17 of the Italian tax treaties

1. The OCED Model Tax Convention: the most relevant allocation rules for sportspersons

To understand how international taxation works in the case of sportspersons, it is important to look at the OECD Model Tax Convention (the “OECD Model”) and its Commentary (in the latest version released in 2017), a “tool” which carries significant weight in the interpretation of double taxation conventions and serves as a guideline for the negotiation and implementation of bilateral tax treaties between Contracting States. Bilateral tax treaties are not as such aimed at levying or imposing taxes, they are rather directed at allocating taxation rights between Contracting States limiting the application of taxes provided by domestic laws to individuals who are residents of the other State. The concept of residence as used in tax treaty law is typically based on the domestic concept of residence applied by the Contracting States to cover the various forms of personal attachment to a State, insofar as this gives rise to a comprehensive taxation (the “full liability to tax”).

The assessment of sportspersons’ tax residence may raise concerns, such as the dispute regarding which country has the primary right to tax, given that they constantly travel around the world for tournaments or events and may end up being tax residents in more than one country. Tax treaty law neither establishes its own standards that must be met in order to determine the place of residence, nor provides criteria for domestic laws regarding residence of individuals. Rather, it is aimed at connecting individuals with one or both Contracting States solely by reason of their link (i.e., domicile, residence or any other criterion of a similar nature) to a given territory and in accordance with domestic law. In situations where the person should be considered as tax resident of two States, the OECD Model has provided tie-breaker rules (substantially replicated in every bilateral tax treaty) according to which a (natural person) taxpayer  should be deemed to be resident, following the hierarchical order for application purposes below, in the Contracting State in which:

1. he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be resident only in the State with which his personal and economic relations are closer, this being understood as the centre of vital interests;
2. if the State in which he has his centre of vital interests cannot be determined, or if he has no permanent home available to him in either State, he shall be deemed to be resident only in the State in which he has an habitual abode;
3. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only in the State of which he is a national;
4. if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement procedure laid down in Art. 25 of the OECD Model.

When the residence status is assessed, taxation of income derived by international performing sportspersons is most frequently determined according to the following allocation rules contained in the OECD Model.

Article 7 provides that the profits of an enterprise of a Contracting State shall be only taxable in that state unless the enterprise carries on business in the other Contracting State through a permanent establishment therein. In case of natural persons (e.g. sportsperson), with the removal of (former) Art. 14 from the OECD Model, income from independent services shall be taxable only in the residence state unless the person has a fixed base regularly available to him in the source State.

[1] Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State.
[2] For the purposes of this Article and Article [23 A] [23 B], the profits that are attributable in each Contracting State to the permanent establishment referred to in paragraph 1 are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise.
[3] Where, in accordance with paragraph 2, a Contracting State adjusts the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall, to the extent necessary to eliminate double taxation on these profits, make an appropriate adjustment to the amount of the tax charged on those profits. In determining such adjustment, the competent authorities of the Contracting States shall if necessary consult each other.
[4] Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

Example: a sportsperson deriving income falling outside of the special provision contained in Art. 17, when the remuneration is not closely connected with the sporting activity. They will be taxable only in their residence state.

Certain elements of income may fall under Art. 12. In such cases, exclusive taxation rights are allocated by the OECD Model to the residence State. However, Italy’s tax treaty network on Art. 12 generally offers a deviation from the OECD Model, allocating primary taxation rights to the source State and secondary taxation rights to the residence State.

[1] Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
[2] The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
[3] The provisions of paragraph 1 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise through a permanent establishment situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.
[4] Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Example: certain payments derived by sportspersons from the exploitation of image rights.

Income derived by sportspersons may also fall within Art. 15 in case an employment contract binds or bound the athlete and the club (employer). In such cases, the allocation rule provides for exclusive taxation in the residence State of the person, unless the working activity is performed in the source State and all the following conditions are met: (i) the sportsperson is present in the other state exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, (ii) the remuneration is borne by a sporting club which is resident in the source State, and (iii) the remuneration is not borne by a permanent establishment that the employer has in the residence State of the sportsperson.

[1] Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
[2] Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and
b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
c) the remuneration is not borne by a permanent establishment which the employer has in the other State.
[3] Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment, as a member of the regular complement of a ship or aircraft, that is exercised aboard a ship or aircraft operated in international traffic, other than aboard a ship or aircraft operated solely within the other Contracting State, shall be taxable only in the first-mentioned State.

Example: income received by professional football players or racing drivers, taxed both in the residence State of the athlete and the source State, as far as the conditions sub. (i), (ii) and (iii) are met.

The special taxing rule is Art. 17 is explained in section 2 below.

Where income derived by sportspersons is not allocated under the distributive rules to a particular Contracting State, it therefore falls under Art. 21 which provides exclusive taxation rights to the residence State.

[1] Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.
[2] The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

Most countries adopt a residence-based income tax system. Resident taxpayers are consequently taxed on their worldwide income (e.g., Italy), irrespective of where the income is earned. Double taxation issues are very likely to arise, when taxation rights are allocated to both the residence State and the source State, as for example under Art. 12 (Italy’s tax treaty network offers a deviation from the OECD Model), 15 and 17. In all these situations, according to Art. 23, double taxation can be avoided by allowing a tax exemption or a tax credit, depending on relevant tax law. Italy, for instance, allows a double taxation relief by granting a tax credit on income from foreign source, computed as the lower amount between the tax actually paid by sportspersons abroad and the Italian tax calculated in proportion to the ratio between foreign income and aggregate income.

2. A closer look at the taxation of sportspersons on an international level

The OECD Model devotes a special clause in Art. 17(1) and (2) to the taxation of international sportspersons, as follows:

[1] Notwithstanding the provisions of Article 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.
[2] Where income in respect of personal activities exercised by an entertainer or a sportsperson acting as such accrues not to the entertainer or sportsperson but to another person, that income may, notwithstanding the provisions of Article 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.

Article 17 applies whenever (i) a person qualifies as a sportsperson, (ii) such person is resident of a Contracting State and (iii) exercises the performance in the other Contracting State. Allocation of taxation rights under Art. 17(1) represents a deviation from the normal tax rules governed by Art. 7 and 15 of the OECD Model: it gives primary taxation rights to the state where the performance takes place, preserving secondary taxation rights to the sportsperson’s state of residence. Accordingly, the residence state does not give up its right to tax entirely. Such exceptional rule also takes place if the income derives directly or indirectly from a performance by an athlete, but payment in respect of that specific performance is made to a “middleman” (such as their empresarios or agent) instead of directly to the sportsperson. The same rationale regulates Art.17(2) whenever any income in respect of personal activities exercised by the sportsperson accrues to other persons (e.g., an intermediary entity or a star-company) and not directly to the athlete. In these circumstances, the allocation rule stipulates a look-through approach to prevent tax avoidance by means of legal entities interposed with the aim of reducing the performance state’s taxation rights.
Article17 of the OECD Model comes therefore to the rescue to decide taxation rights between contracting states, in situations where the residence state shall tax on the basis of the residence criterion while the other state, being the place where the performance took place, shall tax on the basis of source rule. In any event, double taxation can be avoided in the residence state by allowing a tax exemption or a tax credit, following Art.23 of the OECD Model.

In terms of subjective and objective scope, it should be stressed that Art. 17 of the OECD Model does not contain a definition of the term “sportspersons” for tax treaty purposes itself. However, the Commentary clarifies that (i) the applicability of Art. 17 does not appear to be precluded from sports activities characterized by the lack of professional requirements; (ii) sports activities must refer to events carried out in public, or at least characterized by a minimum entertainment requirement; and (iii) the variety of sporting activities is not limited to traditional sporting events but may include other disciplines such as golfers, jockeys, footballers, cricketers, tennis players and racing drivers, as well as activities such as those deriving from billiards and snooker, chess and bridge tournaments.

Moreover, it is recognized that international sportspersons can derive, directly or indirectly (e.g., through star- companies), a considerable part of their remuneration from ancillary activities connected to the performance (casual earnings). This consideration stems from the fact that sportspersons very often receive remuneration in the form of:

• sponsorships, such as wearing a shirt with sponsors’ logos during a match;
• advertising fees, in case of promotion of a major tournament in which the sportsperson may participate;
• merchandising payments, for the sale of a line of products branded with the name or logo of the sportsperson;
• use or disposal of image rights, for the permission to use the person’s portrait.

In these situations, the point is to determine whether income derived by the sportsperson falls within the scope of the special rule contained in Art. 17 or rather in another distributive rule (such as Art. 7, 12 or 21). The Commentary does not provide a definition of what constitutes income related to sporting performances in the country concerned but clarifies that Art. 17 would not apply whenever there is no “close connection” between the income and the performance of activities in the other contracting state. From the perspective of the OECD Commentary, such nexus will generally be found to exist where it cannot reasonably be considered that the income would have been derived in the absence of the performance of these activities. Hence, the nexus, or lack thereof, may be ascertained in consideration of the timing of the income generating event or from the contractual arrangements relating to the participation in named events or a number of unspecified events by the sportsperson.

3. Summary on Art. 17 of the Italian tax treaties

For the purposes of applying Art. 17 to income derived by non-resident sportspersons in Italy, the following table provides the complete current list of Italy’s double tax conventions containing special rules in Art. 17 (the full texts of double tax conventions are available here):

The table shows that Italy’s tax treaty network on Article 17 generally follows the OECD Model.

However, a couple of exceptions are found:

• double tax conventions signed between Italy and a few countries (i.e., Cyprus, Ireland, Tanzania, Thailand, Trinidad & Tobago, Zambia) do not contain the anti-avoidance rule provided by Art. 17(2) of the OECD Model. In these situations, income derived by non-resident sportspersons would be attracted to taxation through the special anti-avoidance rule contained in Italian law and taxed with a final withholding tax at 30%;
• the tax treaty signed with the former Union of Soviet Socialist Republics in 1989 and still applicable to Kirghizstan and Tajikistan, does not establish any provision targeting taxation of sportspersons. Accordingly, income derived in Italy from sportspersons tax residents in Kirghizstan and Tajikistan – either directly or indirectly – would be subject to a final withholding tax at 30% in Italy.

Part 2 will focus on the domestic tax consequences for non-resident sportspersons performing in Italy.

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