Dutch Supreme Court: “A foreign professional sports club can be obliged to withhold Dutch wage taxes over a signing bonus it paid to one of its players which it subsequently lent to a Dutch sports club”

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On July 8, 2022 on the website of the Dutch courts the judgment of the Dutch Supreme Court in case: 21/02654, ECLI:NL:HR:2022:1041, was published. In its judgment the Dutch Supreme Court follows the opinion of Advocate General Watte land confirms the judgment of the Court of Appeal Arnhem-Leeuwarden and confirms that the foreign professional sports club is obliged to withhold Dutch wage tax over a signing bonus it agreed upon and paid to one of its player a few days before the loan agreement with a Dutch professional sports club became definite.

 

Facts

The taxpayer in the underlying case is a Belgian professional football club.

 

In 2010 the club lent three of its players to Dutch professional football clubs. The underlying case regards the question whether or not the Belgian club was obliged to withhold Dutch wage tax over the signing bonus it paid to one of the players,

 

On August 21, 2008 the Belgian club and the player concluded a players’ agreement. The players’ agreement was concluded for the period from August 21, 2008 through June 30, 2012. To the extent relevant the club and the player agreed the following:

-    The player will receive a monthly salary of € 40.000;

-    For each season (annually) the player will receive a gross signing bonus of € 388.000 which will be paid in four equal installments of € 97.000 (gross) each, to be paid in the months September, December, March and June; and

-    The taxpayer guarantees the player a net annual salary of € 750.000.

 

During the 2009/2010 season the player was lent to a German professional football club (H). As of July 21, 2010, the player was on trial with the Dutch professional football club (hereinafter also: I) during a training internship. After a practice match in 2010, in which the player scored, the internship was extended until July 31, 2010.

 

On July 30, 2010 the taxpayer and the player concluded a new players' agreement. This agreement replaces the agreement concluded on August 21, 2008 and covers the period from July 1, 2010 through June 30, 2012. The taxpayer and the player have agreed, among other things, to the same salary and signing fee as in the agreement of August 21, 2008. In addition, this contract awarded the player an amount of €350,000 net. This amount has been designated “prime de signature complémentaire et unique” and according to the players’ agreement is was payable on July 1, 2010.

 

On 2 August 2010, the taxpayer and the player2 signed an addendum to the agreement of July 30, 2010. The addendum refers to the outsourcing of the player to I (the Dutch professional soccer club) for the 2010/2011 season. To the extend relevant the taxpayer and the player have further agreed in the addendum that:

-    for the 2010/2011 season the monthly salary is set at € 30,000;

-    the gross signing bonus for the 2010/2011 season is set at €288,000, to be paid in four equal  installments of €72,000 gross each. The installments are to be paid in September 2010, December 2010, March 2011 and June 2011;

-    for the 2011/2012 season, both the salary and the signing bonus remain unchanged;

-    the taxpayer guarantees the taxpayer an annual net salary of € 687,500 for the 2010/2011 season.

 

On August 3, 2010 the taxpayer and I entered into an agreement in which the parties agree that for the period from August 1, 2010 up to and including June 30, 2011 the player will play for I on a loan basis. During that period (August 2010 – June 2011) the player lived in Belgium.

 

The dispute

The taxpayer and the Dutch tax authorities are disputing whether or not the Netherlands has the right to tax the signing bonus (prime de signature complémentaire et unique) of €350,000 net that was awarded to the player by the new players’ agreement that the taxpayer and the player concluded on July 30, 2010.

 

Judgment of the Dutch Supreme Court

In its judgment the Dutch Supreme Court follows the opinion of the Advocate General and confirms the judgment of the Court of Appeal Arnhem-Leeuwarden. The Dutch Supreme Court ruled that the Netherlands has the right to levy taxes over 11/12 of the signing bonus agreed upon in the players’ agreement of July 30, 2010 minus the amount that relates to matched played outside the Netherlands for which the relating part of the signing bonus is allocated to Belgium: in this case (11/12 x €350,000) -/- €3,500 = € 317,333.

 

Legal framework

 

Dutch-Belgian tax treaty

 

Article 17 – Artistes and sportsmen

1.  Notwithstanding the provisions of Article 7 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2.  Where income in respect of personal activities exercised by an entertainer or a sportsman in his capacity as such accrues not to the entertainer or sportsman himself but to another person, that income may, notwithstanding the provisions of Article 7 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised.

 

Dutch Law

 

Wage tax Act

 

Article 6, Paragraph 2 of the Dutch wage tax Act

Anyone who does not live or is not established in the Netherlands is only regarded as a withholding agent insofar as he:

a.  has a permanent establishment in the Netherlands for the exercise of his business, profession or other activity or has a permanent representative living or established in the Netherlands, or

b.  (…)

 

Article 6, Paragraph 3 of the Dutch wage tax Act

For the purposes of paragraph 2, sub a, permanent establishment or permanent representative means:

(…)

c.  the performance of work aimed at providing intervention for those who perform personal labor in the Netherlands for remuneration and a third party for whom that labor is performed. (…)

 

Article 10 of the wage tax Act

1.  Wage is everything that is received from an employment or a previous employment, including that which is paid or provided in the context of the employment.

(…)

 

Article 13a

1.  Wages are considered to have been received at the time when it:

a.  is paid or settled, is made available to the employee or becomes interest-bearing, or

b. becomes payable and also collectible.

(…)

 

Article 27

1.  The tax is levied by withholding them from the wage.

2.  The withholding agent is obliged to withhold the taxes at the moment the wage is received.

(…)

5.  The withholding agent is obliged to pay the tax withheld over a wage period on declaration.

(…)

 

Individual income tax Act

 

Article 7.2, Paragraph 2, sub b – Taxable income from work and home

The income from work and home in the Netherlands is the combined amount of:

(…)

b.  the taxable wages for performing or having performed work in the Netherlands;

(…)

 

Article 3.81 - Wages

In this Act and the provisions based on it, wages are understood to mean: wages in accordance with the statutory provisions of the wage tax Act, on the understanding that, to the extend necessary in deviation from those provisions, tips and similar performances from third parties are taken into account for the actual amount received.

 

From the considerations of the Dutch Supreme Court

 

Important considerations of the Court of Appeal

Before the we go into the considerations of the Dutch Supreme Court, we feel that there are three consideration of the Court of Appeal Arnhem-Leeuwarden that regards the (interpretation of the facts) that is crucial in the underlying case:

 

Payment of the one-time signing bonus to the player

The taxpayer disputes that the one-off signing bonus which was agreed upon the agreement of July 30, 2010 was paid to the player. At the hearing of the Court, the taxpayer acknowledged that the signing bonus was due, payable, collectable and based on Article 13a of the Dutch wage tax Act thus earned on July 30, 2010. Whether the signing fee has actually been paid is therefore no longer relevant for the underlying proceedings.

 

Attribution of the one-off signing bonus to the labor performed in the Netherlands

As ruled above the player received the one-time signing bonus on July 30, 2010. Unlike the District Court, the Court of Appeal considers it plausible that at that time, partly in view of the extension of the training internship, it was almost certain that the player would be lent to I for the rest of the 2010-2011 season. Although the one-off signing bonus of € 350,000 was agreed upon in a supplement to the agreement that would run for two more seasons, the Court of Appeal considers it plausible that it was the intention of the parties that the signing bonus only relates to the 2010/2011 season, since for the previous season when the player was playing on a loan basis for H in the German competition he was awarded an equal amount of signing bonus. It has not been stated or shown that the parties have agreed that the player would be obliged to make a partial repayment of this signing bonus in case of a dissolution of the employment contract at the end of the 2010/2011 season.

 

In the 2010/2011 season, the player played for eleven months (August 2010 to June 2011) for I. As the Court of Appeal has considered above, it is plausible that the signing bonus for these eleven months is an income that the player received for personal activities that he performed at I. As the Inspector has stated without being contradicted € 3,500 of that signing bonus is to be attributed to a match not played in the Netherlands. The Netherlands therefore has the right to tax (11/12 x € 350,000) -/- €3,500, or €317,333. The entire signing bonus was due and payable on July 30, 2010. The wage tax owed on this had to be withheld at that time. This wage tax is therefore rightly included in an additional assessment issued for the period in which 30 July 2010 fell. It is not important that the additional tax assessment period does not include the entire wage period to which the payment relates.

 

From the considerations of the Dutch Supreme Court

3.1   Plea I argues that the Court of Appeal failed to recognize that application of the treaty only comes into play if based on Dutch tax law a right to levy tax exists. The latter is not the case because the one-off signing bonus has been awarded to the player in the players’ agreement that regulates the employment in Belgium, the lending of the player to the Dutch club is arranged in a separate agreement that was only concluded after the new players’ agreement, moreover this latter agreement still had to be signed by the player, and the one-off signing bonus had already been paid before the lending of the player to the Dutch club took place. According to the taxpayer, this means that the one-off signing bonus included in the the players' agreement cannot be related to the activities that the player had to perform in the Netherlands. The plea further argues that Article 7.2, Paragraph 2, sub b, of the Dutch Income Tax Act only applies to compensations for employment activities that are currently performed in the Netherlands or that haven performed in the Netherlands in the past, and that Article 7.2, Paragraph 2, sub b, of the Dutch Income Tax Act does not apply to compensations received for work to be performed in the Netherlands in the future.

3.2

3.2.1  From established case law it follows that signing bonusses as referred to above constitute wages within the meaning of Article 10 of the Dutch wage tax Act. Pursuant to Article 3.81 of the Dutch individual income tax Act, this also applies to Article 7.2, paragraph 2, sub b of the Dutch individual income tax Act. When applying the latter provision, employment in the Netherlands also applies if from an employment contract it follows that the work will be performed in the Netherlands. This is not affected by the fact that the work has not yet commenced. Nor is an attribution of a signing bonus to work to be performed in the Netherlands precluded by the fact that the signing bonus has already become due and collectible before the work in the Netherlands starts. Nothing else follows from Articles 13a and 27 of the Dutch wage tax Act.

3.2.2  In so far as plea I is directed against the way the Court of Appeal interpreted Article 7.2, Paragraph 2, sub b of the Dutch individual income tax Act and Articles 13a and 27 of the Dutch wage tax Act, it therefore fails. Further, since the plea is directed against a judgment that is interwoven with valuations of a factual nature, the Supreme Court cannot examine the correctness of the plea in the cassation proceedings. Nor is the judgment incomprehensible or insufficiently substantiated. The plea therefore also fails to that extent.

3.3   Plea II is directed against the judgment of the Court of Appeal that the right to levy tax on the one-off signing bonus must be allocated on the basis of Article 17 of the Convention. The ground of appeal fails on the grounds as stated in considerations 5.11 to 5.13 of the Opinion of the Advocate General.

 

Considerations 5.11 to 5.13 of the opinion of the Advocate General

5.11   The text of Article 17 of the Dutch-Belgian Tax Treaty as cited above does not support the limitation of that provision to single, or at least short-lived, performances by athletes and performers as argued by the taxpayer. Which, in my view, would also diametrically opposed to the intention of said provision, i.e. full allocation of the remuneration of performers and athletes, notwithstanding the  Articles 7 and 15, to the State where the sporting or artistic performance for which that remuneration is paid is provided, regardless of the duration of the public performance, regardless of the duration of the presence in that State and regardless of the legal configuration under which that performance in the State of employment takes place. The taxpayer's view also seems to me to be incompatible with your HR BNB 2010/245 judgment, cited in consideration 5.9 above. Also, the quoted OECD comments point in a direction opposite to the stakeholder's argument.

5.12   Whether or not a 'direct link' exists between the signing bonus and the player's performance for I in the Netherlands as meant in the OECD commentary does not seem relevant to me, since the purpose of that criterion in the commentary is to allocate income other than the income for actual sporting or artistic achievements, such as in particular 'royalties for intellectual property rights' and 'advertising and sponsorship fees'. Such non-sporting income only falls under Article 17 of the tax treaty if they can be linked to 'performances or appearances in a given State.' This is not the sort of income that the underlying case is about.

5.13   It follows from the judgments of HR BNB 2007/142-144, which I discussed in consideration 5.8 above, that (also) the salary of a professional football player in employment falls within the scope of Article 17 of the Dutch-Belgian Tax Treaty to the extent that, according to the intention of the parties based on the employment agreement, it is a reward for his personal football activities. As has already been shown above (Considerations 4.12, 4.14 and 4.16), without a lack of reasoning the Court of Appeal was able to deduce from the facts, the combination of contracts and the statements of the taxpayer that this is the case in the underlying case.

 

The text of the judgment of the Supreme Court, including links to the opinion of the Advocate General and the judgement of the Court of Appeal Arnhem-Leeuwarden as made available on the website of the Dutch courts can be found here. (All only available in the Dutch language)

 

 

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