Italy’s Serie A had some incredible stars playing in the league last season. From Cristiano Ronaldo to Romelu Lukaku to Zlatan Ibrahimovic to Diego Godin, Italian soccer has recently attracted major talents from outside leagues. Five years ago, attracting talents from outside leagues was an issue. Serie A teams were consistently losing players and transfer battles to teams in the Premier League, La Liga, Bundesliga, and even Ligue 1 in some cases. The Italian Soccer Federation, Serie A, and the Italian government were all looking at possible solutions to this issue and decided to implement a new tax scheme. Though the new resident worker tax applies to all new resident workers, the tax scheme was created and implemented with soccer players and, more importantly, soccer clubs in mind.
The Issue: Serie A, Broadcast Rights, and Spending
The spending, transfer fees, and wage issues all goes back to income earned by broadcast rights. Of all categories involved in the actual viewing of a soccer match, broadcast rights is by far the most lucrative for soccer clubs; in fact, for many soccer clubs, broadcast rights is the most profitable category on their financial statements. These broadcast rights are negotiated by the overarching organization (English Premier League, La Liga, etc.), and teams financially benefit from these negotiated rights, typically on a prorated basis depending on where the team finished in the league table the previous season.
In the 2020/2021 Serie A season, Inter Milan were crowned champions, followed by AC Milan, Atalanta, and Juventus. When considering the money earned from the Coppa Italia (domestic cup), the TV rights revenue is as follows: Inter Milan – 65 million euros, Juventus – 62.7 million euros, AC Milan – 57.8 million euros. By contrast, Sheffield United, who finished at the bottom of the Premier League and were relegated, earned 105.6 million euros from TV rights during 2020/2021 Premier League season. Obviously, this is a huge disparity in income; in fact, according to Financial Fair Play Rules, without a change in tax structure, relegated Sheffield United could be able to spend more money than Serie A champions Inter Milan.
While the Premier League earns the most money from TV rights of the big five leagues each season, the Premier League is not the only league whose earnings far outpace Serie A. During the 2019/2020 season, Barcelona and Real Madrid each earned 165million euros and 156 million euros, respectively. During the 2020/2021 Bundesliga season, Bayern Munich earned 105 million euros, followed by Borussia Dortmund, who earned 95 million euros. In fact, the average TV rights income for Bundesliga clubs was around 80 million euros, nearly 20% more than what the Serie A champions earned. The only league of the big five that is within the same ballpark as Serie A is Ligue 1, but that represents its own challenges. While PSG earned around 60 million euros during their 2019/2020 Ligue 1 title winning season, PSG is also owned by a subsidiary of a sovereign wealth fund worth 300 billion euros; they have plenty of money to spend without TV rights. Other Ligue 1 team owners include Luxembourg investment vehicles, the former owner of the Los Angeles Dodgers, billionaires of Russian, Swiss, and French citizenship, and others with massive fortunes. All this is to say that while Ligue 1 teams may earn comparable TV rights income to Serie A teams, Ligue 1 owners do not need to rely on TV rights income. Additionally, not to disparage teams in Ligue 1 (outside of PSG), but Inter Milan is looking to compete against teams like Chelsea, Bayern Munich, and Barcelona, not Dijon and Angers.
The Italian government decided that to allow Serie A teams remain competitive, they would pass a new tax law that, among other people, benefitted Serie A clubs: the New Resident Workers Tax.
What is the New Resident Workers Tax?
The New Residents Workers Tax allows workers who move to Italy from another country to receive a tax exemption for 50% of their salary. There are three elements that must be met to qualify for this 50% tax exemption: 1) the worker has not been a resident in Italy for the preceding two tax years; 2) the worker maintains an Italian tax residence for at least 2 tax years following the move; and 3) the majority of the worker’s work will occur in Italy (i.e. at least 183 days of work in Italy each tax year). Additionally, the law explicitly states that athletes, along with other entertainers (artists, performers, etc.), are eligible for the 50% tax exemption.
Implications for Serie A Teams
The implications regarding this workers tax and Serie A clubs is enormous. Soccer players see a net wage in their wage packet. That is the wage that is contractually owed to the player after taxes. The wage that the club is responsible for paying is the gross wage, meaning the pre-tax wage. The key effect that this workers law has is on the amount that the club must pay in taxes before the player receives a paycheck with the net wage. Let’s look at the highest paid player in Serie A during the 2020/2021 season as an example, Cristiano Ronaldo (now with Manchester United). During the 2020/2021 season, Cristiano Ronaldo’s net salary was 31 million euros. Under a normal, pre-New Resident Workers Tax scheme, Ronaldo tax rate would be approximately 45% when national and regional taxes are taken into account. This means that in order for Cristiano Ronaldo to earn 31 million euros net during the season, Juventus would need to pay Ronaldo more than 56 million euros gross. However, under the new tax scheme, Juventus, in order to pay Ronaldo the 31 million euros net, only needs to pay Ronaldo 40 million euros gross, saving the club 16 million euros in wages on one player alone. Frankly, without the New Resident Workers Tax, it may not have been possible for Juventus to pay Ronaldo’s transfer fee, his wages, and still be compliant with Financial Fair Play requirements. To put it another way, this tax allows all Serie A clubs to sign players who have not played in Serie A over the past two years and save a significant amount of money on taxes that would otherwise be owed.
This New Resident Workers Tax scheme also indirectly benefits teams in another way: merchandising. By being able to attract new star players, the teams are able to sell more jersey, memorabilia, and other team items bearing the new star player’s name. Ronaldo, Lukaku, De Ligt, Osimhen…teams have taken advantage of the new tax scheme to be able to save on the player’s wages while profiting for new jersey sales and merchandise. Lukaku: 4 million euros per year saved by Inter Milan; De Ligt: 4.25 million euros saved by Juventus; Osimhen: more than 2.25 million euros saved by Napoli, all while profiting off of fans buying new Lukaku, De Ligt, Osimhen, and, of course, Ronaldo jerseys.
In short, this New Resident Workers Tax scheme benefits the bottom line of all Serie A clubs.
Foreign Competition and Conclusion
Other major European clubs and leagues make far more money from broadcast rights, sponsorships, and other streams of income than the clubs in Serie A. In order to remain competitive and attract top level soccer talent, Italy changed the tax code to benefit clubs signing overseas players. While the tax code is new and amounts to a huge tax savings for clubs, Italy is not the first country to do this. Spain passed a tax law whereby wealthy foreigners living in Spain were only required to pay tax on Spanish income and assets, but did not have to pay tax on income and assets that were not generated or located in Spain. This law was nicknamed the “Beckham Law,” as David Beckham was one of the first foreigners to take advantage of the law. Indeed, it has been posited that the Spanish law was passed in order to lure David Beckham to Real Madrid and that, without the law, Beckham would not have signed for Real Madrid. There are two important lessons that we can take from the Beckham Law and the New Resident Workers Tax: 1. Other countries may be willing to become “tax competitive” to attract soccer talent; and 2. What may happen to the New Resident Workers Tax scheme in the long-term.
First, regarding tax competitiveness, any other sovereign country is welcome to pass a tax law in order to attract talent. Countries may pass a law reducing or eliminating all taxes, income or otherwise, on professional athletes. One team, which is located in a sovereign principality, already does not need to pay any tax on players’ wages to the governing body: AS Monaco. Monaco does not have a personal income tax, and this advantageous structure has been a source of great debate in Ligue 1, with some teams arguing that Monaco pay a fee to Ligue 1 equivalent to the tax that they would owe if Monaco had the same tax laws as France, and other teams arguing that France should pass a law eliminating income tax on professional athlete wages. Another country, Spain, passed the aforementioned Beckham Law. While political and socioeconomic dynamics may make a tax competitive option unrealistic, it is nonetheless a potential way to attract foreign talent. There are also a number of potential effects of competing taxations schemes, include the “race to the bottom” issue, but those issues are too numerous and lengthy to be addressed here.
Second, what may happen to the New Resident Workers Tax scheme in the long-term. There is only one modern precedent for a soccer-centric tax scheme (though many players have attempted to evade taxes and been caught): The so-called Beckham Law. After approximately six years and numerous proposed and actual changes, the Beckham Law was functionally revoked. Foreigner who were Spanish tax residents would be taxed on income and assets earned both within and outside of Spain. In fact, Spain recently instituted wealth tax. Notably, residents of the Madrid region (including Spanish politicians) do not have to pay this wealth tax.
So, what does the future hold for the New Resident Workers Tax? The future is unknown. However, in the present, the tax scheme will continue to attract foreign soccer stars and keep Serie A club competitive despite the broadcast rights income disparity across the big five leagues.
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