Taxation Of World Cup Players

 

I was reading a U.S. Representative criticizing the taxation of FIFA winnings:

We want to encourage these people to come over here and spend their money, and then we take a big chunk of it.”

I get it, but I would like to hear more about taking a big chunk of residents’ money before overly concerning ourselves with nonresidents.

Let’s take a (very) general walkthrough of the taxation of FIFA players.

Resident versus Nonresident

A resident of the U.S. is taxed on worldwide income. It doesn’t matter whether you work in the U.S.; in fact, it doesn’t matter if you live in the U.S. If you are a resident, you are subject to U.S. tax.

The easiest way to be a resident is to be born here - a citizen. There are special rules for U.S. births who did not grow up here, but we will leave that issue alone.

The next way is to obtain a green card, which requires one to go through the immigration system.

A third way is to spend too much time here – which the tax Code terms “substantial presence.” There is math involved, as follows:

·      Present in the US for at least 31 days during the calendar year, AND

·      Present in the US for at least 183 days during the current and preceding two years. Days in the preceding year count at a 1/3 rate; days in the second preceding year count at a 1/6 rate.

Have a German company send an employee to a U.S. office for two or three years and he/she will likely meet the substantial presence test. He or she is not a U.S. citizen but is a U.S. resident under the substantial presence test.

It is unlikely that a FIFA player is going to trip the substantial presence test.

Meaning the FIFA player is a nonresident.

And his/her income taxation changes. The player is now concerned only with U.S.-source income.

One can get mystical when talking about U.S. source.

Does a Swede receiving interest from loaning money to a U.S. business have U.S.-source income?

Does a Brazilian receiving dividends from a multinational corporation have U.S.-source income?

We leave the mystical and return to the concrete when discussing services: if you perform services here – say a player in the World Cup - you will have U.S.-source income.

Divide U.S.-Source Income into Categories

There are two main categories of U.S.-source income, and they are critical in understanding nonresident taxation.

Effectively Connected Income

There should be a trade or business as a first step if we want ECI. It can be humble – a restaurant, dry cleaner or liquor store – but there has to be enough regular and continuous activity to rise to the level of a trade or business. That trade or business activity in turn must take place within the U.S. Meet both criteria and you have ECI.

BTW compensation for the performance of services within the U.S. - like playing soccer - is normally considered ECI.

Fixed, Determinable, Annual, or Periodical (FDAP) Income

The easy definition is any income that is not ECI.

Examples would include interest, dividends and royalties.

Think of FDAP as investment income – not trade or business income – and you get the idea. In days past it would have been a check that arrived in your mailbox.

Allocating Compensation to the U.S.

Only compensation earned while in the U.S. will be subject to U.S. taxation. Sounds fair, but translating that concept to actual numbers can be tricky.

Here is one suggestion: divide the numbers of days in the U.S. by 365 days.

Problem: athletes have seasons. They are not office workers with 9 to 5s and two weeks annual vacation. Using 365 as a denominator does not seem to fit our FIFA discussion.

How about using the number of games as the denominator?

Better, but what about team meetings, practices, press conferences, mandatory league events? Should we include those days in the denominator?

Seems right.

How about bonuses?

There is a can of worms.

This concept BTW is sometimes referred to as “duty days.”

The point is to come up with a ratio, with U.S. duty days as the numerator and total duty days as the denominator.

Allocating Noncompensation to the U.S.

We are talking name/image/likeness, endorsements and things related. Chances are these payments are referred to as royalties.

How are we supposed to reasonably allocate this to the U.S.? Lionel Messi and Cristino Ronaldo are already famous and earning their NILs and endorsements without entering the U.S. I could argue that a reasonable allocation to the U.S. would be zero (-0-).

If there was a product endorsement, a reasonable allocation might include dividing the amount of product sold in the U.S. by total product sold worldwide.

I am not as sure what to do with indirect endorsements, such as wearing Nike products on a regular basis.

Yep, room here for disagreement.

Tax Deductions

There is a significant difference between the taxation of ECI and FDAP income:

You are allowed to deduct expenses against ECI.

You are not allowed to deduct expenses against FDAP.

And you can immediately see the tax planning: move income between ECI and FDAP as necessary and as possible.

Withholding

You may have read that the IRS was taking 30% off the top of FIFA winnings.

True but misleading.

The 30% was withholding.

The player still has to file a nonresident tax return.

Granted, the default rate for FDAP income is 30%, so that income bucket might be a push.

But ECI allows for deductions and graduated tax rates.

Depending upon the amount of deductions and his/her run through the tax rates, that 30% withholding might be excessive. The player might be entitled to a refund.

I doubt that FIFA players would have much in the way of deductions, however, as I expect the club to absorb team and travel expenses.

Filing the Tax Return

Nonresident aliens have their own tax form:

If the athlete received a W-2, it would go on line 1a.

If the athlete was self-employed, the net business income would go first on Schedule 1 and then on line 8.

Line 9 is the sum of all income in the ECI bucket.

NOTE: Nonresident aliens are normally not subject to self-employment tax.

What about FDAP income?

It has its own schedule.

Tax Treaties

Treaties can override what we just discussed above.

Let’s look at an example.

Sergio Garcia was a professional golfer and party to a famous tax case involving services, FDAP and a treaty. It goes without saying that the IRS and Garcia did not agree on how to allocate U.S.-source income. The Tax Court finally decided that the NIL/endorsement/whatever-you-want-to-call-it was not so intertwined with his performance of services as to require it to be allocated the same as compensation for services. The Court said that 35% were for services and 65% were royalties.

So what, you ask.

Garcia was a resident of Switzerland.

Switzerland has a tax treaty with the U.S.

Which includes the following language:

Royalties derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.”

“Contracting State” is a common term in tax treaties.

Garcia was a resident of Switzerland which in turn was a Contracting State meaning that royalties received by Garcia were taxable only to Switzerland.

That 65% representing royalties was not taxable by the U.S.

You see the power of a treaty.

Central Withholding Agreement

This is a way to negotiate with the IRS to lower the 30% withholding rate for personal services (such as a nonresident athlete or performing artist).

The IRS has a specialized unit for this work, and - not surprisingly - there are fairly strict timelines for request and approval.

State and Local Income Taxes

We are talking about the jock tax.

Most states use some version of “duty days” that we discussed above. California famously counts every practice held at an opponent’s facilities during a game week. The point, of course, is to increase the numerator (that is, the duty days allocated to California).

Certain cities will also pile on, for example:

New York City                 3.8% tax rate

Philadelphia                     3.4% tax rate

Cleveland                         2.5% tax rate

Mind you, this is on top of the state tax.

And tax treaties do not apply to state and local taxes.

Spain

What is Spain’s equivalent to the U.S. tax regime?

Well, the automatic withholding is less: 24% (reduced further to 19% for a resident of another EU country).

The top tax rate will hurt, though. The maximum national rate tops out at 47%, with certain regional authorities increasing it to 54%.

The maximum U.S. tax rate by contrast is 37 percent.

What If The IRS Changes Mailing Addresses?

 

I am looking at case filings in the Tax Court electronic filing system.

Not mine, thankfully.

It reminds me of something.

Tax CPAs (likely) use professional preparation software. Over the years I have used several myself. Recent years have introduced the “suites,” whereby preparation software is bundled with other software (research, time and billing, practice management, yada yada). It makes it almost impossible to change, as one then has to change almost all practice software and also learn a new suite It is a monumental pain.

The preparation software has updates, of course. Sometimes I would see a prior year updating, beggaring the question: why? Why is the 2021 preparation software updating in 2025, for example?

Let talk about Boparai. As I write this, there have been 40 back-and-forth filings with the IRS, with the first one starting last spring (May 27, 2025). Rosie Boparai recently lost a motion, and this case will not go to trial.

Rosie extended her 2019 tax return from April 15, 2020 to October 15, 2020.

Rosie did not file a return, however.

Three years later (on July 17, 2023) she appeared in person at the Sacramento Taxpayer Assistance Center and attempted to hand-deliver her 2019 tax return. The TAC employees refused to accept her return, however, because she had not made an appointment.

COMMENT: I have a serious problem here. I can see if someone has a tax issue that needs research and investigation, but Rosie was just dropping off a paper return. Someone could have stamped it received and put it into the processing pipe. Is it unconventional? Yes, but so what? A taxpayer tried to comply.

Facing failure at the TAC, Rosie put the return in the mail. The return showed a refund, but she included a check for $10,000. Rosie was figuring that – sending money and simultaneously requesting a refund – someone would pay attention to her return.

NOTE: Consider the calendar here. The return was due April 15, 2020. It was extended until October 15, 2020. She put it in the mail July 17, 2023. As long as that extension was valid, Rosie is within the three-year statute of limitations for her 2019 refund.

Rosie mailed that return to San Francisco.

An average person would say she filed. A bit late, yes, but still within the rules.

Problem: the IRS closed its Fresno and San Francisco mailing addresses by the end of 2021. 

This would not have been a problem had she filed her 2019 return on time. 

The post office marked the envelope as undeliverable. Rosie asserted she never received the returned mail.

The IRS issued a NOD in February 2025.

Rosie filed a petition in Tax Court.

She also filed (or refiled, possibly) her 2019 return in May 2025.

The IRS agreed that Rosie did not owe money. The IRS however had no intention of refunding her 2019 overpayment. You know why: the return was filed outside the three-year statute of limitations.

Rosie was in Tax Court fighting to have her July 17, 2023 TAC visit/mailing to San Francisco count as filing her return.

Here is Reg 301.7502-1(c)(1):

That “properly addressed to the agency, officer, or office” language was brutal to Rosie.

A return filed in 2023 (yes, that would include a 2019 return filed in 2023) should have gone to Ogden, Utah or Cincinnati, Ohio.

Not San Francisco.

The return was not “properly addressed.”

July 17, 2023 did not count.

Which meant that Rosie had not filed her return within the three-year window. There would be no refund.

My thoughts?

The Court was right.

A lot of tax is procedural: correct form, correct date, address and so on. Rosie missed a step.

I also see Rosie being denied at the TAC as IRS negligence, impeding her attempt to comply and causing her irreparable harm.

My argument is one of equity. The Tax Court is not a court of equity, however; it is a court of law. A court of equity can … bend … the law a smidge to get to fairness. The Tax Court does not have this wiggle room. It has to follow the rules.

I expect cases like this to go away with electronic filing. Oh, I suppose there might be the oddball case here or there where the software glitches, but that should be rare.

And there is a reason why I see my preparation software updating several years after the fact.

Today we looked at the DAWSON filings for Boparai v Commissioner, Docket No. 7789-25.