Dr. Siegfried Friedrich talks to lawyer and tax consultant Oliver Hubertus, partner at Baker Tilly and expert in legal and tax arrangements and structuring in professional sports.
Dr. Siegfried Friedrich: Being aware that a professional club has financial requirements in very different areas within the soccer group, the question arises as to how free you are in terms of individual structuring from a legal and tax perspective.
Oliver, I once learned that a non-profit association is not allowed to sell assets and use the inflow of funds freely without further ado. What needs to be considered when structuring investor commitments?
Oliver Hubertus: You are addressing one of the most complex issues in the area of non-profit status. In addition to a return on investment, investors are interested in obtaining a minimum level of co-determination rights; both elements are rather obstructive with regard to the non-profit status, but ultimately do not rule out an investment. Therefore, the standard practice of around 50% of professional clubs is to spin off part of the club’s assets into a commercial “soccer company” (Spielbetriebsgesellschaft), followed by the investor’s participation in such company. If the non-profit status were to be revoked, this would have severe consequences for the club: no tax exemption, no donation receipts, considerable tax payments and an unpleasant discussion with the associations about the potential effects of “licensing”.
Dr. Friedrich: Does this mean that investor commitments always require a spin-off?
Hubertus: It is the rule, but ultimately not without an alternative. For all clubs that do not spin off for a variety of reasons, an investment through hybrid participations, such as profit participation rights, could also be implemented directly in the “professional soccer division” as an alternative. This form of investment is certainly more complex to implement from a legal and tax perspective for both parties involved, but is still an option.
Dr. Friedrich: If clubs decide to spin off, is there only the option of selling shares?
Hubertus: There is considerable scope here: the club can structure the spin-off in such a way that the investor already has a stake in the absorbing company. In this case, no further sale of shares is required. However, it is also possible for the club to first acquire all shares itself as part of the spin-off and then sell shares in the soccer company to the investor. Finally, instead of a sale of shares, a capital increase can also take place subsequently or together with the spin-off, i.e., the investor does not receive any shares in the soccer company from the club, but is granted new shares in the soccer company in the course of a capital increase.
Dr. Friedrich: Is there a “silver bullet” when it comes to these investment options?
Hubertus: No; you must always assess the specific individual case and weigh up the interests of the association and investor in order to determine which option is the “best case”, in particular for company and tax law purposes, but also from a financing perspective.
Dr. Friedrich: Can you explain this in more detail using an example?
Hubertus: Let’s assume that the club has to expect a loss in the current financial year due to a not entirely successful past season and excessive personnel costs in the commercial business operation “professional soccer division”. However, due to the high level of interest shown by investors in the “product” of professional soccer, the “professional soccer division” has a high enterprise value. The club now wants to spin off without paying taxes, but with the desire to have investors participate in the soccer company immediately after the spin-off.
Dr. Friedrich: In this case, the club spins off and then sells shares to the investor?
Hubertus: Yes, they could do that, but they have to pay very close attention to the tax aspects in order to not generate avoidable tax payments.
Dr. Friedrich: What do you suggest?
Hubertus: Due to the losses incurred in the “professional soccer division”, the club should not spin off at the tax book value, but at interim values in order to use the losses incurred in the past season at its own level without affecting its non-profit status. At the same time, it shifts tax depreciation volume to the company and can thus reduce such company’s tax ratio in subsequent years. Irrespective of the tax approach, the club has very broad scope under commercial law. It can use the spin-off to build up equity up to the market value of the spun-off assets or simply continue the book values. In order to maintain tax neutrality for the investor’s participation, no shares in the company are sold to the investor, which would be detrimental for tax purposes; rather, the company increases its capital, and the investor participates in the company by making a cash contribution. The club, for its part, dilutes its stake in the soccer company: this means that we would achieve our objectives in full; no taxes are generated, the non-profit status is maintained, “losses” are transferred from the club to the company in a tax-optimized manner through the interim value approach and the company has liquid funds available as a result of the cash capital increase.
Dr. Friedrich: The implementation of an investment and the preceding structuring is basically no different from other sectors; are there any special features under associations law, such as the “50+1” regulation, that could deter investors?
Hubertus: So far, I have not seen any “deterrent effect” from associations law. I am rather pragmatic and see it as completely value-neutral. The associations law must be taken into account in the case of spin-offs and participations by investors.
Dr. Friedrich: But what does that mean in concrete terms? How many shares can be transferred to an investor, for example, if the 50+1 rule has to be observed?
Hubertus: “Translated”, “50+1” means that a club that is the parent company of a “professional soccer company” must have a majority shareholding in this company. Majority means the majority of votes, but not the majority of capital. In this respect, the club could transfer 99.99 % of the capital share to the investor in the case of a soccer company in the legal form of a GmbH or 74.99 % in the case of an AG, but must retain 50+1 votes. In the case of a KGaA, the club could even transfer 100 % of the capital shares including votes – as long as it is the sole shareholder of the KGaA’s general partner, which in turn manages the business of the company and represents it externally. As long as the 50+1 rule must be observed, an investor must accept that the club can outvote him.
Dr. Friedrich: Are such shareholdings the rule?
Hubertus: It depends on the situation; for example, the German soccer club “TSG 1899 Hoffenheim” only held around 5.1 % of the capital after the professional soccer department’s relocation (probably) for real estate transfer tax reasons. Other clubs, such as FC Bayern Munich, still hold a blocking minority of 75 % in the soccer company. The club or soccer company can generally only generate a cash inflow from the shares once; therefore, any consideration of opening up to investors should also take into account whether the shares are only transferred once and are then used up for the club in terms of a liquidity inflow.
Dr. Friedrich: And what aspects do we need to keep in mind with regard to Financial Fair Play?
Hubertus: The break-even rule is certainly very important in this context. This rule prohibits clubs and soccer companies from spending more than the generated income, subject to certain parameters. What is to be understood as relevant income and expenditure is defined in the FFP regulations, which are based on IFRS standards. If an investment is made in a soccer company, the investor becomes a “related party” in relation to all business relationships the investor otherwise maintains with the soccer company in addition to its share. Investors are often not only interested in holding a share in the soccer company, but also have other contractual relationships, such as sponsorship agreements. Due to the investor’s “close relationship” with the soccer company after the investment, income resulting from such contractual relationships can no longer be included in the break-even analysis without further ado; it must now always be proven that the agreed remuneration is “appropriate”. If this proof cannot be provided or can only be provided in part, such (pro rata) income is excluded from the break-even analysis to the detriment of the soccer company.
Dr. Friedrich: Thank you Oliver, I’ll summarize your words as follows: Many structures are possible for an individually suitable solution, but it is not entirely without risk from a legal and tax perspective!
(Manuscript. The spoken word prevails.)
SpoBis - SPONSORS Business Summit, Düsseldorf, February 9-10, 2015
Forum “Investors in soccer” Feb. 9, 1 p.m.
“The participation of investors in soccer clubs - a calculable investment decision?”, Dr. Siegfried Friedrich, Partner Baker Tilly
