The Sports Law & Policy Centre | Penny-Wise: Tax Structuring by Athletes through Incorporation
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Penny-Wise: Tax Structuring by Athletes through Incorporation


By Seshank Shekar


It has become a fairly regular and widely accepted practice among many high profile athletes to incorporate separate legal entities. These legal entities are usually in the form of ‘loan out’ corporations wholly owned by the athlete. Typically the athlete then becomes an ‘employee’ of his own corporation, and the primary function of such corporation is to loan out the services or the image rights of the athlete to third parties. Such services may be in the form of actual sporting services performed by the athlete or the commercial services afforded by the athlete, such as his/her endorsements and public appearances. Recently ‘loan out’ corporations and the athletes who own them, have come under the scanner, as ‘loan out’ corporations often serve as a tool to evade tax liability in several jurisdictions. In light of the recent international developments, it is pertinent to examine the way in which two major sporting nations, namely the United States (“US”) and the United Kingdom (“UK”) deal with such tax structuring techniques.

United Kingdom

In the UK, over the past few years there have been several controversies reported with respect to athletes and entertainers setting up off-shore corporations, primarily to mitigate or avoid their tax liability to Her Majesty’s Revenue and Customs (“HMRC”). Most recently, Sir Chris Hoy, the celebrated cyclist and six-time Olympic gold medal winner, was alleged to have used a loan scheme with his image rights company (“IRC”) to avoid paying tax on his earnings. Hoy allegedly used his own company, Hoy Trackstars Ltd. to obtain a loan as a form of disguised remuneration. Hoy Trackstars Ltd. was in charge of receiving all of Hoy’s endorsement fees in return for him promoting his sponsors’ brands and allowing his image to be used in their advertisements. For an athlete, image rights refer to an athlete’s proprietary right to, inter alia, the athlete’s name, physical characteristics, personal likeness or personal marks like his/her signature. IRCs, such as the one used by Hoy, started to be considered as tax avoidance mechanisms after it was widely reported that a number of highly paid Premier League footballers especially in the UK, allegedly used such schemes in consonance with their clubs. These arrangements are especially relevant for high profile footballers, such as Wayne Rooney, as they form an essential part of any potential earnings. Most modern day footballers factor a percentage of these earnings related to image rights into their agreements with their respective clubs so that their income is not based solely on their performance on the field.

Typically, these arrangements involve two separate contracts:

(1) between the player and the football club on one side, wherein the footballer earns a salary for playing and pays income tax on that salary; and

(2) between the IRC and the football club on the other side wherein the club pays a proportion of the player’s earnings directly in the IRC which in turn sells or licences his image rights to the club. Consequently, the club obtains permission to use the player’s image rights for any sponsorship, marketing and commercial activities. The fee for image rights is paid into the company, and the footballer can take out a loan against that fee until the loan is repaid.

The effect of a player setting up an IRC and the club contracting with the IRC is that it not only helps to reduce the income tax burden on players who have the capacity to earn a substantial part of their income through image rights, but it also provides a vehicle for preventing unauthorised commercial use of the individual’s image. By assigning image rights to an IRC, which then licences the rights to clubs, an athlete in the UK has to only pay the corporation tax to HMRC which is at a much lower rate than Income Tax, which in some cases rises up to fifty per-cent of all income earned by an athlete or entertainer in the UK.

The landmark case with respect to IRC’s and their tax implications in the UK is Sports Club, Evelyn and Jocelyn v Inspector of Taxes (SC 3114-16/99), wherein HMRC challenged the legitimacy of the arrangements between Arsenal Football Club (Arsenal) and two of its highest earning players, Dennis Bergkamp and David Platt. The players had separate image rights agreements with Arsenal which were signed purely to allow the club to pay a portion of their salaries to the players’ respective IRCs. The HMRC argued that the earnings arising out of the agreements were taxable as income arising out of employment and the image rights agreements themselves had no independent value. The key issues which the Special Commissioners considered in coming to their decision in this case included:

(1) whether the image rights agreements had a value and whether such value was dependent on the players’ value, not as footballers, but as recognisable personalities;

(2) whether the payments made under such agreements were disproportionate in comparison with the players’ value for wider commercial exploitation; and

(3) whether there was any motive to avoid paying tax under such an agreement.

The HMRC failed in its claim as the court held that the arrangements were legitimate and ‘separate commercial contracts’ and were therefore excluded under the existing income tax legislation of the UK. It was held that the players were justified in using their IRCs as pension funds and the rights payments were found to be reasonable in all the circumstances.

Since this decision, it has become common practice for several professional footballers based in the UK to establish offshore IRC’s to which the players assign or grant an exclusive licence of their image rights. Due to the secrecy surrounding the contracts which clubs have with players, which may ultimately disguise the actual value of payments made to players as footballers, IRCs can be easily used as an instrument to avoid tax. For instance clubs usually pay fees to acquire the image rights of a player with high footballing abilities, but with almost non-existent image rights value. In such circumstances, the fees paid for the player’s image rights may be exorbitant in relation to his/her salary, resulting in the player declaring very little footballing income and thus limiting the player’s tax liability. These potential loopholes convinced the HMRC to investigate several top professional football, rugby union and rugby league clubs and their players in the UK, to determine whether they owed unpaid tax relating to image rights payments. These investigations reportedly led to the English Premier League and the Rugby Guinness Premiership striking settlements with the HMRC collectively on behalf of all their participating clubs.

United States of America

While the IRC is the most popular form of a ‘loan out’ corporation in the UK, in the US, the main form of incorporation preferred by athletes is that of the Personal Service Corporation (“PSC”). PSCs are corporations which are essentially a legal fiction, typically wholly owned by the athlete themselves and employed for the financial benefit of such athletes. The arrangements between the athlete, a PSC and an employer typically involve a twofold contractual relationship:

(1) an agreement between the professional athlete and his wholly owned PSC by which the athlete agrees to provide services to that PSC; and

(2) an agreement between the PSC and a sports club/franchise or any other employer to furnish the athlete’s services, which may include his sporting services as well as services related to promotion or endorsing or marketing of products.

The employer pays the PSC directly for the athlete’s services and the PSC includes the amounts paid by the third party in its gross income. The athlete includes in his/her income only the wages paid to him/her by the PSC. Therefore, any money going into the PSC is not considered to be the income of the athlete and is taxed at the established corporate rate which is substantially lesser than the rate for income tax. Athletes gain further benefits with the help of PSCs by filing returns on any qualified pension plans, profit-sharing plans (such as issuance of dividends to shareholders) and medical bills reimbursement plans they may have in place with their PSC. The use of a PSC thus opens up the possibility of substantial tax benefits.

The Internal Revenue Service (“IRS”), the agency responsible for the implementation of Internal Revenue Code (“IRC”) and the collection of taxes in the US, has often attacked the validity and legitimacy of these PSC’s, and has met with mixed success in this respect. However, before an athlete sets up a PSC, the athlete needs to assess the application of Section 269A of IRC which specifically provides for penalties on an athlete ‘whose principal purpose for forming, or availing of, PSC is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available’.

The IRS has a reserved right under the IRC to attack PSC’s which are not legitimate companies and which in the opinion of the IRC used solely for the purpose of tax evasion. In this context, the IRS first took action against an athlete’s PSC inSargent v. Commissioner (93 T.C. 572 (1989)) which was heard on appeal in the Eighth Circuit Court, wherein the IRS challenged the use of a PSC by Gary Sargent who played for the Minnesota North Stars of the National Hockey League. Sargent contracted with the North Stars to provide his services to the club as a hockey player and also as a consultant. The North Stars paid Sargent’s PSC – ‘Chiefy-Cat’, for the use of Sargent’s services and Chiefy-Cat, in turn, paid Sargent a salary and contributed the remainder to a qualified pension plan. The IRS proposed to disallow these pension deductions and elected to approach the Court to tax Sargent on the entire amount paid by the Club to Chiefy-Cat. In determining whether the payments paid to Sargent by the PSC or the North Stars were taxable, the Eight Circuit Court had to determine inter alia as to which entity was the actual employer of Sargent. The court examined the extent of control the PSC or the franchise had over the player and affirmed the hockey player’s arrangement with the PSC as bona fide and went on to uphold the legitimacy of Sargent’s arrangement with Chiefy-Cat.

However, this decision did not deter the IRS as it subsequently sought to suppress athlete PSCs in the case of Leavell v. Commissioner (104 T.C. 140 (1995)), with respect to the PSC of the basketball player Allen Leavell who played for the Houston Rockets in the National Basketball Association (“NBA”). Leavell incorporated a PSC for his services as a professional basketball player and to market his personal appearances and endorsement opportunities. Leavell was not only the sole shareholder of the PSC but also served as the PSC’s president and treasurer. The Tax Court, while rejecting the ratio laid down in Sargent, took note of the authority of the Houston Rockets and the NBA to directly control Leavell’s on court services and concluded that Leavell was an employee of the Houston Rockets and not his PSC, and that the payments made to his PSC should be considered personal income and be subject to Income Tax.

The conflicting findings in Leavell and Sargent are only an illustration of the inherent confusion and uncertainty associated with the taxation of professional athletes in the U.S. In a bid to avoid litigation and the wrath of the IRS, several sports teams in the major league now refuse to contract with players who choose to have PSC’s for handling all income relating to their sporting commitments.


Unlike the US and UK, the situation of athletes or sportsmen having their own corporations for their services or image rights has never been addressed in India. However, there have been a few isolated incidents reported wherein the income tax authorities have moved against high profile entertainers such as Amitabh Bachchan for allegedly limiting their tax burden through personal service engagements with their own entertainment companies. While the legality of the incorporation of athletes’ services into separate entities and the use of such entities still remains a grey area in the US and UK, it is evident that it serves as a common method for decreasing an athlete’s or an entertainer’s tax liability. However, most of the advantages that make such arrangements a viable technique for tax limitation are slowly being eroded by the constant efforts of the HMRC in the UK and the IRS in the US.


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