Italy: Special accounting and Tax rules for Sport Clubs under the scrutiny of the EC Commission
In November 2003 the European Commission probed certain measures for professional sport clubs introduced by the Italian Government back in February 2003. These measures are contained in Law no. 27 of 21 February 2003, so-called “Football Saviour Decree” but in fact they are applicable to all sport clubs (hereinafter “Law 27/2003”). Italy has two months to respond to the Commission’s request for information on two separate aspects of Law 27/2003 (as described below). Failure by Italy to provide the Commission with satisfactory responses may result in the Commission continuing its infringement procedure and ultimately referring the matters to the European Court of Justice.
The provision of Law 27/2003, which is currently under the Commission’s scrutiny, provides that professional sport clubs may book in their balance sheet, as an intangible asset, an amount equal to the write-downs in value of the pluri-annual rights under the contracts between the club and the sportsmen. The write-downs must result from an expert’s sworn appraisal and be approved by the club’s board of auditors and can be made on grounds such as expected realisation value of the contract, expected revenues flows during the life of the contract, etc). If the club opts to book this artificially created item asset, it must then amortize it in ten years according to a straight-line method (regardless of the residual duration of the written-down sportsman’s contract). The election for this accounting treatment is binding also for tax purposes.
The first of the Commission concerns is that such (optional) accounting treatment may infringe the EC Accounting Directives (78/669/EEC and 83/349/EEC), which have been implemented in Italy. This is because it allows sportsmen’s contracts to be written down over a longer period of time than their useful economic life. Also, there is a concern that Law 27/2003 allows sport clubs not to make value adjustments in respect of their rights under their contracts with the sportsmen even in case these can no longer perform at the expected level (e.g., because of injuries). This is viewed by the Commission as an infringement of the principles of true and fair view and of prudence.
The other Commission’s concern is that Law 27/2003 may involve the granting by Italy of a State Aid in breach of Article 87 of the EC Treaty. In particular, the Commission suspects that the tax treatment of the write-downs provided by Law 27/2003 may constitute a special tax depreciation arrangement as defined in the Commission Notice on State Aids and direct business taxation of 11 November 1998 (SEC (1998) 1800 def.).
As a rule, under Italian tax law, write-downs in value of assets may not be deducted for tax purposes unless they are actually realised (e.g., through assignment of the sportsman’s contract to a third party). As an exception to this rule, Law 27/2003 allows sport clubs to take a tax deduction for such write-downs by way of a tax amortization that is not available to other Italian taxpayers. It is the Commission’s view that this leads to a situation where tax revenues are levied form companies engaged in other sectors that are in a similar financial position as the sports clubs. The Commission also believes that since some of the activities of the sport clubs take place on the European market (e.g., UEFA Champions League) Law 27/2003 may create a distortion of competition and affect trade between Member States. All this may therefore amount to a prohibited State Aid.
It will be interesting to see how the Italian Government will respond to the Commission’s claims. Although the Commission has declared that there may be room for fixing Law 27/2003 to bring it in line with EC law, it is not easy to figure out how this can be achieved without substantially amending the new law. From a tax perspective, a partial solution could be to provide that the special asset booked in the financial statements cannot be amortized for tax purposes, the ordinary tax rule remaining applicable to the deduction of the costs under the sportsman's contracts. Amendments to the law to comply with the EC Accounting Directives would appear more problematic.
It is worth noting that most of the major Italian football clubs have, meanwhile, taken advantage of Law 27/2003 and booked in their 2002/2003 annual accounts intangible assets deriving form the write-downs of sportsmen’s contractual rights worth hundreds of thousand of Euro’s on aggregate. This has contributed to considerably embellish their not-so-good-looking financial statements.
