Germany: No domestic tax liability for fee paid for lending a professional soccer player from club abroad

In a recently published decision of 27 May 2009 the German Supreme Tax Court (Bundezfinanzhof) has decided on the taxation of fees paid by a German professional football club to a foreign football club (decision I R 86/07) for lending a professional football player between 1 July 1995 to 30 June 1996.

In the case at hand a German club had borrowed a player from a Spanish professional football club. During the tax procedures it appeared that the Spanish club had borrowed the player from a Portuguese club. The German tax authorities subjected at first instance each of the foreign clubs to German corporate income tax on the fees which they each received. The taxpayers then requested an exemption from this tax on the basis of the tax treaty concluded by their respective countries of residence (according to Sec. 50d(2) of the German Einkommensteuergesetz, hereinafter EStG). The tax authorities rejected this exemption because of the failure to present a certificate of the country of residence, but did nevertheless reduced the applicable tax rate from 41,61% (plus 3,12% Solidaritätszuschlag) to 15%.

The appeal of the taxpayers was rejected by the Tax Court of Munich (Decision of 13 November 2007, 2 K 2892/03). Then the case was taken before the Supreme Tax Court, and this Court held in favour of the taxpayers. The Supreme Tax Court analysed the lending agreement, and held that the agreement did not encompass the transfer of a right, but merely permission for the lending club to enter into an employment with the player and to ask for the concession with the national soccer association for the player to be admitted to the competition. Hence, the Supreme Tax Court held that the foreign clubs did not enjoy any type of taxable German domestic income (as defined in Art. 49 of the EStG) because the rights were not used in a domestic permanent establishment of the foreign taxpayer(s). Also, the Supreme Court rejected the substance over form approach used by the Tax Court of Munich, according which the lending contract could be considered as a labour secondment agreement.

On 7 January 2010 the Germany Ministry of Finance issued a decision, in which it is stipulated that the above decision is not to be followed and applied to transfer sums, pending the possible introduction of new - possibly retro active - legislation which would allow for a substance over form approach rather than the formalistic approach of the Supreme Tax Court (IV C 3 - S 2411/07/10013).

Source: BFH IR 86/07, Rijkele Betten