In this blog we continue unpacking Doyen’s TPO deals based on the documents obtained via footballleaks. This time we focus on the battle between Doyen and Sporting over the Rojo case, which raises different legal issues as the FC Twente deals dealt with in our first blog.

I.              The context: The free-fall of Sporting

Sporting Lisbon, or Sporting Club de Portugal as the club is officially known, is a Portuguese club active in 44 different sports. Although the club has the legal status of Sociedade Anónima Desportiva, a specific form of public limited company, it also has over 130.000 club members, making it one of the biggest sports clubs in the world.

The professional football branch of Sporting is by far the most important and famous part of the club, and with its 19 league titles in total, it is a proud member of the big three cartel, with FC Porto and Benfica, dominating Portuguese football. Yet, it has not won a league title since 2002.

The members of Sporting get to elect the club’s president. A typical election campaign is akin to a political one with regard to status, media coverage and campaign funds. In fact, former Sporting president Pedro Santana Lopes went on to become the Prime Minister of Portugal in 2004-2005. In 2011, the elections were hotly disputed with Godinho Lopes defeating his main rival Bruno de Carvalho by only 300 votes. A request by De Carvalho to recount the votes was later dismissed, causing local unrests and police intervention.

Under Godinho Lopes’ presidency, Sporting obtained very poor sporting results, including a seventh place in the 2012/13 season, the worst ranking in the club’s history. New elections were held in 2013 and won by Bruno de Carvalho in a landslide. In addition to underwhelming results on the field, it turned out that the financial health of the club off the field was also at risk. Bruno de Carvalho faced a loss of €43 million in the 2012/13 season alone. This large financial debt was one of the reasons why on 1 October 2014, the General Assembly approved the proposal by the new Board of Directors to press liability charges against Godinho Lopes for breaching due diligence duties.

In the midst of the financial and managerial chaos surrounding Sporting, one dispute stands out as being relevant to our series of blogs on Doyen’s TPO deals. Faced with financial difficulties, Godinho Lopes had recourse to Doyen Sport to finance the recruitment of a number of players, amongst them Marco Rojo, an Argentine defender coming from Spartak Moscow in 2012. After two years at the club, the player was transferred against a healthy €20 million fee to Manchester United in 2014. However, the club staunchly refused to pay out the share of the economic rights owned by Doyen. Thus, giving way to a legal dispute on which we will put the spotlight in this blog. Although the case is still pending in front of CAS, several documents related to it were published on the footballleaks website.[1]

II.            The facts: the Rojo case

Before analysing the fine prints of the Economic Rights Participation Agreement (ERPA) between Doyen and Sporting concerning the economic rights of Rojo, a bit of background on the player and his career is needed. Marcos Rojo is an Argentine professional football player who appeared on the elite football scene at a young age. In 2009, by the age of 19, he won the Copa Libertadores with his side Estudiantes de la Plata, and in 2011, aged 21, he was a regular starter for the Argentinian national team during the Copa America. Sporting, under Godinho’s presidency, signed Rojo from Spartak Moscow for €5.43 million in July 2012.[2] In order to finance the signing of Rojo, Sporting needed fresh money, thus it turned to Doyen as a “last resort initiative”.[3] As provided by the ERPA, the Maltese investment company paid € 3 million and obtained in return 75% of Rojo’s Economic rights. The agreement includes similar provisions to the ones outlined in detail in our FC Twente blog. Notably, in the case Sporting would receive a transfer offer for Rojo of more than €8 million, Doyen could request that the club accept the offer or pay an amount equivalent to 75% of the offer to buy back the rights of the player from the fund. Moreover, in the case the club was to renew the contract of the player or failed to avoid that his contract runs out, it was bound to pay a minimum fee of €4.2 million (in case of renewal, Doyen could also chose to keep its share of the player’s economic rights).

Rojo’s outstanding 2014 World Cup (he was selected for the World Cup All-Star Team) triggered interest from English Premier League clubs, most notably Southampton and Manchester United. Both sides were keen on signing him in the summer of 2014, but Sporting president De Carvalho had no intention of selling him. According to De Carvalho, Rojo was key to the club’s ambition of becoming Portuguese champion. Sporting claimed that Doyen, via its director Nelio Lucas, was “promoting and forcing this transfer” and, thus, “violating his duty to respect Sporting’s independence in transfer related matters”.[4] De Carvalho maintained that Doyen’s influence breached then art.18bis of the FIFA RSTP. In retaliation against Doyen’s perceived influence, Sporting refused to pay to Doyen the agreed 75% share of the proceeds from the transfer of Rojo to Manchester United. Instead, it argued that Doyen had breached its contractual duties and declared the ERPA (and the guarantees attached to it) null and void. Nonetheless, the club did transfer back to Doyen the €3 million it invested at the outset. Hence, Sporting put Doyen’s contractual edifice to the test and Doyen was forced to go to court (and more precisely to the Court of Arbitration for Sport) to try to enforce its rights under the ERPA agreement.

III.         The showdown: The CAS as ultimate arbiter of the legality of Doyen’s TPO contracts

The ERPA signed by Doyen and Sporting contains both a clause defining Swiss law as the law applicable to the contract and the CAS as the jurisdiction competent to deal with disputes arising out of the contract.[5] Henceforth, it was mandatory for Doyen to turn to the CAS as soon as it became obvious that it would not recoup the 75% it believes it was owed on Rojo’s transfer. The dispute was finally heard by a CAS panel in June of this year and the final decision is still, as far as we know, pending (see the outstanding coverage of the issue by Tariq Panja from Bloomberg, here and here). The case is of great importance to Doyen, if the CAS finds that Doyen’s ERPA is contrary to Swiss law, this finding will most likely apply to each of Doyen’s TPO deals that are based on a similar model and dramatically weaken its contractual position. The good news for Doyen is that it probably has only relatively few ERPA’s still in place (for example FC Twente and Doyen agreed to put an end to their agreement), as the FIFA ban should have blocked it from entering into new agreements.

This case is not about former article 18bis of the FIFA RSTP, as is often misunderstood. This would come only into play if FIFA were to sanction Sporting for having had recourse to an ERPA with Doyen, an issue that might still arise and a configuration potentially already at play in the FC Twente case. The Rojo dispute between Sporting and Doyen, however, is of a purely contractual nature. It is only about whether Doyen’s TPO deals are compatible with Swiss civil law. In this regard, footballleaks has recently published a very interesting document: a confidential report by a Swiss law firm on the legality of Doyen’s Model ERPA in light of Swiss law. This report raises a number of thorny legal issues that the CAS will have to weigh on.

The ERPA between Doyen and Sporting must abide by the requirements of Swiss civil law. In general, the Swiss Civil Code is favourable to contractual autonomy, yet there are some restrictions to the freedom of the parties. To be valid, an agreement should not be contrary to the bonos mores. In other words, the moral values or ethical principles supported by the Swiss legal system. Indeed, as foreseen by Art. 20.1 of the Swiss Code of Obligations, a “contract is void if its terms are impossible, unlawful or immoral”.

The whole Rojo case in front of the CAS is likely to hang on the determination whether Doyen’s ERPA model is immoral or not from the Swiss perspective. Immorality is constituted especially if the contract introduces a serious imbalance between the obligations of the parties. The Swiss law firm mandated by Doyen doubted the signature of an ERPA would create such imbalance, simply because “both the FUND [Doyen] and the Club have rights and obligations according to the Agreement”.[6] This falls a bit short. As we have seen, Doyen uses the leverage offered by the financial difficulties of clubs (FC Twente or Sporting) to impose very harsh contractual conditions and high interest rates. This harshness is clearly acknowledged in the ERPA. For example, clause 10.6 indicates that Sporting “is conscious of the harshness and the severity of the consequences of clauses 10.4 and 10.5”. Whether the embedded contractual imbalance in the ERPA is sufficient to be deemed immoral under Swiss law is for the CAS to decide, but it is not a possibility that should be discarded lightly. Moreover, this potential immorality is also supported by the willingness of FIFA to ban TPO as it points at the conflicts of interest and integrity risks arising out of its use.

The ERPA could also be contrary to art. 27.2 of the Swiss Civil Code, which provides that: “No person may surrender his or her freedom or restrict the use of it to a degree which violates the law or public morals”. According to the Swiss law firm contracted by Doyen, this is especially the case if a legal entity’s “economic freedom is restricted in such a way that its economic existence is in danger”.[7] It also argued that, “the undertakings of the Club cannot in principle be considered excessive”, as “there is no obvious disparity between the considerations of the Parties”.[8] Here again, the arguments provided by Doyen’s law firm are feeble at best. In fact, the contractual imbalance is openly acknowledged in Doyen’s own contract. The economic freedom of Sporting (or FC Twente for that matter) is so drastically reduced that a club is forced into selling its best players at Doyen’s will.[9] Those players are at the heart of the “economic existence” of a club. In fact, the fate of FC Twente illustrates how the loss of its best players led to the club facing financial and sporting bankruptcy.

Finally, Sporting is also likely to have argued that Doyen was in breach of its contractual duties. Clause 14 of the ERPA stipulates that Doyen “recognizes that the Club is an independent entity in so far as the Club’s employment and transfer-related matters are concerned and [Doyen] shall not, either though this Agreement or otherwise, seek to exert influence over these matters […]”. The Club claimed in its termination letter of the ERPA that “Doyen has seriously and irremediably violated its obligations of non-influence in Sporting transfer policy […] which constitutes a material breach of the agreement”. Swiss contract law may entail the right for Sporting to refuse to execute its part of the deal in case of breach of contract by Doyen. In that regard, Sporting would have had to factually demonstrate the faulty character of Doyen’s intervention in Rojo’s transfer.

It is certainly not a given that the CAS will consider Doyen’s ERPA contrary to Swiss law or for Doyen to be in breach of its contractual duties, but there are credible legal arguments that point in both directions. Surely, the hubris of the management of Sporting and FC Twente is chiefly responsible for the terrible deals closed with Doyen. Yet, Doyen leveraged their dire financial situations and irrational ambitions to strong-arm them into one-sided agreements that are imposing unfair terms on the clubs. Doyen takes on very little risk: If a player fails to become a star, the fund will recoup its investment plus very reasonable interests (unless the club is bankrupt); if a player breaks through, it will pocket the jackpot. The fund is a true vulture fund geared to the football industry. It buys under-priced assets (economic rights attached to players) in fire sales and hopes for a huge profit.

We will hear soon from the CAS whether it deems this practice legal under Swiss law. In any event, FIFA has decided to ban TPO outright, raising the opposite question of the compatibility of the ban with EU law. This will be the subject of our final blog.

[1] The documents used, especially the ERPA applicable to Rojo and the termination letter send out by Sporting, might be blocked or unavailable due to complaints lodged by Doyen. They are on file with the authors.

[2] http://www.transfermarkt.nl/marcos-rojo/profil/spieler/93176.

[3] Rojo ERPA, 23 August 2012, p.2.

[4] Letter of termination of the ERPA, 14 August 2014, para.15. See also paras 17-20.

[5] Rojo ERPA, 23 August 2012, clause 22 and 23.

[6] FRORIEP, ‘Memorandum on certain questions of Swiss law in relation to a draft ERPA’, para.16.

[7] Ibid, para.23.

[8] Ibid, para.25.

[9] Doyen could not ignore the fact that those clubs were in such financial difficulties, that they would be unable to pay on their own the share of a transfer offer above the agreed amount and thus retain their player.

Last week, the French newspaper Les Echos broke the story that UEFA (or better said its subsidiary) will be exempted from paying taxes in France on revenues derived from Euro 2016. At a time when International Sporting Federations, most notably FIFA, are facing heavy criticisms for their bidding procedures and the special treatment enjoyed by their officials, this tax exemption was not likely to go unnoticed. The French minister for sport, confronted with an angry public opinion, responded by stating that tax exemptions are common practice regarding international sporting events. The former French government agreed to this exemption. In fact, he stressed that without it “France would never have hosted the competition and the Euro 2016 would have gone elsewhere”.

This is not the first time that UEFA is exempted from paying taxes in a host country. For example, for the Euro 2012, UEFA was not subject to direct taxation in Poland.[1] Similar conditions were also part of the application procedures for Euro 2004 and Euro 2008, but is up to the host country to decide how it fulfils the tax exemption requirement of UEFA.

On 12 November 2014 the French council of ministers approved a draft legislation that would provide a fiscally advantageous solution for organisers of international sporting events. The law still needs to be approved by the parliament where it is facing strong political opposition. The organisers of the 2015 European basketball Championships, the 2018 Ryder Cup (golf), and of the football Euro 2016 would be fully exempted from paying direct taxes. However, it is unlikely that the French organisers of the yearly held Tour de France (cycling) and Roland Garros (tennis) will enjoy the same privilege. Even though the legislation is not specific to the Euro 2016, many critics hold that the main reason for introducing this legislation was to satisfy UEFA’s demands.

Regarding the Euro 2016, a special joint-stock company has been created called Euro 2016 SAS. 95% of the shares of this company are owned by UEFA, the remaining 5% by the French Football Federation (FFF). Euro 2016 SAS is responsible for organising the competition itself, related events, and the promotion of the events.[2] The board includes UEFA officials, FFF officials, and French government officials. According to the French minister, Euro 2016 SAS will be exempted from direct and related taxes (corporate tax, income tax, payroll tax, etc.). VAT, however, must still be paid. Allowing Euro 2016 SAS to be exempted from paying direct taxes comes at a time when most EU Member States, including France, are forced to introduce austerity measures. Interestingly, it also comes at a time when the European Commission is becoming increasingly active in dealing with matters related to State aid and taxation. In February 2014, former taxation and customs union Commissioner, Algirdas Šemeta, stated that competition policy in general and State aid law in particular could “greatly reinforce our tax policy work.” He also said that pursuing cases under competition rules could make a real difference as they can be enforced directly on the basis of the EU Treaty. Since this statement, the Commission has opened numerous investigations into alleged State aid received through tax schemes.[3] These cases include alleged aid provided by Ireland to Apple, aid provided by the Netherlands to Starbucks and aid provided by Luxembourg to Amazon. Last week’s LuxLeaks scandal, concerning specific tax deals offered to multinationals by the Luxembourg State, has put State aid and tax policy high on the political agenda. Our analysis is embedded into this broader context, which is decisive in understanding the potential readiness of the Commission to tackle selective fiscal State aid measures. In the following paragraphs we will engage in a substantial analysis of a hypothetical State aid investigation by the EU Commission into the suggested tax exemption offered to UEFA by the French State.

In order for a measure to be considered unlawful State aid it has to fulfil the criteria stipulated in Article 107 (1) TFEU.[4] However, with respect to tax measures, the key question will generally be whether the tax measure is selective.[5] In this regard, when considering whether a measure is selective, and consequently constitutes State aid, the effects on the market are taken into account and not the causes or aim of that measure.[6]

According to settled case-law, the material selectivity of tax measures should normally be assessed by following a three-step analysis.[7] Firstly, the system of reference has to be identified. The system of reference constitutes the framework against which the selectivity of a measure is assessed. It is a consistent set of rules generally applicable to all undertakings falling within its scope as defined by its guiding principle.[8] Secondly, it should be determined whether the given measure constitutes a derogation from the system of reference insofar as it differentiates between economic operators who, in light of the objective intrinsic to that system, are in a comparable factual and legal situation. In the case at hand one can think of other sporting or cultural events held in France. If the measure in question indeed derogates, it still needs to be verified in the last step of the test whether the derogatory measure is justified by the nature or the general scheme of the system.[9] If a prima facie selective measure is justified by the nature or the general scheme of the system, it will not be considered selective and thus fall outside the scope of Article 107(1) TFEU.[10]  

1. System of reference

The French corporate tax (impôt sur les sociétiés) is a standard tax with a rate of approximately 33% that applies to all resident companies in France and that affects all profits made in France by the resident companies. The guiding principle of the corporate tax system would consist in levying taxes on all undertakings generating profit in France.  

2. Is the measure a derogation from the system of reference?

In principle, all undertakings based in France that make a profit are liable to pay the French corporate tax. Similarly, workers and employers based in France are liable to pay the French payroll tax. The sole fact that a new legislation would allow undertakings such as Euro 2016 SAS to be exempted from paying corporate tax and payroll tax derogates from the abovementioned system of reference. Even if one were to assume that international sporting events are subject to a specific system of reference, exonerating their organisers from all direct taxes, this would still be at odds with the fact that undertakings such as Amaury Sport Organisation (the French organiser of the Tour de France) would not be exempted from paying taxes.  In short, at this stage, the measure seems to be prima facie selective.  

3. Is the measure justifiable by the nature or the general scheme of the reference system?

 A prima facie selective aid measure can still be found justified in light of the logic of the system of reference.[11] It has to be borne in mind that a Member State is free to shape the fundamental aspects of its tax system by determining the taxable situations, the tax rate and tax base. Art. 107 (1) TFEU does not prevent the Member State from introducing, reducing or abolishing a tax in order to further its economic aims.[12] It is, however, for the Member State, which has introduced a prima facie selective measure, to show that it is actually justified by the nature and general scheme of the system in question.[13]

It is likely that the French authorities will argue that the measure was introduced to facilitate the organisation of international sporting events to be held on French territory. Organisations responsible for the choice of the host of an international sporting event, such as UEFA or the IOC, need incentives to select France as a host nation. Yet it is doubtful that this could constitute an acceptable justification for the whole scheme. It would imply accepting targeted fiscal dumping as a viable strategy to raise competitiveness, opening the door to a ‘beggar thy neighbour’ policy. Moreover, this tax policy is not aimed at targeting all sports events, i.e. to encourage the practice of sport or any other objective of general interest. Therefore, the Commission is unlikely to accept that it fits into the nature and general scheme of the reference system.

Nonetheless, the French government still believes that the measure is justifiable for a number of reasons. The former French minister for sport, Jean-François Lamour, admitted that hosting mega sporting events always cost more than they generate, and that those who say the opposite are mistaken. However, he also stated that hosting Euro 2016 would serve as an “economic accelerator that can boost the French economy.”[14] “This tax exemption may shock”, admits another former minister for sport, David Douillet, “but it should be considered as an investment, since nearly 3 million visitors are to be expected”. Moreover, “hosting the tournament creates about 20.000 jobs in the construction sector alone. The measure will allow France to host major international tournaments and ensures that they are not organised only in countries that have the means to afford them. In the case of Euro 2016, UEFA will donate €20 million to the host cities, pay €23 million rental money for stadiums and will participate for an amount of €20 million in shares of the French Football Federation regarding amateur football”[15], says the French minister for sport Patrick Kanner. Lastly, as stated in the introduction, Mr. Kanner also held that “France would never have hosted the competition and the Euro 2016 would have gone elsewhere”, had it not agreed to the conditions set by UEFA. Justifications, such as the ones listed here, may be compatible with EU law if it facilitates the development of certain economic activities where such aid does not adversely affect trading conditions to an extent contrary to common interest. Furthermore, the measures must have a clear objective of common interest in order for them to be justified.

According to the French newspaper Le Monde, France has already invested nearly €1.6 billion in the construction and renovation of stadiums and has spent €400 million in access and transport infrastructures for Euro 2016.[16] In Commission Decision SA.35501 Financement de la construction et de la rénovation des stades pour l’Euro 2016, the Commission assessed the public money spent on infrastructure and declared the spending compatible with EU law under Article 107 (3)c) TFEU.[17] The Commission took into account Article 165 TFEU and concluded that the public spending was aimed at a well-defined objective of common interest. It also accepted that there was a public need for the modernisation and enlargement of the stadiums, and that this would not occur without State intervention.

It is important to note, however, that the case at hand describes a different State intervention, namely a specific tax exemption for Euro 2016 SAS. Can arguments raised to justify public spending on infrastructure (i.e. job creation, promotion of France, market failure, cultural, and recreational considerations, etc.) be used analogically to justify a tax exemption? Indeed, there is a direct link between the State’s decision to spend public money in constructing infrastructure and the creation of 20.000 jobs in the construction sector, but not between the legislation allowing tax exemptions and the same job creation. The foregone tax money is not going to be directly re-invested in France, not even in the EU, but is ultimately going to go to a Swiss association: UEFA. The link between the need for the tax exemption and the benefits derived from the EURO2016 can only be made relying on the need to bow to UEFA’s illegitimate blackmail: ‘you’ll get the EURO (and the jobs and exposure hereto tied) only against a fiscal gift’. It is therefore unlikely that the measure at hand fulfils an objective of common interest and would be compatible with Article 107 (3)c) TFEU. 

Usually a negative state aid decision is seen as a backlash for a Member State. However, in UEFA’s tax exemption case, it might be a benediction. It would have positive effects not only for France, but also for all EU Member States, putting a definitive end to UEFA’s blackmailing. A clear precedent would be set and all the organisers of international sporting events taking place in the EU, whether FIFA World Cups, Olympic Games or else, would finally have to comply with tax laws just like anyone else.

[1] Karolina Tetlak and Dick Molenaar, “Tax Exemptions for Euro 2012 in Poland and Ukraine”, European Taxation, June 2012, page 328

[2] The French government and local authorities, on the other hand, are to provide the sites, infrastructure, public services and transportation. They are also responsible for public safety, and for promoting the country and host cities

[3] Timothy Lyons, “The modernisation of EU state aid law and taxation”, British Tax Review, 2014, 2, pages 113-114

[4] (1) The measure has to be selective; (2) granted through State resources; (3) it has to confer an economic advantage upon the recipient; and; (4) it must distort or threaten to distort competition and must have the potential to affect trade between Member States.

[5]  OJ C 384 of 10 December 1998, Commission Notice on the Application of the State Aid Rules to Measures relating to Direct Business Taxation, para. 3

[6] Case C-279/08 P, para. 51; Commission Decision SA.34914, para. 29

[7] See e.g. Joined Cases C-78/08 to C-80/08, Paint Graphos and others [2011], para. 49; Commission Decision SA.34914 - Alleged aid granted to offshore companies – Gibraltar Income Tax Act 2010, para. 28

[8] Commission Decision SA.34914, para. 31

[9] See e.g. Case C-279/08 P, Commission v Netherlands (NOx) [2011], para.62

[10] Joined Cases C-106/09 P and C-107/09 P, Commission and Spain v Government of Gibraltar and United Kingdom [2011], para. 36

[11] Commission Decision SA.29769, State aid to certain Spanish football clubs, para. 15

[12] Conor Quigley, “The notion of State aid in the EEC” [1988] European Law Review, pages 242 and 245

[13] Case T-211/05, Italy v Commisison, para.125

[14] Euro 2016: pourquoi offrir un cadeau fiscal à l’UEFA? Le Monde, 5 November 2014

[15] La France n’aurait pas eu l’Euro 2016 si elle n’avait pas défiscalisé l’UEFA, Le Monde, 5 November 2014

[16] Ibid

[17] Article 107 (3)c):Aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest may be considered to be compatible with the internal market.