Taxation of Non-Resident Athletes Playing in Professional Sports Leagues in the U.S.
Now that France has won the 2018 FIFA World Cup hosted in Russia, it is time for some players to take a well-needed vacation while others plan their next steps. Some players will begin offseason workouts and meet up with their club teams, while others will begin planning for a potential move to a new club team.
The summer transfer window closes at the end of August, and often times, these transfers can take players to another country. If the World Cup matches did not keep you at the edge of your seat, this transfer window surely will. Cristiano Ronaldo kick-started the window in spectacular fashion; the Portuguese National moved away from Spanish power house Real Madrid to Italian giant Juventus. Having scored four goals overall in this World Cup including a goal in the final match against Croatia along with several assists, French forward Antoine Griezmann has recently expressed interest in finishing his career with a team in the MLS.1 Although his contract with Atlético Madrid doesn’t expire until 2023, it would be interesting to understand the U.S. tax ramifications if he were to make his move this year under current law and also see what it would mean in terms of taxes to other players making their way to the United States’ Major League Soccer?
Non-resident athletes are taxed on U.S.-sourced income, including payment for performances, wages, bonuses, endorsements, sponsorship income, prize winnings, merchandise sales, royalty and other income effectively connected to a U.S. trade or business and other certain types of income that are not derived from a U.S. trade or business. Withholding rates are dependent on a number of factors, including whether the non-resident athlete is acting in the capacity of an independent contractor or an employee. For performance of personal services in the U.S. as an employee, non-residents are subject to federal tax withholding at graduated rates with an allowance for deductions that may be taken against such income. Whereas non-resident athletes performing independent services in the U.S. are subject to a flat 30% withholding tax on gross income that is not effectively connected with a trade or business in the U.S. and may be eligible for reduced withholding, including exemptions, if there is a tax treaty between the U.S. and country of residence. The non-resident athlete performing independent personal services in the U.S. can enter into a Central Withholding Agreement with the IRS, and qualify for a reduced withholding rate, provided they meet certain requirements.2
Recently, the following foreign professional athletes transferred to the MLS just this month: Pablo Aranguiz (Chile), Tomas Conechny (Argentina), Giles Barnes (Jamaica), Eric Remedi (Argentina), Guram Kashia (Georgia), Ronaldo Peña (Venezuela), Marquinhos Pedroso (Brazil), Romario Ibarra (Ecuador), Angelo Rodriguez (Colombia), and Raul Ruidiaz (Peru). With the exception of Venezuela, South America does not have income tax treaties with the U.S. When there is no treaty in place, the Internal Revenue Code governs the tax treatment of the foreign athlete. When there is a tax treaty in place, there could be tax exemptions and reduced tax rate withholding. Each treaty can differ on the amount of tax that a country can apply to taxpayer’s income and should be carefully examined. Generally, “when two countries assert jurisdiction over the same income, the treaty apportions tax revenues between the treasuries of the two treaty countries via an agreed set of rules so as to avoid both powers asserting tax authority”.3 When determining place of residence, most treaties use various factors (e.g., permanent home, personal and economic relations, habitual abode, and nationality) to determine in which of the two countries an individual is resident for treaty purposes.
In Griezmann’s case, assuming he’s a resident of Spain, he may be able to claim the benefit of the U.S./Spain Treaty, exempting some of the potential income from taxation in the U.S. For example, under Article 19 – Artistes and Athletes of the U.S./Spain Treaty, income derived by a non-resident athlete in the U.S. is not subject to U.S. income tax unless their gross receipts from such activities exceed $10,000. This would be a moot point in Griezmann’s case since his new contract is reported to be worth 23 million euros per year with Atlético Madrid. Aside from earning income for performing in athletic events, he receives endorsement and sponsorship income, some of which is characterized as royalties. Under Article 12, U.S.-sourced royalty income not predominantly attributable to the performance itself will be taxed in Spain; and 10% of the gross amount earned in the U.S. may be taxed by the U.S.
As more and more foreign athletes play in U.S.-based leagues, non-resident athletes should take note and seek proper tax advice. The issues are very complex and should be carefully examined.
1 Holyman, I. (2019, June 29). Atletico Madrid striker Antoine Griezmann wants to finish career in MLS. http://www.espn.com/soccer/soccer-transfers/story/3550308/atletico-madrid-striker-antoine-griezmann-wants-to-finish-career-in-mls
2 U.S. Department of the Treasury, Internal Revenue Service. Taxation of Foreign Athletes and Entertainers.
3 Carole C. Berry, Taxation of U.S. Athletes Playing in Foreign Countries, 13 Marq. Sports L. Rev. 1 (2002)