LUXEMBOURG (CN) — The European Court of Justice gave a red card to a Spanish tax scheme for professional soccer clubs on Thursday, overturning a lower court ruling that allowed four clubs, including Fútbol Club Barcelona, to pay a lower tax rate.
The European Union’s high court found that the tax scheme “introduced a differentiation in the professional sports sector, by refusing professional football clubs in general the possibility of operating as a non-profit entity, while reserving that possibility, and the tax regime associated with it, to the four football clubs eligible for that derogation.”
“By limiting the resulting advantageous tax treatment to certain professional football clubs only, it is such as to affect the ability of the Kingdom of Spain to rely on the compatibility of the aid scheme at issue with the objective of promoting sport…as an objective of common interest,” the ruling states.
In 2016, the European Commission, the EU’s executive body, called foul over a 1990 Spanish law that allowed profitable soccer clubs to pay a reduced income tax rate and ordered the country to collect back the unpaid taxes.
Together with Athletic Club, Real Madrid, and CA Osasuna, F.C. Barcelona attempted to block the move and brought a complaint to the European General Court the same year.
The soccer clubs won when the lower court sided with Spain in 2019, citing the “specific nature” of the sector and finding that the commission hadn’t demonstrated the tax reduction qualified as state aid. Under competition regulations in the 27-member political and economic union, national governments cannot give financial advantage, or state aid, to private companies. The rule is meant to ensure an equal playing field across the internal market.
The commission, however, appealed and passed the ball to the Court of Justice, arguing it wasn’t required to examine the tax liability of other clubs with a different tax status.
In an effort to weed out corruption in soccer clubs, Spain passed a law in 1990 that reclassified professional football clubs as sports public limited companies. But an exception was made for “clubs that had achieved a positive result for the tax years preceding the adoption of the law,” namely F.C. Barcelona, Athletic Club, Real Madrid, and CA Osasuna.
A nonbinding opinion by a court magistrate last year concluded that this special tax regime “is likely to place its beneficiaries in a more favorable financial position than that of the other relevant taxpayers.”
Spain’s argument that the other clubs were allowed a higher tax deduction to reinvest extraordinary profits, which applies when players are transferred from one team to another, scored no points with the Court of Justice’s five-judge panel.
“After all, it is precisely at the stage of any recovery of the aid granted on the basis of that aid scheme that the Commission must take those effects into account, where it is necessary to determine the exact amount of aid which the beneficiary has actually obtained,” the Fifth Chamber wrote.
It is now up to Spain to determine how much each club owes in back taxes. The commission estimated it could be as high as 5 million euros ($6 million) per club.
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