Much Ado About Nothing – Mourinho, Ronaldo and the BVI

Ferencvaros vs. Chelsea stadium opening football matchAs a long suffering Liverpool supporter, I can absolutely assure you that I have literally no interest or desire to defend Jose Mourinho or Christian Ronaldo. In fact, I am actually hardwired to positively enjoy any misfortune they may suffer, such is the slightly callous nature of being a football fan.

However, when they recently both appeared on the front pages of various British journalistic publications (rather than adopting their rather comfortable position on the back page about their latest sulk), linked with entities based in my home of the British Virgin Islands, I felt duty bound to comment. Because, once again, some of the rhetoric being used to describe their personal (and frankly, private) tax affairs was in some parts inaccurate and in others categorically misleading to the reader.

Whatever your feelings might be towards both of these individuals, what they have actually done is not only set up a very legitimate intellectual property holding company, but also one that has been blessed by the HMRC (the tax authority in the UK) on many occasions. Let me explain.

Intellectual property (“IP”) is not something that is unique to sports people, it is frankly in every facet of the modern world and for example can very regularly be seen as the most valuable part of any business. A recent analysis of S&P 500 companies showed that IP accounted for an average of over 80 per cent of company value. Whether the IP consists of manufacturing patents, marketing trademarks, corporate know-how, analytic formulas, or web source code, there are a number of significant issues to consider on an ongoing basis, one of which for multinational corporations includes how they best leverage their IP globally to ensure it is utilized to meet the demands of international growth. These types of entities operating in multiple jurisdictions always have some incredibly complex tax structuring to consider and there is certainly not a single, perfect answer for everyone, it depends on a wide number of factors. However, one relatively common route that a number of corporations take is to transfer all (or some) of their IP to an offshore vehicle.

Now it might actually be in the best interests of the company to leave some (or all) of the IP in the jurisdiction of their domestic headquarters. But there are various reasons for setting up offshore IP companies, including, for example, risk insulation; companies often strive to separate risk-bearing activities legally from other operations. In addition, and this may specifically be important for licensing operations, if risk-bearing activities involve the use of valuable assets (such as patents), companies may want to separate ownership of these assets from the operations for which these assets are used. Such separation can be established by using a separate company for the ownership of the asset. The assets can then be licensed to the group company using the asset in its commercial operations (or directly to external customers).

Clearly there are also fiscal reasons for using an offshore vehicle in a low tax jurisdiction, but it is also because the corporate legislation in a country like the British Virgin Islands is exceptionally modern, which meets the challenges of international business with a robust and flexible regime that allows for a significant number of different products, all of which are governed by English legal principles.

Now, individuals who have generated intellectual property in themselves are no different and sports people are clearly some of the most recognised names and faces on this planet currently. The right of publicity, often called personality rights, is the right of an individual to control the commercial use of his or her name, image, likeness, or other unequivocal aspects of one’s identity. It is generally considered a property right as opposed to a personal right, and as such, the validity of the right of publicity can survive the death of the individual (to varying degrees depending on the jurisdiction). This is how and why the estate of a deceased music artist continues to benefit from the almost certain boost in album sales immediately after they pass away.

Whilst the rules of the sport have largely stayed the same over the last 100 years, football has changed so radically over the last 50 years that it is barely recognisable off the field any more. Gone are the days of players drinking beer at half-time and working part-time jobs on the side. Clubs in the Premier League alone generate around US$4 billion every year, which makes it a truly enormous industry and as commercial drivers push football into the entertainment and brand space, clubs are looking for a variety of ways to ‘monetise’ and grow their revenue base. The simple “jumpers for goalposts” sport we knew and loved has disappeared.

One of the fundamental parts of this is that clubs are entering into a multitude of commercial partnerships whereby brands want to be associated with clubs and their high-profile players. This may include obvious items like sports drinks, but also some slightly stranger items such as cars, watches and underpants. Some Premier League clubs have in excess of 70 commercial partners, all seeking the right to use the image of high-profile players in their advertising.

A football player’s image can include a player’s name, nicknames, likeness, image, photograph, signature, autograph, initials, statements, endorsement, physical details, voice and other personal characteristics. So a club will be paying a high profile player to endorse and promote a number of these specific commercial deals. And just to be clear for those non-footie fans out there, the two people being listed here are probably the most famous footballer in the world right now and arguably the most famous coach. They are as high profile as it comes and can absolutely genuinely and very credibly state that they have a huge amount of intellectual property in their own “brands”.

Now whilst there have been a few challenges to the outer borders of the concept throughout the years, the HMRC itself recognises that image rights contracts, if properly used, are legitimate ways to structure payments to players in return for endorsing particular products and services. Clubs continue to understand that their star players are marketable assets off the field too.

Clubs therefore use standard IP structures that are very well known in the industry and ensure that the HMRC is kept fully briefed of precisely how the arrangements with new players they acquire are put together. The questions the HMRC will continue to ask may include the total percentage of the player’s overall package that is paid to the player’s image rights company and how the club is using those rights accordingly. The days of over 20% of a player’s total package being provided by way of image rights payments by clubs to players is long gone in all but exceptional circumstances.

So long as clubs can reasonably justify image rights payments to its players through commercial opportunities, which are likely to be closer to 20 per cent of the players total playing contract, more image rights deals will continue to be entered into, benefiting both clubs and players alike.

And it has to be kept in mind that these licensing deals are on an overwhelmingly vast and global basis. Hence, the IP company has to be based in a jurisdiction that is universally well known and well regarded to ensure that the contractual relationships run smoothly and without delay. No one would want a factory in Kuala Lumpur to not be able to send out their Ronaldo Y-Fronts on time. And, without wanting to labour a very obvious point, the IP property holding company merely acts to neutralise tax on the relevant IP at that level, it does not remove any tax that is payable upon the transfer of the IP out of the jurisdiction in which it was created and into the offshore vehicle and nor does it remove any tax that the player would have to pay in their jurisdiction of their tax residency if a distribution of the monies collected is made to them in any form.

So coming back to the articles written last week. Two guys set up very lawful and legitimate structures that have been fully declared and indeed blessed by the tax authority in the UK and have acted entirely appropriately and correctly throughout their course of dealings. Millions of these types of structures exist across the globe in a very transparent manner.

If we were going to highlight anything from this news item, it is really just that it demonstrates once again that the corporate vehicle of the British Virgin Islands, and other offshore jurisdictions like it, truly act as part of the vital plumbing to the world’s financial infrastructure.

Now, can I get back to booing them both please?

Philip Graham
Philip is a partner and expert on offshore funds at Harneys who puts his ever increasing grey hairs down to three young children, supporting Liverpool Football Club, and being married. In no particular order.

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