Taxation of entertainers and sportspersons has always been an intriguing topic, particularly when relating to those individuals who are more mobile and earn income from various jurisdictions each year.

Sportspersons and entertainers typically earn a variety of income, be it payments for performances, tournament winnings, sponsorship, advertising and more. Understanding how to classify the income is key in determining which country has the rights to tax it. Article 17 of the OECD Model Tax Convention (‘OECD MTC’), on which most similar treaty articles are based, allocates primary taxing rights on income from personal activities of entertainers and sportspersons to the Contracting State where such activities are exercised, that is, to the source state. On the other hand, article 12 of the OECD MTC, dealing with royalties, assigns exclusive taxing rights to the Contracting State where the individual is resident.

In view of the different treatment of the taxing rights on the personal income from sports and entertainment activities and on royalty income, it is important to be able to classify such income correctly, and at times, this isn’t always easy. The Commentary to Article 17 of the OECD MTC sheds a lot of light on what type of income would fall within this article as opposed to Article 12:

Firstly, there is no definition of ‘entertainer’. The article includes a number of examples, which are not exhaustive, such as a theatre, motion picture, radio or television artiste, or a musician but doesn’t provide a clear definition. The Commentary clarifies that the term doesn’t extend to a visiting conference speaker, or to a model performing as such or to administrative support such as cameramen, producers and directors.

Similarly to the lack of a clear definition for ‘entertainer’, there is also no definition for ‘sportsperson’. The Commentary however confirms that it is not restricted to participants in traditional athletic events, but also covers, for example, golfers, jockeys, footballers, cricketers, tennis players and racing drivers. The Article also applies to income derived from billiards, snooker, chess and bridge tournaments.

Paragraph 9 of the Commentary to Article 17 delves into the issue as to whether income is covered by Article 17, or by other articles, be it Article 12 (Royalties) or Article 7 (Business Profits). The main point is whether there is a ‘close connection’ between the income and the performance of activities in the country concerned. If such a close connection exists, and the likelihood is that the income wouldn’t have been earned by the sportsperson or entertainer had it not been for the performance of specific activities in the country, then such income would fall within the remit of Article 17, with primary taxing rights allocated to the source country.

Whilst royalties for intellectual property rights will normally be covered by Article 12, in general, advertising and sponsorship fees fall outside the scope of Article 12. Advertising and sponsorship income would fall either under the rules of Article 17 if there is a close connection with a performance in a given State, or under the rules of Articles 7 (Business Profits) or Article 15 (Income from Employment) if such close income could not be attributed to any specific performances.

"Image rights’ companies are also tackled in the Commentary. Here again, one needs to understand whether any payments for the use of the entertainer’s or sportsperson’s name, signature or image is closely connected with the performance in a given state. If such connection does not exist, the payments would not be covered by Article 17.

In view of the difficulty for States to tax non-resident persons, payments which could be taxed in the source state as a result of the rights assigned to it by this article, are typically taxed by way of a withholding tax from the gross payments to the entertainer or sportsperson. In view of the non-exclusive rights of the source state, the entertainer or sportsperson would also be taxed in their state of residence and provided double taxation relief through the credit or exemption method.

September 2021

The writer is a co-founding partner of Seed, an internationally focused research-driven advisory firm based out of Europe (Malta) and the Middle East.

www.seedconsultancy.com | nicky@seedconsultancy.com