Tax Planning for Cross-border Endorsement Payments to Professional U.S. Athletes

High-profile athletes like professional golfers and tennis players often make a lot of money from endorsing products. Recently, two golfers, Sergio Garcia and Retief Goosen, had legal issues about how their endorsement income should be taxed. The court decided that Garcia’s income was mostly from royalties, which are taxed differently, and that Goosen’s income was partly from work he did in the US, so it was taxed at US rates. The IRS and courts look at three main things when deciding how to tax endorsement income for non-U.S. athletes: 1) what the athlete is getting paid for (appearing in ads or just wearing a logo); 2) how the income is divided between different categories; and 3) where the royalty income comes from. The athlete wants as much income as possible to be classified as royalties, because then they might pay less tax. But to do that, they need to show that they’re mainly getting paid for their name and image, not their performance or appearances. Finally, they need to show where the products they’re endorsing are being sold. The Garcia and Goosen cases are important for non-U.S. athletes with endorsement deals in the U.S. It helps decide how their income should be taxed. These cases can also help U.S. athletes with endorsement deals outside the U.S. pay less in taxes on their income. Some professional U.S. athletes, like NBA players, are signing endorsement deals with non-U.S. shoe companies, such as in China. The issue is whether the U.S. athlete can delay paying U.S. income tax on the money earned from these deals. One way they might do this is by setting up a foreign corporation to handle the endorsement contract with the non-U.S. company. Whether the athlete has to pay U.S. tax on this foreign income depends on the type of income earned by the foreign corporation, as well as any tax treaties between the U.S. and the foreign country. Generally, U.S. taxpayers are taxed on all their income, but can get a credit for any foreign income taxes paid. However, there are rules that can cause them to be taxed on certain types of foreign income, even if it’s earned through a foreign corporation. One of these types of income is personal service contract income, which includes income from contracts for personal services. If a foreign company wants to avoid paying extra taxes, it needs to make sure its service agreements give the company the right to choose who will do the work, even if everyone already knows who it will be. This way, the company can avoid being taxed as if it’s the person doing the work. Subpart F income includes foreign base company services income (FBCSI), which is income from performing services for a related person outside the country where the company is based. If a U.S. athlete sets up a company in a low-tax country and earns money from endorsements or appearances in another country, that income could be subject to U.S. taxes. This is because the athlete is providing significant help to the company in earning that income. So, it can be hard to avoid paying taxes on this type of income without some tricky tax planning. If a U.S. athlete earns money from endorsements outside of the U.S., they may need to pay U.S. taxes on that income. However, there are some exceptions and ways to avoid paying those taxes. One way is to use a company based in Malta, which has a higher tax rate, to avoid the U.S. tax. Another way is to use a special provision in a tax treaty between the U.S. and the country where the money was earned. It’s important to understand these rules to make sure the athlete pays the right amount of taxes. This provision helps determine the amount of foreign taxes a company has to pay on its income from other countries. The tax rate is calculated by dividing the foreign income taxes paid by the net item of income. Even if the foreign tax rate is reduced when the income is distributed to shareholders, the original tax rate still applies for this calculation. An example is given where a company earns passive income in a foreign country and later distributes some of that income to its parent company. Even though the tax rate on the income is reduced when it’s distributed, the original tax rate is still used for this calculation. This provision could also apply to a U.S. athlete’s endorsement income earned through a foreign company that has a high corporate tax rate but refunds some of the tax to its shareholders later on. For U.S. athletes with endorsement deals with non-U.S. companies, there is a way to defer paying taxes on the money they earn. By setting up a company in Malta, they can take advantage of the low corporate tax rate and get a refund on some of the taxes they do pay. This means they can earn money from their endorsements without owing too much in taxes. This can be a good option for athletes like Dwayne Wade, who has deals with companies outside the U.S. If a professional athlete earns money from endorsement deals and image rights, they may be able to defer paying U.S. taxes by selling those rights for a promissory note payable over time. However, they still need to be careful to follow tax laws and not use complicated arrangements that could be challenged by the IRS. If the athlete owns a foreign corporation that earns income, they may also be subject to U.S. taxes on that income. This passage discusses various income tax treaties and regulations related to international business. The authors, Jeffrey L. Rubinger and Nadia E. Kruler, are tax lawyers at a law firm in Miami. The article was previously published in a tax journal. We are representing the Tax Law Section. 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Source: https://www.floridabar.org/the-florida-bar-journal/tax-planning-for-cross-border-endorsement-payments-to-professional-u-s-athletes/