Asser International Sports Law Blog

Our International Sports Law Diary
The Asser International Sports Law Centre is part of the T.M.C. Asser Instituut

Case note: State aid Decision on the preferential corporate tax treatment of Real Madrid, Athletic Bilbao, Osasuna and FC Barcelona

On 28 September 2016, the Commission published the non-confidential version of its negative Decision and recovery order regarding the preferential corporate tax treatment of Real Madrid, Athletic Bilbao, Osasuna and FC Barcelona. It is the second-to-last publication of the Commission’s Decisions concerning State aid granted to professional football clubs, all announced on 4 July of this year.[1] Contrary to the other “State aid in football” cases, this Decision concerns State aid and taxation, a very hot topic in today’s State aid landscape. Obviously, this Decision will not have the same impact as other prominent tax decisions, such as the ones concerning Starbucks and Apple

Background

This case dates back to November 2009, when a representative of a number of investors specialised in the purchase of publicly listed shares, and shareholders of a number of European football clubs drew the attention of the Commission to a possible preferential corporate tax treatment of the four mentioned Spanish clubs.[2] The preferential tax treatment derived directly from a Spanish sports law of 1990, which obliged all Spanish professional sport clubs to convert into sport limited companies. The justification for the measure was that many clubs had been managed badly because neither their members nor their administrators bore any financial liability for economic losses. This law exempted from this duty to convert those football clubs which had a positive balance in the preceding 4-5 years. The only clubs who at that moment fulfilled these conditions were Real Madrid, Athletic Bilbao, Osasuna and FC Barcelona, and were consequently permitted to remain associations. Sports associations are non-profit entities and, as such, qualified for a partial corporate tax exemption under the Spanish Corporate tax Law. Instead of paying tax for their commercial income at the general rate of 30%, sport clubs were only required to pay tax at a rate of 25%. Moreover, Spain did not include a time period for a possible re-assessment of the financial position of the sport limited companies. Thus, no professional sporting entity has had its legal qualification modified since the original assessment of 1990, irrespective of how the financial health of the entity evolved.[3]

Intervention by the European Ombudsman

The complaint was given a “high priority status” by the European Commission[4] and the allegations of an unfair Spanish tax system were widely covered in the press (see for example here and here). Nevertheless, it took the Commission more than four years to launch a formal investigation and nearly seven to reach a final decision. In fact, there are reasons to believe that the Commission’s delay in investigating the matter was only halted after an intervention by the European Ombudsman. As stated above, the complaint was submitted in November 2011. More than 25 months later, and not having been informed about the progress of the case, the complainant turned to the Ombudsman. According to the complainant, the Commission had failed to decide, in a timely way, whether or not to open the formal investigation procedure. The Ombudsman agreed with the complainant and found that the Commission had not justified its failure to decide on the matter. Furthermore, the public suspicion that the Commission’s inaction might be linked to the fact that the then Commissioner for Competition, Joaquín Almunia, was a socio (member) of one of the football clubs (Athletic Club Bilbao) involved, were highlighted by the Ombudsman in its Recommendation.[5] Even though the Commission has denied that the delay in launching the formal investigation was linked to Almunia’s personal footballing preferences, on 18 December 2013 (a mere two days after receiving the Ombudsman’s recommendation) the Commission decided to open an in-depth investigation into the tax privileges granted to the four Spanish football clubs.[6] 

The Decision

As is the case with most, if not all, State aid and tax cases, the key question is whether the tax measure (or treatment in this case) leads to a selective economic advantage for one or more undertakings, in this case the four professional football clubs.[7] In order to uncover a selective advantage in the form of tax income, the case-law subscribes that one begins by identifying and examining the common regime/system applicable in the Member State concerned. Secondly, an assessment is made of whether the treatment derogates from that common system. This assessment includes deciphering the objective assigned to the tax system, as well as determining whether the economic operators in question (i.e. the four football clubs) are in a comparable factual and legal situation to the other economic operators falling under the common system.[8] If the four clubs are in a comparable factual and legal situation, but their tax treatment derogates from the common system, this treatment will be considered selectively advantageous. Third and lastly, it is necessary to appraise whether the tax treatment is justified by the logic and nature of the tax system.[9] As regards this justification appraisal, there are two important aspects to note: First of all, there is a shift in the burden of proof, since it is for the Member State which has introduced such a differentiation in charges in favour of certain undertakings active in professional football to show that it is actually justified by the nature and general scheme of the system in question.[10] Secondly, this justification appraisal has to be separated from the general justification appraisal of Article 107(3), the latter of which will only take place after State aid in the sense of Article 107(1) is fully established.


The common system applicable and the objective assigned to the system

In both the Decision to open a formal investigation and the final Decision, the Commission considered that the common system applicable is that of the corporate tax law. This has been the common system since the professional sporting entities had to convert to limited companies in 1990. The Commission also held that the objective assigned to the system is generating State revenues on the basis of company profits.[11]


Are the four clubs in a comparable factual and legal situation?

The Commission believes that Real Madrid, Athletic Club Bilbao, Osasuna and FC Barcelona are in a comparable factual and legal situation as other professional sport companies in light of the abovementioned objective of the tax system, and cannot see how they should be treated differently. Nonetheless, Spain and the clubs argued that the clubs were not in the same factual and legal situation, because the clubs’ aim was not to make profits. Instead, all profits made have to be reinvested in the club itself. They also claimed that the CJEU’s case law allows for exceptions “in light of the peculiarities of cooperative societies which have to conform to particular operating principles”. Indeed, “those undertakings cannot be regarded as being in a comparable factual and legal situation to that of commercial companies, provided that they act in the economic interest of their members, the members being actively involved in the running of the business and entitled to equitable distribution of the results of economic performance”.[12] The fact that clubs cannot distribute profits to shareholders is a relevant peculiarity in the eyes of Spain.

The Commission rebutted Spain’s claim that sport associations and sport limited companies are not in the same factual and legal situation.   It firstly criticised Spain’s obligatory conversion of all-but-four sport associations into sport limited companies in 1990 by highlighting that “differences in the economic performance cannot justify different treatment as regards the obligatory form of organisation or the lack of choice in that respect. Losses are not intrinsic to a certain form of organisation. The business performance is therefore not an objective criterion justifying different taxation bases or imposing certain forms of incorporation for an indefinite period”.[13] Moreover, not being able to distribute profits to shareholders “cannot support a lower taxation of certain football clubs when compared to other professional sporting entities. (…) Those four clubs, although they are non-profit entities, actively seek to make profit themselves”, in a comparable way to other professional sporting entities.[14] Indeed, “the fact that clubs are obliged to reinvest the income they realise (…) does not weaken their competitive position, nor justifies a different, more favourable, tax treatment with respect to other entities active in professional sport. It rather drives them to improve their facilities”.[15]


Justification by the nature and logic of the tax system

As stated above, it is up to the Member State concerned to argue why the different tax treatment is justified under the general tax system. The Decision shows that Spain, the four clubs and La Liga (who was given interested party status by the Commission) presented a variety of arguments that in their eyes justified the different treatment. Three of these arguments were the followings:

1. Associations have stricter internal control mechanisms than sporting limited companies;

2. Associations have fewer possibilities of access to the capital market than sporting limited companies;

3. Associations are placed at a disadvantageous position under UEFA’s Financial Fair Play rules compared to sporting limited companies.

As regards the first justification brought forward, it underlines the liability regime imposed on the management body of a sport association. For example, a club’s management board “must provide a bank guarantee covering 15% of the club’s budgeted spending in order to guarantee any losses generated during its term. In addition, management board members will be strictly liable, in an unlimited manner, with their present and future personal assets, for any losses generated that exceed this guaranteed amount.”[16] Nonetheless, the Commission held that this justification is at odds with the rationale for the conversion of the other sport clubs to sport limited companies in 1990, which was the fact that many clubs had been managed badly. “If there was a need for certain clubs to be subject to stricter controls, the obligatory transformation into a limited company would not be necessary to pursue the purpose of that law.[17]

Further, Spain’s claim that clubs have fewer possibilities of access to the capital market cannot be seen as a justification for deviating from the common tax system. Simply put, “if the disadvantages of the clubs in this respect are as manifest as [Spain and the clubs] assert, they always have the possibility to change their corporate form”.[18]

Last, the Commission considers the Financial Fair Play rules of the UEFA to be “internal rules set by a football organisation which aim to ensure a reasonable financial management of sport entities and to avoid continuous loss making. They cannot justify a different taxation of profits by the State”.[19] With this last consideration, the Commission displays a rather benevolent attitude towards UEFA’s Financial Fair Play Rules. Indeed, refusing to attack these rules in any way is very much in line with its previous public statements on FFP, such as the Commission’s and UEFA’s Joint Statement on FFP of March 2012 and the Cooperation Agreement between the Commission and UEFA of October 2014.


Compatibility assessment under Article 107(3)

As can be read from paragraph 85 of the Decision, neither Spain nor the beneficiaries have claimed that any of the exceptions provided for in Article 107(2) and 107(3) TFEU apply in the present case. Generally speaking, successful justifications under Articles 107(2) and (3) are uncommon in State aid and taxation cases. Two possible reasons for this can be deciphered: On the one hand, Member State and interested parties seek justifications by the nature and logic of the tax system, i.e. they argue that the justification rules out a selective advantage for one more undertakings, thereby ruling out State aid under Article 107(1). On the other hand, State aid through tax advantages are in most cases considered as operating aid. Operating aid can normally not be considered compatible with the internal market under Article 107(3) TFEU in that it does not facilitate the development of certain activities or of certain economic areas, nor are the tax incentives in question limited in time, digressive or proportionate to what is necessary to remedy to a specific economic handicap of the areas concerned.[20] In the preferential corporate tax treatment of four Spanish football clubs case, the Commission noted that a lower tax burden than one that should normally be borne by the clubs in the course of their business operations, should be considered as operating aid.[21] Hence, this type of aid cannot be considered compatible aid under any of the exceptions of Article 107(3).

Yet, the tax benefit scheme in the Hungarian sport sector decision of 2011 provides an example of a tax benefit scheme for the sport sector that is declared compatible State aid under Article 107(3)c) TFEU. In this case, the Commission held that the scheme was introduced in a sufficiently transparent and proportionate manner, i.e. that the measure was well-designed to fulfil the objective of developing the country’s sport sector.[22] Moreover, the Commission acknowledged the special characteristics of sport and held that the objective of the scheme is in line with the overall objectives of sport as stipulated in Article 165 TFEU, namely that the EU “shall contribute to the promotion of European sporting issues”, because the sport sector “has enormous potential for bringing the citizens of Europe together, reaching out to all, regardless of age or social origin”.[23]

As regards the preferential corporate tax treatment of four Spanish football clubs case, no reference was made by Spain or the interested parties to Article 165, or how the preferential tax treatment could contribute to the promotion of sporting issues or values. Perhaps Spain and the four clubs were aware that such a justification would not fly, since the preferential tax treatment is only beneficial to four football clubs and not to the sports sector in general.


Recovery of the aid

Given that the Commission considered the preferential tax treatment to be unjustifiable State aid, a recovery decision was adopted. According to the Commission, the amount of the aid to be recovered from the four football clubs consists of the difference between the amount of corporate tax which the clubs actually paid and the amount of corporate tax which would have been due under the general corporate regime starting from the year 2000.[24] The Commission further recalls that the exact amount of the aid to be recovered will be assessed on a case by case basis during the recovery proceeding which will be carried out by the Spanish authorities in close cooperation with the Commission.[25]

In this regard, it is important to mention that Spain amended the corporate tax rules in November 2014 and new rules entered into force on 1 January 2015.[26] Under the amended law, the corporate income tax rate of 30% for all limited companies will be reduced to 28% for 2015 and to 25% from 2016 onwards. This includes limited sport companies as well, which will, from 2016, be submitted to that 25% corporate tax rate.[27] In other words, since there is no longer a different tax treatment for associations compared to sport limited companies as of 2016, Spain has seized to grant (unlawful) State aid to the four professional football clubs. The recovery will thus only involve the advantages obtained until the end of 2015. 


Conclusion

Few will disagree with the Commission in that the Spanish corporate tax system allowed for an economic selective advantage to be granted to Real Madrid, Athletic Club Bilbao, Osasuna and FC Barcelona over more than 25 years, and without the presence of an acceptable justification for such a favourable treatment. Having said this, this particular “saga” has not quite ended after it became clear that Athletic Club de Bilbao (at least) appealed the Commission’s Decision in front of the General Court of the EU.

Notwithstanding the upcoming Court case, the practical impact of this Decision will probably be very limited. Firstly, the actual aid that needs to be recovered by Spain will be relatively low in financial terms. As can be read in the Commission’s press release of 4 July 2016, it is estimated that the amounts that need to be recovered are around €0-5 million per club.[28] The Spanish government is yet to announce how much it will recover, but Real Madrid and FC Barcelona in particular will have no difficulties returning the aid, irrespective of what the amount exactly is. Secondly, by lowering the corporate tax rate for all limited companies in 2015 and 2016, Spain cannot be considered anymore as granting State aid to its professional football associations based on the corporate tax system. This also means that there is no more reason to believe that the European Commission could “force” the four clubs to change their legal status from club to sport limited company through the enforcement of EU State aid rules, as some have insinuated. The fans of these clubs were dreading this outcome because becoming a sport limited company would open the doors to external investors, who would not necessarily in their eyes have the best interest of the clubs in mind.



[1] The Commission has previously published: Commission Decision of 4 July 2016, SA.41613 on the measure implemented by the Netherlands with regard to the professional football club PSV in Eindhoven; Commission Decision of 4 July 2016, SA.40168 on the State aid implemented by the Netherlands

in favour of the professional football club Willem II in Tilburg; Commission Decision of 4 July 2016, SA.41612 on the State aid implemented by the Netherlands in favour of the professional football club MVV in Maastricht; Commission Decision of 4 July 2016, SA.41614 on the measures implemented by the Netherlands in favour of the professional football club FC Den Bosch in 's-Hertogenbosch; Commission Decision of 4 July 2016, SA.41617 on the State aid implemented by the Netherlands in favour of the professional football club NEC in Nijmegen; and Commission Decision of 4 July 2016, SA.33754 on the State aid implemented by Spain for Real Madrid CF. The last remaining decision to be published is Commission Decision of 4 July 2016, SA.36387 Aid to Valencia football clubs.

[2] Draft recommendation of 16 December 2013 of the European Ombudsman in the inquiry into complaint 2521/2011/JF against the European Commission, points 1-3.

[3] Commission Decision of 4 July 2016, SA.29769 on the State Aid implemented by Spain for certain football clubs, paras. 5-9.

[4] Draft recommendation of the European Ombudsman in the inquiry into complaint 2521/2011/JF against the European Commission, point 13.

[5] “Rather than allaying suspicions regarding a conflict of interests, and regarding inappropriate influences on the decision making process, the Commission's failures here have actually added to those suspicions”.

[6] Interestingly enough, on that same day, the Commission decided to open an in-depth investigation into State guarantees in favour of three Spanish football clubs in Valencia and land transfers by the Council of Madrid to Real Madrid: Commission decision of 18 December 2013, SA.36387, Spain—Alleged aid in favour of three Valencia football clubs; Commission decision of 18 December 2013, SA.33754, Spain—Real Madrid CF.

[7] C Quigley, “European State Aid Law and Policy”, Hart Publishing (2015), pages 109-127.

[8] See for example Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para. 49.

[9] Commission Decision of 4 July 2016, SA.29769, para. 51.

[10] Commission Decision of 4 July 2016, SA.29769, para. 59. See also Case T-211/05 Italian Republic v Commission ECLI:EU:T:2009:304, para. 125.

[11] Commission decision of 18 December 2013, SA.29769, Spain—State aid to certain Spanish professional football clubs, para. 16; and Commission Decision of 4 July 2016, SA.29769, para. 53.

[12] Commission Decision of 4 July 2016, SA.29769, para. 62; and joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para. 61.

[13] Commission Decision of 4 July 2016, SA.29769, para. 56.

[14] Ibid, para. 65

[15] Ibid, para. 67.

[16] Ibid, para. 24.

[17] Ibid, para. 61.

[18] Ibid, para. 68.

[19] Ibid, para. 71.

[20] See for example Commission Decision of 10 October 2015, SA.38374 on State aid implemented by the Netherlands to Starbucks, para. 433.

[21] Commission Decision of 4 July 2016, SA.29769, para. 86.

[22] Commission Decision of 9 November 2011, SA.31722 – Hungary - Supporting the Hungarian sport sector via tax benefit scheme., paras 95-98.

[23] Ibid, paras 86-87. For more information on the tax benefit scheme in the Hungarian sport sector decision, see O. van Maren, “The EU State aid and Sport Saga: Hungary’s tax benefit scheme revisited? (Part 1)”, Asser International Sports Law Blog, 18 May 2016.

[24] According to Article 17(1) of the State Aid Procedural Regulation 2015/1589, the powers of the Commission to recover aid are subject to a limitation period of ten years. Since the Commission asked Spain for information for the first time in 2010, the recovery of the tax difference starts with the taxation year 2000.

[25] Commission Decision of 4 July 2016, SA.29769, paras. 93-97.

[26] Ley 27/2014 de 27 noviembre 2014, del Impuesto sobre Sociedades, BOE of 28 November 2014. Article 29(1) stipulates that “El tipo general de gravamen para los contribuyentes de este Impuesto será el 25 por ciento”.

[27] Commission Decision of 4 July 2016, SA.29769, para. 34.

[28] European Commission - Press release IP/16/2401 of 4 July 2016, State aid: Commission decides Spanish professional football clubs have to pay back incompatible aid.

Comments (2) -

  • Boris

    11/7/2016 7:50:54 PM |

    Very interesting analysis.

    "there are reasons to believe that the Commission’s delay in investigating the matter was only halted after an intervention by the European Ombudsman"

    This is really scary stuff, very close to corruption, why was the EC protecting a few companies? why does the EC take such huge reputational risks? It is all very strange. Looking at this, it is not really surprising that the US believes that the EU's competition policy is biased.

    One question, EC has stated that Spain has already amended the tax rules and you say that the discriminatory treatment has ended in 2015 but under the current Spanish corporation tax law (articles 109-111) the sport clubs are still exceptionally allowed (as partially exempted entities) to treat many items of revenue as fully exempt for corporation tax purposes. The tax rate may now be the same but the tax base selective advantage still exists. Has the EC asked Spain to eliminate this preferential treatment or are lower corporation tax bases a clever loophole that could be used by the likes of Luxembourg and Ireland to favour specific companies? At the end of the day, these countries could achieve the same result whether it is by reducing the tax base or by granting a lower tax rate.

    The EC has ruled Real Madrid and Barca will have to calculate their taxes since 2000 as if they had been sport limited companies but sport limited companies can only participate in one sport discipline (i.e. they cannot participate in football and basketball simultaneously). Will an exception be made for Real and Barca or will they have to calculate their football and basketball taxes separately? How could the EC justify the exception?

    The Telegraph referred to a €7m annual tax saving due to the ability to set-off basketball losses against football profits (www.telegraph.co.uk/.../) and over 16 years this could add up to a huge amount.

    Have you noticed that there is a provision in the new corporation tax law (seventh additional disposition) that states that the conversion of the sport clubs into PLCs shall be free of corporation tax (for the undertakings that would receive the assets) and free of personal tax (for the non-profit members that would make a handsome profit by receiving the shares of the clubs). This is a very weird transaction for any non-profit and the model could be replicated elsewhere to circumvent state aid rules. Why should the conversion not be taxed according to the general tax rules for both corporations and individuals? Has the EC asked Spain to end this discriminatory treatment?

    Many thanks

    • Oskar van Maren

      11/8/2016 12:33:25 PM |

      Dear Boris,

      Thank you very much for your comment.

      You pose a series of questions that will require me to look into the matter thoroughly.

      I shall get back to you as soon as possible and look forward to the discussion with you.

      Best,

      Oskar

Comments are closed
Asser International Sports Law Blog | Blog Symposium: Third-party entitlement to shares of transfer fees: problems and solutions - By Dr. Raffaele Poli (Head of CIES Football Observatory)

Asser International Sports Law Blog

Our International Sports Law Diary
The Asser International Sports Law Centre is part of the T.M.C. Asser Instituut

Blog Symposium: Third-party entitlement to shares of transfer fees: problems and solutions - By Dr. Raffaele Poli (Head of CIES Football Observatory)

Introduction: FIFA’s TPO ban and its compatibility with EU competition law.
Day 1: FIFA must regulate TPO, not ban it.
Day 3: The Impact of the TPO Ban on South American Football.
Day 4: Third Party Investment from a UK Perspective.
Day 5: Why FIFA's TPO ban is justified.

Editor’s note: Raffaele Poli is a human geographer. Since 2002, he has studied the labour and transfer markets of football players. Within the context of his PhD thesis on the transfer networks of African footballers, he set up the CIES Football Observatory based at the International Centre for Sports Studies (CIES) located in Neuchâtel, Switzerland. Since 2005, this research group develops original research in the area of football from a multidisciplinary perspective combining quantitative and qualitative methods. Raffaele was also involved in a recent study on TPO providing FIFA with more background information on its functioning and regulation (the executive summary is available here).

This is the third blog of our Symposium on FIFA’s TPO ban, it is meant to provide an interdisciplinary view on the question. Therefore, it will venture beyond the purely legal aspects of the ban to introduce its social, political and economical context and the related challenges it faces.

 

1)    Introduction

This paper reviews the main challenges to the smooth development of football when considering the repercussions of third party entitlement to shares of transfer fees (sections 2 to 5) and formulates a non-partisan proposal to reform the transfer system as a whole (section 6).

Third parties define all other parties than the teams transferring the registration of a player: companies, holdings, investments funds, agents, club shareholders and employees, footballers and relatives, other football clubs, football academies, etc.

In the interests of accuracy and avoidance of doubt, the common terms of third-party ownership and players’ economic rights are not used in this paper. Literally speaking, the business area considered is indeed based on options rather than ownership.

Moreover, the term of ownership suggests that third-party investors “own” players as for a master with respect to a slave. TPE arrangements also raise crucial issues in terms of power between third-party investors and players. However, the stakes are hardly comparable with those in the master/slave relationship. It is thus more accurate to refer to entitlement instead of ownership.

With regard to economic rights, they are nothing more than transfer compensation as stipulated by FIFA regulations. The notion of economic rights is thus also misleading as it suggests the existence of specific rights beyond those deriving from regulations set up by football authorities. The unreflective use of this concept only adds confusion to the debate.

The common goal of actors participating in the business of third-party entitlement (hereafter TPE) is to make a financial profit through the transfer of players, or, for individuals involved in the financing of clubs, to be able to secure their investments.

 

2)    TPE and the sustainability of football clubs

The growth of TPE deals raises crucial issues for the sustainable development of clubs. This is especially true for teams that view regular investment from third parties as a key income source in their business model.

While TPE investments might initially be welcomed by clubs facing economic problems, over time, such agreements have the potential to provoke a loss of control over transfer operations and durably compromise the financial situation of teams.

Within the context of economic polarisation[1], TPE deals do not have the power to solve financial issues arising from an unfavourable position in the market. On the contrary, a difficult situation from an economic standpoint reduces considerably the bargaining power of clubs with respect to third parties.

Third-party investors promoting TPE arrangements are thus often able to acquire a favourable position within a club to minimise their risks and maximise profits over the longer term. This reinforces the dependency of clubs vis-à-vis third parties and affects their financial stability.

The TPE business model develops in parallel with the progressive takeover of clubs by groups or individuals motivated by the possibility to speculate on the transfer market. The tendency to consider teams as a launching-pad to generate profits through the transfer of players increases.

Club employees in charge of transfers also contribute to this process by using their strategic position for personal profit. Within this framework, economic stakes tend to overcome sporting objectives. This runs in the vast majority of cases contrary to the long-standing interests of clubs.

Indeed, the greed of third-party investors, the high mobility of players and the chronic financial instability of clubs engaging in TPE practices tend to have a negative impact on results. Several studies by the CIES Football Observatory have provided evidence that over-activity in the transfer market is counterproductive in the long run.[2]

In turn, poor performance levels have a negative effect on the ability to generate revenues in the transfer market and can lead to bankruptcies. It is indeed harder to find potential buyers interested in taking over a club when the latter is not entitled to potential transfer fees for players under contract.

 

3)    TPE and the development of the game

The logic of short-term profit maximisation underlying TPE practices is often not appropriate for the sporting development of players. This is above all valid for young talents transferred abroad before the acquisition of a solid experience in their home country.

The numerous transfers that many footballers at the heart of the TPE business model will be confronted with to develop or restart their career only add to the pressure which makes fulfilling their potential more difficult. In many cases, this aspect is not sufficiently taken into account by third-party investors primarily attracted by the lure of money.

The monetisation of players’ mobility within the framework of the TPE business model tends thus to have a negative effect not only for footballers, but also on football in general. Short-termism and speculation often run contrary to the personal development of players and entail greater risks of breaking careers.

Furthermore, there are serious concerns with regard to influence and bias in player selection. Indeed, the speculative nature of the TPE business model and vested interests between the various actors involved promotes favouritism.

High risks of favouritisms and insider trading also exist with regard to national team selection both at adult and youth level. Indeed, international caps can significantly increase the market value of a player and guarantee higher profits.

In addition, as the ability to produce high-quality matches is strongly linked to team cohesion, the increase in player turnover within the framework of the development of TPE arrangements is damaging to football as a spectacle.

While some well-connected clubs are able to take advantage of their privileged access to the best talent by means of TPE deals, this always takes place to the detriment of other teams within the context of a zero-sum game.

Consequently, the TPE business model prevents leagues from increasing the competitive balance between clubs and the overall performance of the league. The same holds true at international level for football as a whole.

 

4)    TPE and the transfer system

An additional concern with regard to the TPE business model relates to two founding principles underlying the transfer system of football players as agreed in 2001 by the EU, FIFA, and UEFA: contractual stability and the promotion of training.[3]

Contrary to the principle of contractual stability, the TPE business model promotes the use of the transfer system for the purpose of financial speculation. Within this framework, the trend of transferring players before the end of their contract increases.

The speculative nature of the TPE business model also has a negative impact on the promotion of training. Firstly, TPE deals are concluded without the payment of training indemnities and solidarity contributions as stipulated in FIFA regulations. Secondly, footballers having already been the subject of investment tend to be favoured above players who are locally trained.

With this in mind, it is not surprising to observe that the number of players transferred by top division clubs in 31 UEFA member associations has reached an all-time high in 2014/15. In parallel, a record low was recorded in the percentage of club-trained footballers.[4] In the long-term, these developments weaken clubs both sportingly and economically.

In addition, the TPE business model amplifies the conflicts of interest between intermediaries, fund or investment company managers and club shareholders or employees in charge of transfers. The TPE arrangements between these actors lead to the institutionalisation of conflicts of interest as the modus operandi of the transfer market.

In parallel, a process of “cartelisation” based on privileged relations develops. Established intermediaries play a crucial role in this process. The direct involvement of the most influential agents in the TPE business sphere reinforces their dominant position.[5] This further limits the competitiveness of the player representation market and the transfer market in general.

As a consequence, a few investment funds and companies collaborate on a regular basis with a close-knit group of intermediaries holding strong ties with team shareholders and managers. The key actors in these dominant networks are thus more than ever able to exercise a lasting control over more footballers and clubs.[6]

This gives them even more leverage over actors who are not part of their network. As in all economic sectors, enjoying an oligopolistic position is indeed particularly useful. Specifically in football, this drives up transfer costs for players controlled, generates ever-greater profits and consolidates the control on the market.

In addition, when TPE investors want to maintain a percentage on future transfers with the aim of maximising profits, clubs from national associations where such practices are forbidden (i.e. England) have much less bargaining power. This also leads to rising recruitment costs. From this perspective, the TPE business model is a source of inequalities between countries.

A further negative consequence of the development of the TPE business model is the creation of parallel transfer markets which are for the most part outside the scope and control of the football authorities, as well as the arbitrary justice of sporting federations.

Contrary to club officials, third-party investors do not have to respect the normal transfer windows. This gives third parties a competitive advantage over clubs. Moreover, as already mentioned, TPE agreements do not provide for the payment of solidarity or training contributions.

By sidestepping sporting regulations, the spread of the TPE business model undermines the authority of football governing bodies and the arbitrary justice of sport. This jeopardises the regulatory mechanisms agreed with public authorities to protect the interests of clubs, players and the agents wishing to operate in compliance with the existing legal framework.

 

5)    TPE and the rights of workers

By widening the number and variety of actors entitled to shares in transfer fees, TPE practices can restrict the freedom of movement of players in several ways. This situation raises important issues with regard to workers’ rights.

The existence of TPE deals generally makes negotiations more complicated. Transfers can collapse even though the clubs and the player concerned had reached an agreement. Moreover, as mentioned above, the multiplication of actors involved in transactions is likely to hinder the free movement of players by increasing transfer costs to the satisfaction of all parties involved.

From an ethical point of view, the fact that many players are kept in the dark regarding arrangements for the share of potential fees for their transfer is also problematic. Insofar as these agreements often have an impact on the rest of their career, players should at least be informed as to the identity of the actors involved, as well as to the terms of the deals.

Morally speaking, the written consent of players should also be compulsory to validate the contractual details agreed between the different parties involved. This is currently not the case. As a matter of fact, many TPE arrangements run contrary to the fundamental right of players to decide where they want to play.

TPE practices thus contribute in reducing the decision-making powers of footballers to the profit of third parties. In the least favourable scenarios, players find themselves in a situation of dependence towards third-party investors and intermediaries with little or no room to manoeuvre.

Young players from poor family backgrounds with little knowledge on the functioning of the transfer system are particularly vulnerable with respect to arrangements promoted within the context of the TPE business model.

This was notably raised by Marcelo Estigarribia in a recent interview published by an Italian magazine.[7] The Paraguayan footballer complained about the numerous transfers he had to face up (six over the last seven years) after that an investment company acquired the control of his career through TPE arrangements.

Of course, successful footballers can also take advantage of the networks set up by dominant actors through TPE arrangements. However, the opposite holds often true for the majority of less successful players who would have needed a more stable context to develop their skills or would have liked to have a greater control on their career path.

 

6)    Plea for a holistic approach

The practical functioning of the transfer market of football players and the development of the TPE business model threaten the integrity of football. A holistic approach is needed to limit the worst pitfalls of the business and reduce its profitability for third parties who do not act in the long standing interests of clubs and of football in general.

This will involve reforming the existing transfer system and making it better suited to fulfil the purpose for which it was first implemented and has since been adapted as previously described in this paper.

An efficient measure would be to entitle each team in which a player has passed through to a compensation for each fee paying transfer taking place over the course of the player’s professional career on a pro rata basis to the number of official matches played at the club.

For example, if footballer X begins as a professional in club X and plays 75 matches there before being transferred to club Y, in the event of a paying fee transfer to club Z after 25 official games played for club Y, club X is entitled to 75% of the transfer fee. And this even though club Y already paid a fee to sign the player from club X.

This reform would re-focus the transfer system back on the objectives for which it was conceived, notably with regard to contractual stability and the promotion of training. It would also have a positive impact in terms of income redistribution, a key issue in today’s football.[8]

At contractual stability level, the reform would ensure that clubs are rewarded with a substantial compensation at a later stage even if the player leaves at the end of his contract. Consequently, teams could more easily afford keeping the best talents for a longer period. This would also help tame salary inflation.

With regard to the promotion of training, such a reform would make sustainable investments in clubs or youth academies for the training of the next generation of players more interesting from a financial standpoint.

Training clubs would indeed be better compensated economically in that they would receive substantial money also in the event of a second, third or further paying fee transfer, which are generally the most profitable.

In the meantime, this would reduce the attractiveness of speculating on specific talents to obtain short-term profits with no real contribution to the smooth development of football, as it is the case with the current TPE business model.

Of course, this reform is no golden bullet. It would not solve all the problems related to corporate governance issues at club level. It would also not be able to tackle all the concerns arising from the practical functioning of the transfer market of football players as highlighted above.

However, it would have the merit to re-direct the transfer system towards the key principles underlying its creation and existence. It would also allow football governing bodies to gain a better control over its operation.

Beyond the TPE issue, all stakeholders concerned about the integrity of football should have an interest in updating the transfer system to protect the smooth development of the game. The proposed reform moves in that



[1] See UEFA 2014: The European Club Footballing Landscape, Club Licensing Benchmarking Report (http://www.uefa.org/MultimediaFiles/Download/Tech/uefaorg/General/02/09/18/26/2091826_DOWNLOAD.pdf).

[2] See Poli R., Besson R. and Ravenel L. 2015: Club instability and its consequences, CIES Football Observatory Monthly Report n° 2 (http://www.football-observatory.com/IMG/pdf/mr01_eng.pdfhttp://www.football-observatory.com/IMG/pdf/mr01_eng.pdf).

[3] See http://europa.eu/rapid/press-release_IP-02-824_en.htm.

[4] The figures are available in the CIES Football Observatory’s Digital Atlas at http://www.football-observatory.com/Digital-Atlas.

[5] See Poli, R. and Rossi, G. (2012) Football agents in the biggest five European markets. An empirical research report. CIES: Neuchâtel (http://www.football-observatory.com/IMG/pdf/report_agents_2012-2.pdf).

[6] A thorough analysis of the working of dominant networks in the transfer market of football players is available in Russo, P. (2014) Gol di rapina. Il lato oscuro del calcio globale. Edizioni Clichy, Firenze.

[7] Fabrizio Salvio, Sport Week, 27.09.2014, 34-38.

[8] See Poli R., Besson R. and Ravenel L. 2015: Transfer expenditure and results, CIES Football Observatory Monthly Report n° 3 (http://www.football-observatory.com/IMG/pdf/mr03_eng.pdf).

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