AP Photo/Francisco Seco

The charges laid recently by the Spanish authorities against Cristiano Ronaldo for tax offences come shortly after his nemesis, Lionel Messi, the Barcelona and Argentina forward, was found guilty of similar offences last year. Ronaldo and Messi are the latest in a long line of professional footballers who have run foul of the Spanish tax laws.

In Ronaldo’s case, Spanish prosecutors have accused the Real Madrid footballer of having evaded €14.7 million (about R220m) in tax. The allegations include that he made use of various offshore company structures to “hide” the income he made from image-rights payments. A further charge is that Ronaldo voluntarily failed to declare €28.4m in income linked to the sale of his image rights to a Spanish company.

What are image rights?

Sport has become a highly commercialised industry that attracts substantial revenue from sponsorship, among other things. In particular, the image rights of sportspeople have garnered increasing commercial value.

In South Africa, the Draft Guide on the Taxation of Professional Sports Clubs and Players published by the South African Revenue Service (Sars) states: “South African sports players are, like their overseas counterparts, enjoying the benefit of being able to exploit … commercial opportunities, such as image licensing agreements, celebrity endorsements and appearance fees. Image licensing agreements involve the commercial exploitation of a player’s image, such as the use of the player’s name, photograph, reputation, voice, signature, initials or nickname. 

“Image rights are the legal rights associated with using the image of a sportsperson in marketing or promotional activities. Image rights payments refer to the payments that a player receives from an enterprise that uses such player’s image for advertising purposes.”

An example of this is Springbok rugby player Tendai “The Beast” Mtawarira’s promotion of disposable razors. Ordinarily, disposable razors may be seen as weak, bad quality and untrustworthy, but in the hands of the “The Beast”, the product is suddenly associated with toughness, good quality and sustained excellence.

South African tax law jurisprudence on this issue is thin. However, in one case a leading golf professional resident in the United Kingdom, but in South Africa to play in the annual golf tournament at Sun City, entered into a commercial agreement with an international hotel group, which agreed to pay the golfer $100 000 (R1.3m) in consideration for certain rights to exploit his intellectual property. 

The judge in the matter offered the following in respect of the meaning of image rights: “The utilisation of his likeness, biographical material, his presence at promotional events and media conferences, and repeat television/video utilisation of his participation in the tournament.”

In South Africa, image rights are protected in terms of the common law, the right to privacy in terms of the Constitution, or through statutory intellectual property protection tools, namely copyright or trademark protection.

Payment structures

The structures set up by Ronaldo and his contemporaries involved transferring their image rights to an offshore company typically set up by them and located in a low-tax jurisdiction, such as Mauritius or the Channel Islands. The offshore company grants the use of the image rights to the club to which the player belongs. The club pays the player his or her ordinary salary directly while making payments in respect of the use of his or her image rights to the foreign company.

These structures are not limited to team players who receive salaries from sports clubs; they are also used by those who compete in individual sports, such as golf and tennis.

There are a number of issues that need to be considered from a South African tax, legal and exchange control perspective regarding using such offshore companies to evade tax. These include:

• Whether an individual is, in fact, able to divest of his or her image rights to a company;

• Whether, from an exchange control perspective, a South African resident is able to transfer his or her intellectual property to an offshore company;

• Whether the image rights payments fall within the “gross income” of the individual or are of a capital nature, and, to the extent that they do fall within his or her gross income, whether they are subject to employees’ tax deductions by the player’s employer (the club or, for example, the South African Rugby Union); and

• Whether Sars could nevertheless utilise the withholding tax on royalties contained in section 49B of the Income Tax Act to levy tax on the amount paid over to the foreign company.

Sars’s view

Sars’s view in the draft guide on the taxation of image rights is that an individual cannot divest of his or her image rights. It states: “Image rights are essentially personal rights that are vested in the player as an individual person. These rights cannot be separated from the sportsperson and consequently cannot be disposed of or ‘sold’ to another person.”  

Notwithstanding this view, the position may be different where, for example, a sportsperson makes use of copyright or trademark protection.

In respect of the taxation of image-rights payments, the position of Sars is clear. The draft guide states: “It is clear therefore that payments made to a sportsperson for the right to use the sportsperson’s image rights will be included in the sportsperson’s gross income and will be taxable as such. Should such a payment be made to a sportsperson by the club to whom the sportsperson is contracted, such payments will constitute remuneration for employees’ tax purposes. 

“As the amount paid to the sportsperson for the exploitation of the sportsperson’s image rights is in these circumstances paid by an ‘employer’ (the club) to an ‘employee’ (the sportsperson), the club is obliged to withhold employees’ tax, and the amount paid for the use of the sportsperson’s ‘image’ rights must be disclosed on the sportsperson’s IRP5.”

Thus, in South Africa it is clear that Sars views such payments as taxable in the hands of the sportsperson, and the tax thereon may even be withheld by the employer. 

Nevertheless, there are a number of key issues one needs to consider in respect of the exploitation of a sportsperson’s image rights, and it will be interesting to monitor developments in this regard in the hope that clarity and certainty may be found in the courts in due course.

Jerome Brink is an associate in the tax and exchange control practice at law firm Cliffe Dekker Hofmeyr.