September 2020
New precedent from the Supreme Administrative Court on the taxation of foreign athletes in Finland
Signing bonuses are commonly paid to athletes in connection with signing a letter of intent or a team player contract. The signing bonus is usually considered as compensation for entering into a contract and as a reward for not playing for any other league during the term of the contract. It is paid in addition to the athlete’s base salary and performance bonuses, which in return are paid to the player in exchange for specific services rendered.
Foreign non-resident individuals are subject to tax in Finland only with respect to so-called Finnish-sourced income. Under Section 10 (4b) of the Finnish Income Tax Act, income received for personal performance as an athlete or artist in Finland is deemed as Finnish-sourced income and is therefore subject to taxation in Finland. The tax treaties Finland has concluded with other countries rarely prevent Finland from taxing this income. Usually, a salary paid to an athlete who is a non-resident of Finland at the moment of making the payment is taxed in accordance with the provisions of the Act on the Taxation of Non-Residents' Income. Thus, a non-resident tax at source of 15% is deducted from the compensation. However, in its precedent KHO:2020:96, issued on 17 September 2020, the Supreme Administrative Court ended up with a different outcome.
In the case at hand, a Finnish employer, whom we can call “Employer Ltd”, had concluded preliminary player contracts for periods of two or three seasons with a number of non-Finnish ice hockey players for playing in the team of Employer Ltd in Finland. The players were obligated to refund the signing bonus if they subsequently chose to play for another league instead. It was also agreed in the contract that Employer Ltd, and not the players, would pay the income taxes due on the players’ salaries in Finland; i.e. net salary agreements were concluded. At the time the contracts were signed and the signing bonuses were paid, the players were non-residents of Finland. But the players became Finnish tax residents when they started performing services for the team of Employer Ltd in Finland.
A tax audit was then performed on Employer Ltd. It was argued by the tax auditors that the signing bonuses had been paid in lieu of salaries only in order to avoid the higher progressive income taxation levied on resident individuals in Finland. As a result, based on the audit report, unpaid withholding taxes were imposed on Employer Ltd. According to the Supreme Administrative Court (SAC), the signing bonuses were actually related to the sporting activities the players had performed while they were tax residents of Finland. Based on the background information, the total amount of each athlete’s signing bonus and base salary during the first season was roughly the same as the total base salary paid during the second season. For example, for one player the net salary for the first season was EUR 20,000, while for the second season it was EUR 140,000. His signing bonus had amounted to EUR 120,000 net. The SAC therefore deemed that, in these circumstances, the signing bonuses should have been considered as a part of the net salaries received for the first season, and that they should have been subject to progressive withholding tax, rather than a non-resident tax at source of 15%. It was also explicitly stated in the decision that the 15% tax at source card granted by the Tax Administration did not give the employer any “protection of legitimate expectations”.
The decision KHO:2020:96 does not imply that signing bonuses paid to non-resident athletes before they move to Finland should always be considered as salary income for their playing services performed in Finland, or that the signing bonuses should be subject to the withholding tax levied on resident individuals. The tax treatment depends on the contents of each contract and on the definition of the signing bonus, as well as the structure of the athlete’s entire compensation package. In Finland, it is the employer that primarily carries the tax consequences of not deducting the correct taxes, and the Tax Administration may recover the owed amounts from the employer later. In addition, punitive tax increases and charges for negligence are often imposed. Thus, the tax consequences should be carefully reviewed beforehand in all such cases.
Foreign non-resident individuals are subject to tax in Finland only with respect to so-called Finnish-sourced income. Under Section 10 (4b) of the Finnish Income Tax Act, income received for personal performance as an athlete or artist in Finland is deemed as Finnish-sourced income and is therefore subject to taxation in Finland. The tax treaties Finland has concluded with other countries rarely prevent Finland from taxing this income. Usually, a salary paid to an athlete who is a non-resident of Finland at the moment of making the payment is taxed in accordance with the provisions of the Act on the Taxation of Non-Residents' Income. Thus, a non-resident tax at source of 15% is deducted from the compensation. However, in its precedent KHO:2020:96, issued on 17 September 2020, the Supreme Administrative Court ended up with a different outcome.
In the case at hand, a Finnish employer, whom we can call “Employer Ltd”, had concluded preliminary player contracts for periods of two or three seasons with a number of non-Finnish ice hockey players for playing in the team of Employer Ltd in Finland. The players were obligated to refund the signing bonus if they subsequently chose to play for another league instead. It was also agreed in the contract that Employer Ltd, and not the players, would pay the income taxes due on the players’ salaries in Finland; i.e. net salary agreements were concluded. At the time the contracts were signed and the signing bonuses were paid, the players were non-residents of Finland. But the players became Finnish tax residents when they started performing services for the team of Employer Ltd in Finland.
A tax audit was then performed on Employer Ltd. It was argued by the tax auditors that the signing bonuses had been paid in lieu of salaries only in order to avoid the higher progressive income taxation levied on resident individuals in Finland. As a result, based on the audit report, unpaid withholding taxes were imposed on Employer Ltd. According to the Supreme Administrative Court (SAC), the signing bonuses were actually related to the sporting activities the players had performed while they were tax residents of Finland. Based on the background information, the total amount of each athlete’s signing bonus and base salary during the first season was roughly the same as the total base salary paid during the second season. For example, for one player the net salary for the first season was EUR 20,000, while for the second season it was EUR 140,000. His signing bonus had amounted to EUR 120,000 net. The SAC therefore deemed that, in these circumstances, the signing bonuses should have been considered as a part of the net salaries received for the first season, and that they should have been subject to progressive withholding tax, rather than a non-resident tax at source of 15%. It was also explicitly stated in the decision that the 15% tax at source card granted by the Tax Administration did not give the employer any “protection of legitimate expectations”.
The decision KHO:2020:96 does not imply that signing bonuses paid to non-resident athletes before they move to Finland should always be considered as salary income for their playing services performed in Finland, or that the signing bonuses should be subject to the withholding tax levied on resident individuals. The tax treatment depends on the contents of each contract and on the definition of the signing bonus, as well as the structure of the athlete’s entire compensation package. In Finland, it is the employer that primarily carries the tax consequences of not deducting the correct taxes, and the Tax Administration may recover the owed amounts from the employer later. In addition, punitive tax increases and charges for negligence are often imposed. Thus, the tax consequences should be carefully reviewed beforehand in all such cases.
Legal Disclaimer
The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
