In the June issue of our newsletter we have published an article about taxation of professional athletes which focused mainly on the question whether professional athletes should be considered employees or self-employed persons for the purpose of income tax, and how we should approach taxation of payments in kind, which are often received by athletes, especially those employed by a club.

Around the same time, a case widely discussed in the media emerged about Prague Sparta forward David Lafata who had his attorney submit an appeal in cassation to the Supreme Administrative Court (SAC) against a decision of the Regional Court in České Budějovice and later also against the decision of the Appellate Financial Directorate.

The lawsuit was about the classification of income which the footballer had based on the cooperation agreement for athletic performance and the commercial contract with the football club that he had signed, and for being a member of the Czech football representation. The financial administration questioned the nature of the income and said that it shall not be considered business income as according to the Trade Licensing Act but income from liberal profession. Both these types of income are income from self-employment according to § 7 Act on Income Tax but there is a difference in the amount of flat-rate expenditure that can be applied. When it comes to income from liberal profession, 40% flat-rate expenditure can be applied while with income from trade it is 60%. By applying the latter percentage of flat-rate expenditure David Lafata wrongfully reduced the amount of tax base, said the financial administration, and this way paid less tax from his income.

The SAC was going over the issue of whether income of a professional football player can be considered business income or not. According to the Trade Licensing Act, business means a continuous activity conducted alone, on one’s own name while accepting full responsibility in order to generate profit; all of this done under the conditions given by the Trade Licensing Act.

The Financial Administration’s main argument was that the activity of a professional athlete is not conducted alone and on one’s own name because a professional football player plays for a club, under the name of the club and because it is a team sport the result is a result of team effort. Furthermore, the player cannot freely decide which matches he is going to play and whether or not he will attend practice because he has to respect coach’s orders. According to the Financial Administration, a football player is not even fully responsible for the results of his actions, the responsibility is transferred to the club for which he conducts the activity.

The plaintiff peremptorily refused the idea that the activity is not independent because if that was true it could not be considered as income according to § 7 Income from self-employment. They also argued that David Lafata signed the contract voluntarily and is responsible for meeting his obligations and fulfilling his commitment. He can also voluntarily decide that he will not play a certain match or will not partake in practice and for these instances the contract lists specific sanctions. And even an athlete playing a team sport for a club acts under his or her own name; articles and reports in the media are a proof of that. Among these arguments they also pointed out that the Financial Administration never questioned the fact that he applied VAT which can only be done in connection to economic activities conducted independently as a self-employed person.

To formulate its decision, the SAC worked with the fact that the individual characteristics of business are not present in their “pure” form in the case of professional football players. However, the Trade Licensing Act clearly states that Management of establishments of physical education and organization of athletic activities” includes among others the “activities of professional athletes conducted independently and with the intention to generate profit”. This legal provision allows the activity of a professional athlete in compliance with the Trade Licensing Act without differentiating between activities in individual and team sports. In view of the fact that legal provisions in this area are a little unclear, the SAC ruled that the current state of legal provisions does not allow for the tax subject to be forced to choose the type of taxation that is more convenient for the fiscal interest of the state.

The victory of David Lafata in this case means a change in the area of taxation of professional athletes and the possibility to apply bigger percentage of flat-rate expenditure as business self-employed persons. It also helped a number of athletes who had or still have a similar dispute with the Financial Administration. This case also shed light on the fact that there is a demand for legal changes in the regulations for sport and the position of athletes. Individual team sports unions have already agreed that it is necessary to draft a new Act on Sports which is a job for the Ministry of Education.

If this case has gotten your attention, don’t hesitate to contact us about help with your specific situation.