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Acquisition of a French football club: focus on tax matters
The 2000s marked a turning point for French football when growing interest by foreign investors resulted in several landmark acquisitions of French football clubs. To name but a few, the acquisition of PSG from Colony Capital by the sovereign wealth fund of Qatar in 2011 for €70 million, the acquisition in 2011 of AS Monaco by the Russian businessman Dmitri Rybolovlev for €1 saving the club from bankruptcy, the 2016 acquisition of Olympique de Marseille from Margarita Louis Dreyfus by the American billionaire Frank McCourt for €45 million and the 2020 acquisition of Toulouse Football Club by the American fund Red Birds for €20 million. The latest example is the announced acquisition of Olympique Lyonnais by the American John Textor for €800 million.
Half of the French Ligue 1 clubs (AJ Auxerre, OGC Nice, LOSC Lille, TFC Toulouse, PSG, RC Lens, OM, AS Monaco, ESTAC Troyes, Clermont Foot) are now owned by foreign investors.
This increased focus by foreign investors combined with the sale by the French Professional Football League (LFP) to CVC of a 13% stake in the company operating French football’s audio-visual rights for €1.5 billion have contributed to boosting the value of French football clubs. Two of them - PSG, whose value is estimated at €2.1 billion, and Olympique Lyonnais valued at c. €500 million - even feature in the list of the 30 richest clubs in the world[1].
The valuation of a football club depends on multiple criteria, such as the quality of the players, sporting results, financial performance, valuation of TV rights of the championship in which the club participates, ownership of the sporting infrastructures (stadium, training centre) and the club’s renown. A club’s ranking is also very important and acquisition contracts generally provide for a price adjustment, upwards or downwards, in case the club should be promoted to a higher division or relegated to a lower division.
Buy-side due diligence of a French football club can also raise some interesting tax topics. Here are some of them.
I. Financial relations between the sports association and the commercial company
A French football club is primarily a non-profit sports association governed by the 1901 Act applicable to non-profit organisations.
As football progressively became a lucrative business, the French legislator decided that the business activities of a football club should be carried out by a commercial company. Pursuant to the Law of 16 July 1984, when a sports association affiliated to a federation regularly participates in the organisation of commercial sporting events that exceed one of the thresholds in terms of revenue (1.2 million euros) or wages (800,000 euros), the sports association must entrust the management of its business operations to a commercial company.
Nowadays, professional football clubs in France are composed of at least two entities: (i) a sports association and (ii) a commercial company (in which the sports association generally holds a minority stake), which are bound by a contract subject to the provisions of Articles L.122-14 to L.122-19 of the French sports code.
This contract defines, amongst other things, the rules and financial conditions for the provision of membership rights to the French Football Federation (FFF) as well as the club's name, brand and other distinctive signs. Under the terms of the contract, the sports association provides the commercial company with its affiliation rights to the FFF, which is essential for the club's participation in French and international competitions, as well as the use of the club's name and logos.
The law does not provide for any specific method of remuneration, which is left to the discretion of the parties. A remuneration in line with the margin realised by the commercial company would be justified with respect to intangible assets that are essential for the club's activity. In practice, the structure of this remuneration, its contractual name (royalty, image right, subsidy, flat-rate remuneration, etc.) and its method of determination vary from one club to another.
II. Amortisation and depreciation of the football players in the accounts of the commercial company
Players are a key asset for football clubs.
The value of a player corresponds to his acquisition cost, the main components of which are the transfer fee paid by the acquiring club to the selling club and ancillary costs such as consultancy and agent fees.
Each football player is booked as an asset by the commercial company for the total value of the transfer upon approval of the transfer by the LFP. Any earnouts are either capitalised or included in off-balance sheet commitments. If a contract with a player is extended, the net book value is increased by the costs of the extension.
Amortisation is recognised on a straight-line basis over the duration of each player’s contract. The amortisation period may not exceed five years in accordance with the UEFA’s recommendations. If the term of the contract is extended, the net book value, increased by extension costs, is amortised over the new duration.
At the end of each financial year on 30 June (which corresponds to the end of the football season), the club must proceed with a review of its players and carry out an impairment test, which consists in comparing the net book value of each player with the theoretical market value, when there is an indication of impairment. This impairment test must be performed at two levels: at the level of the team considered as a cash-generating unit (expected net cash flows, reconciliation between past and achieved results) and at the level of the individual player in case of failure (performance, unavailability, play time during games).
If the current value of the fixed asset (i.e. a football player) falls below its net book value (i) impairment is recognised if the loss of value is not considered as irreversible or (ii) exceptional amortisation is booked if the loss of value is definitive and irreversible (in this case, the depreciation schedule should be modified prospectively).
The French tax authorities scrutinise depreciations and amortisations booked with respect to football players.
From a tax standpoint, only an effective and definitive depreciation justifies an exceptional amortisation in addition to the normal amortisation allowance. On the contrary, a depreciation should be booked when the decrease in value is not considered as irreversible. The depreciation may be deducted for tax purposes if the expected realisation value at the end of the financial year is lower than the net book value of the asset, it being specified that mere decline in performance is not itself sufficient to justify probable loss but can be part of a set of indicators justifying the depreciation.
For players transferred at the end of their contract, the market value of the asset is zero and the loss of value is definitive, which justifies the deduction of an exceptional amortisation.
On the contrary, when a player is temporarily loaned to another club at the end of the season due to his low performance or low play time, the French tax authorities consider that the loss of value is not definitive or irreversible as the purpose of player loans is generally to encourage the player to get back on track and return to an expected level of performance. Therefore, in the case of player loans, the French tax authorities deny the tax deduction of exceptional amortisation.
III. Payments to players and service providers resident for tax purposes outside of France
A football club may have to make payments to beneficiaries resident for tax purposes or established outside of France. Such beneficiaries may be players or intermediaries, such as agents and other service providers.
Payments to non-resident beneficiaries generally fall within the scope of French withholding tax provided for by the Article 182 B of the French tax code.
The domestic rates of this withholding tax (15% for sports services provided in France, 25% for consultancy services and commissions paid to intermediaries, 75% when the beneficiary is established in a non-cooperative jurisdiction) and the reductions/exemptions available per applicable double tax treaty vary depending on the status of the beneficiary and the nature of the services provided (sports services, consultancy services, commissions). Careful analysis of the nature and qualification of the amounts paid by the French football clubs to non-residents is required.
When the club fails to withhold the tax, this is viewed as an indirect benefit in addition to the gross amount paid, leading to an increased withholding tax risk of 15/85 (sports services) or 25/75 (other services).
When a player is transferred from one club to another, the acquiring club pays a transfer fee to the original club and this transfer fee is booked as an asset by the acquiring club and amortised over the duration of the player’s contract. The French tax authorities tried unsuccessfully in the past to argue that a transfer fee should be treated as remuneration for a sporting service, falling within the scope of 15% withholding tax per the provisions of Article 182 B, I-d of the French tax code, as it compensates a player's departure. The transfer fee corresponds to the acquisition price of the contract with a football player and cannot be viewed as the consideration for a sporting service provided by the player to the club.
Wages as well as break-up fees paid by French football clubs to non-resident players should be treated as remuneration for a sporting activity carried out in France, falling within the scope of 15% withholding tax, subject to applicable double tax treaties. The OECD Model Tax Convention provides that income from sporting activities is taxable in the State in which the sporting activity is carried out and therefore does not prevent the application of French withholding tax when the applicable double tax treaty follows the OECD Model Tax Convention.
The French tax authorities consider that this withholding tax also applies to "compensatory" payments to players as per the contracts with the French football clubs, even if the beneficiary was a French tax resident at the time of execution of his contract, provided that at the time of payment (which may occur after the termination of the contract) the player has left France and is no longer a French tax resident.
Income that a non-resident football player may receive from ancillary services other than sports services, such as for example advertising services provided in France, should be subject to French withholding tax at the rate of 25% as per the provisions of Article 182 B, I-c of the French tax code, subject to applicable double tax treaties.
Finally, fees paid by a French football club to sports agents and other service providers established outside France are generally viewed as remuneration for services used in France, falling within the scope of 25% withholding tax as per the provisions of Article 182 B, I - c of the French tax code, subject to applicable double tax treaties.
[1] Football Benchmark “The European Elite 2022”.
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