Throughout the last few decades, it has become increasingly common for foreign athletes to pursue a career in U.S. professional sports. Lionel Messi, arguably one of the greatest soccer players on the planet, sent shockwaves throughout the sport after announcing he may soon be transitioning his career into Major League Soccer (MLS). Given the growth of the sports industry, it has become ever so critical for foreign athletes to become educated in regard to the U.S. taxation of their income.

How are foreign athletes taxed?

Foreign athletes who are not U.S. citizens or green card holders will be considered nonresident aliens upon entering the country. Nonresident aliens are subject to tax only on U.S. source income, while resident aliens are subject to U.S. tax on their worldwide income. To establish residency, non-U.S. citizens need to satisfy either the “green card test”, or the substantial presence test, explained later.

An EB-1 visa is available to foreign athletes with extraordinary abilities that are seeking permanent residency. To receive this visa, the athlete must be able to demonstrate “sustained or international acclaim” and that their achievements have been recognized in their field. Other visas that may be available to foreign athletes or staff include B-1, P-1 and O-1.

Substantial Presence Test

• Present in the United States for at least 31 days during the calendar year
• Present in the United States for a total of at least 183 days during the current year and the two preceding calendar years
  • Each day of first preceding year counts as 1/3 of a day, while each day in the second preceding year will count as 1/6

Does this differ depending on the sport?

Depending on the sport, the source of income may be different. For instance, in golf or tennis, athletes will come to the U.S. to participate in tournaments that only last for a short span of time. The money they earn is derived from prizes or awards won in the tournament. Under general regulation for prizes and awards, the source of these payments is determined on the residence status of the payor.

Tax saving strategies for athletes

A foreign athlete may have several options available to reduce their tax exposure. For example, professional golfer Sergio Garcia, a tax resident of Switzerland, signed an endorsement agreement with TaylorMade Adidas Golf that required him to exclusively wear TaylorMade attire and use TaylorMade golf products, in addition to participating in a minimum of 20 golf tournaments a year and perform other personal services.

Under this agreement, Garcia licensed his name, fame, image, and likeness to TaylorMade for use in promotional materials and advertising. The agreement was amended to allocate 85% of the payments from TaylorMade to the license of Garcia’s name, fame, image, and likeliness, and 15% of those payments to his performance of personal services.

Under this agreement, 15% of those payments, if effectively connected to a U.S. trade or business, would be taxed at graduated rates up to 37%, while the other 85% would be taxed at a maximum of 30%. In conclusion, the IRS deemed this allocation to be “improper”, but the U.S. Tax Court ended up deeming a 65/35 ratio appropriate.

Some planning and action in the short term can save you time, frustration, and potentially money. KLR’s International Tax Services team can help you navigate the complex U.S. tax laws and cover international matters to ensure you are claiming all the credits and deductions to which you are entitled.