Part 1 of the article introduced selected principles on the tax treatment of sportspersons under international tax law. Part 2, below, provides specific inputs about the domestic rules applicable to income derived by non-residents athletes performing in Italy.
Summary: 1. General principles of the Italian tax system applied to non-resident sportspersons – 2. Domestic rules applicable to income from sports performances – 3. Domestic rules applicable to income deriving from the exploitation of image rights – 4. Territorial criteria applied to income from image rights – 5. Apportionment of domestic and foreign sourced income for the computation of the taxable income in Italy
1. General principles of the Italian tax system applied to non-resident sportspersons
Individual tax residents in Italy, regardless of their nationality, are taxable on their entire income, whether of Italian or foreign origin (worldwide taxation principle). Under Italian Law, an individual is considered resident for tax purposes where, for the greater part of the tax year (i.e. 183 days in the calendar year, or 184 days in the leap year) they are: (i) registered in the Civil Registry of the Resident Population, or (ii) resident in Italy (defined as the place where an individual has his habitual place of abode), or (iii) domiciled in Italy (where their personal and economic connections are closer). Due to the limitations of the territoriality principle, non-resident individuals are only subject to taxation with respect to Italian sourced income and according to the following rules:
- income from land and buildings is deemed to arise in Italy if the property is located therein;
- income from capital is deemed to arise in Italy if it is paid by the State, by resident entities or by Italian permanent establishments of non-resident entities with the exclusion of interest on deposits and bank accounts;
- income from employment is deemed to be Italian sourced if the employment activity is performed in Italy (the same territoriality principle applies to income assimilated to employment);
- income from self-employment is deemed to arise in Italy if the relevant professional activity is carried-out therein;
- business income is deemed to be Italian sourced whenever it derives from activities performed within the territory through an Italian permanent establishment; and
- miscellaneous income qualifies as domestic income if it derives from activities carried-out in Italy and relates to assets located therein, including capital gains deriving from the disposal of shareholdings in resident entities (exceptions are listed under Art. 23(1)(f), n. 1)-2)-3) of the TUIR).
2. Domestic rules applicable to income from sports performances
2.1 The tax and legal framework: Law No. 91/1981
The understanding of taxing rules applicable to domestic income derived by non-resident sportspersons requires a preliminary assessment of the legal framework regulating professional sports activities in Italy: Law No. 91, of 23 March 1981 (“Law No. 91/1981”). First and foremost, under Italian law the “professional status” is granted only to athletes, coaches, sporting directors and athletic trainers affiliated to one of the following Sports Federations: Italian Football Association, Italian Basketball Association, Italian Cycling Association and Italian Golf Association. Performances of professional sportspersons are regulated by employment contracts, drafted in accordance with the standard forms set out by the relevant Sport Federations. Contracts must be in writing and cannot last for more than 5 years.
Taxation of sportspersons relies, therefore, on the nature of the underlying professional sport relationship between the athlete and the club, in accordance with provisions contained in Law No. 91/1981. Sportspersons are deemed to perform services within an employment relationship if the activity is carried out on a continuing basis and it takes place in exchange for consideration (e.g. salary received by a football player). In contrast, they are deemed to perform within an independent service relationship if at least one of the following conditions is met: (i) the activity is carried out either within a single, or several interconnected sporting events, over a short period of time; (ii) the sportsperson is not contractually bound with regard to the frequency of preparation or to the number of training sessions undertaken; and (iii) the sporting service, while being continuous, does not exceed eight hours per week, five days a month or thirty days a year. In this case, Law No. 91/1981 establishes that remuneration received should be treated, for tax purposes, as income assimilated to employment (e.g. the case of a cyclist who contracts with a team only for participation in a big event, such as the Tour de France or Giro d’Italia). Outside the framework of Law No. 91/1981, payments received by non-residents sportspersons are generally treated as income from self-employment (e.g. income received by non-resident athletes for the participation in major tournaments held in Italy).
Based on the above, in the framework of professional sports, income received by non-resident sportspersons would be subject to the following sourcing rules:
- income from employment is deemed to be Italian sourced if the sport performance is carried-out in Italy;
- income assimilated to employment is deemed to be Italian sourced if the payer is resident in Italy;
- income from self-employment is deemed to be Italian sourced if the sport activity is performed within the Italian territory.
2.2 Income derived from employment relationships
Taxation of non-residents generally follows the same rules and tax rates applied to residents. In accordance with the principle of territoriality provide by law, income derived by sportspersons for performances carried out in Italy is subject to withholding tax (Art. 23 of the Presidential Decree No. 600, from 29 September 1983, , “Decree No. 600”) by the employer, as a prepayment of individual income tax (“IRPEF”). Income from employment includes salaries and compensations, whether in cash or in kind, paid to the employee in the framework of the contractual relationship. The withholding tax is computed with the following ordinary progressive income tax rates:
| Income (Eur) | Tax Rate | |
|---|---|---|
| - | up to 15.000 | 23% |
| from 15.001 | to 28.000 | 27% |
| from 28.001 | to 55.000 | 38% |
| from 55.001 | to 75.000 | 41% |
| over 75.001 | - | 43% |
However, if the employer is not a withholding agent, the employee is required to file the Italian Tax Return for the purposes of taxing income derived from sports performances carried-out in Italy. If the double tax convention signed between Italy and the sportsperson’ residence country follows the OECD Model in Art. 17, the withholding tax applied in Italy is not subject to any limitation in tax rate. Eventually, the tax paid in Italy will be credited against the worldwide income tax due in the residence state.
2.3 Income assimilated to employment
In the case of income assimilated to employment, remuneration from sports performances is subject to withholding tax at 30% (Art. 24(1-ter) of Decree No. 600). However, if the payer does not qualify as a withholding agent in Italy, the sportsperson is required to file the Italian Tax Return for the purposes of taxing income received for performances carried out in Italy. If the double tax convention signed between Italy and the sportsperson’ residence country follows the OECD Model in Art. 17, the withholding tax applied in Italy is not subject to any limitation in tax rate. Eventually, the tax paid in Italy will be credited against the worldwide income tax due in the residence state.
2.4 Income derived from self-employment relationships
Income derived by self-employed sportspersons for performances carried out in Italy is subject to withholding tax at 30% (Art. 25(2) of Decree No. 600). However, if the payer does not qualify as a withholding agent in Italy, the sportsperson is required to file the Italian Tax Return for the purposes of taxing income received for performances carried-out in Italy. If the double tax convention signed between Italy and the sportsperson’ residence country follows the OECD Model in Art. 17, the withholding tax applied in Italy is not subject to any limitation in tax rate. Eventually, the tax paid in Italy will be credited against the worldwide income tax due in the residence state.
3. Domestic rules applicable to income deriving from the exploitation of image rights
3.1 Income qualification under Italian Law
Remuneration deriving from the exploitation of image rights constitutes a significant portion of earnings for certain professional sportspersons. From a domestic point of view, the tax treatment of income deriving from the use or disposal of image rights may assume different qualifications in relation to the way in which they are exploited by the sportsperson: accordingly, it may qualify as income from employment, income from self-employment or miscellaneous income. It constitutes employment income whenever the sportsperson (e.g. professional football player) contracts with his club, agreeing both the performance of the sporting activity and the disposal of the commercial rights to use his image for promotional purposes. In such case, according to the principle of the “all-inclusive-income”, the employment income is constituted by the ordinary remuneration received for the performances carried-out in Italy by the sportsperson as well as any income deriving from the exploitation of the individual’s image rights assigned to the employer.
Income from the use or disposal of image rights constitutes self-employment income when the original holder of the rights exercises their activity with the professionalism and habituality required by Italian tax law. In such case, being their notoriety attributable to the professional activity carried out, remuneration received by the sportsperson shall be included to the taxable income. In this regard, the Italian Revenue Agency, in Resolution No. 255, from 2 October 2009 , expressed the view that “among the intangible elements attributable to artistic activity, may also be included any right for the exploitation of the image where it can be directly attributable to the reputation of the character, acquired in relation to public performances”. The same conclusions can be extended to sportspersons.
In any case, where remuneration deriving from the exploitation of the image rights is not attributable to an employment relationship or the original holder is exploiting the rights from outside his professional activity (such as a self-employment relationship), the remuneration would be finally qualified as miscellaneous income, deriving from the “assumption of obligations to do, not to do or to permit” (e.g. income derived by a professional football player who, outside his employment contract, assigns the use of his image to a management company for the purposes of an advertising campaign).
3.2 Income derived from employment relationships
Income derived by sportspersons is subject to withholding tax by the employer. The withholding tax is computed with the ordinary progressive income tax rates. However, if the employer is not a withholding agent, the employee is required to file the Italian Tax Return for the purposes of taxing income received for activities carried out in Italy.
3.3 Income from self-employment
Income derived by self-employed sportspersons for performances carried out in Italy is subject to withholding tax at 30%. However, in case the payer does not qualify as a withholding agent in Italy, the sportsperson is required to file the Italian Tax Return for the purposes of taxing income received for the exploitation of image rights connected with Italy.
3.4 Miscellaneous income
In the last instance, whenever income deriving from the use or disposal of image rights qualifies as miscellaneous income, it would be subject to withholding tax at 30%. Again, in case the payer does not qualify as a withholding agent in Italy, the sportsperson is required to file an Italian Tax Return to tax income connected with activities performed within the Italian territory.
4. Territorial criteria applied to income from image rights
The territoriality of income derived from the exploitation of image rights is determined according to the following criteria:
- employment income is deemed to be Italian sourced if the activity is carried-out in Italy;
- income from self-employment is deemed to be Italian sourced if the relevant professional activity is carried out in Italy; and
- miscellaneous income is deemed to be Italian sourced when referring to activities carried-out in the Italian territory.
All three cases are applicable regardless of the tax residence of both the individual who carries out the activity and of the payor, having exclusive regard to the place where the activity takes place. In cases where remuneration falls within the category of income from employment or income from self-employment, for the purposes of territoriality, the identification of the place where the activity takes place is straightforward: its is only necessary to consider the place where the professional performance has been carried-out. In contrast, outside these situations (i.e., whenever the income is qualified as miscellaneous income), the evaluation of the “forced separation” that usually comes about the owner of the right (e.g. sportsperson) and the intangible element that the assignment of the right of economic exploitation to the image determines, becomes relevant for tax purposes. It is therefore necessary to consider where the image is commercially and economically exploited. In this sense, it seems unlikely that the place where the contract is signed will act as a factor in determining the source state of the income under consideration, as it also seems unlikely that it should be sought in the place where the photo shooting takes place. And last but not least, it may also not be applicable to make reference, as territorial criteria, to the residence of the payer. The exercise of taxation rights requires therefore an evaluation of the underlying factual relationship, as the place where the activity is carried out can only be referred to that of “exploitation of the acquired image right”. Accordingly, it is necessary to evaluate the existing relationship between the obligation assumed and the territory. Consider the following example: a sportsperson resident in Portugal transfers to company A, resident in Germany, the right to use their image to advertise the products of company A in Italy. In this case, remuneration received by the sportsperson would be taxable in Italy providing that the activity of exploitation of their image (e.g., publication of advertisements in magazines which are distributed in Italy) – for which they received a fee – is carried-out within the Italian territory. In the situation, the activity of exploitation is carried-out in Italy so that, irrespective of the place where parties entered into the agreement or the place where the photo shooting took place, the non-resident sportspersons would be subject to withholding tax in Italy (any additional consideration would require a case-by-case analysis in order to define if the exploiting of the sportsperson’s image rights comes under Art. 17 or another allocation rule).
5. Apportionment of income for the computation of the taxable income in Italy
Article 17 of the OECD Model preserves the rights of taxation to the performance state on income connected to activities carried out in that contracting state. Therefore, it is required to proceed with the apportionment of income received for professional activities in every country where the sportspersons have performed. Two methods are currently the most prevalent. The first is the games played formula, which takes into consideration an event-based approach and seeks to attribute the relevant income based on the number of public performances in each State; the second is the duty days formula, according to which the number of days that the sportsperson spent in the different countries (either for public performances or preparation activities) are taken into account, allocating the income proportionally.
The apportionment through the games played formula is determined by multiplying the overall income by the ratio of public performance days in each State and divided by the total number of public performance days in a given year; while the duty days formula requires to divide the number of days spent in each country (either taking part in competitions or training and preparation under the supervision of the employer) and the total number of working days in the year. In Resolution No. 79, of 16 June 2006, the Italian Revenue Agency, in response to a Ruling submitted by an Italian cycling team to determine whether the salary paid to a German cyclist should be subject to Italian withholding tax in full or not, confirmed that the games played formula was applicable instead of the duty days formula. The tax administration held the view that “in case of a contract which regulates the employment relationship between a resident company and a non-resident sportsperson, it is possible to allocate the income according to the proportion between the days of competition held in Italy and those carried out abroad”.
– Example: a Spanish racing driver employed by a British motor racing team for a world championship season consisting of a series of races in different countries. Assuming a number of 22 races in a year, this driver will be subject to withholding tax in Italy, computed on 1/22 of his annual salary.
However, despite this view being generally adopted by most tax courts worldwide (e.g., United States, Canada or Belgium), it is far from the position taken by the OECD in the Commentary on Art. 17 (see paragraph 9.3), according to which “it would be reasonable to allocate the salary on the basis of the number of working days during which he is present in each State where his employment-related activities (e.g. travel, training, races, public appearances) are performed and to allocate the bonuses to where the relevant races took place”. The different approach is essentially attributable to the less administrative burdens required to the taxpayers and the tax administration to mark the number of days spent in official competition rather than adopting a tracking approach aimed at counting the days spent in travels, training or appearances in the performance state.
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Part 1) of the Country Guide can be read here.
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