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17 June 2020

There is no blanket answer to this question. Each case has to be considered individually.

E-sport, i.e. the direct competition between people using suitable video and computer games on different devices and digital platforms under pre-defined rules, is enjoying great popularity right now. Many enthusiasts practice e-sports as a hobby. However, there are also professional players who earn their living with e-sports.
In addition to individual players, clubs that employ e-athletes also take part in sporting competitions from different organisers. The best players in the world can win prize money in the millions. There are also lucrative sponsoring contracts.

1. Single player

1.1 Income Tax

An individual players are considered to be self-employed if

  • they organise their activities freely,
  • they act at their own expense and risk,
  • they have a profit motive,
  • they proceed according to plan and professionally, and
  • the activity is designed to be permanent.

In this case, income from this self-employment is subject to income tax. Consequently, the e-athlete must record their income and expenses, take care of the payment of social security contributions and declare their income in their tax return. If, on the other hand, the practice of e-sports qualifies as a hobby, none of this is necessary.

Whether a "tax-free hobby" exists depends on the circumstances of the individual case. If a profit is expected in the long term, based on the overall circumstances, self-employment can be concluded. If, on the other hand, a loss-making activity is maintained over the years, this is more likely to indicate a hobby. Recognition (or not) as a sport has no influence on this qualification.

1.2 Value added tax

If an e-athlete qualifies as a self-employed person, the next step is to check whether he or she is subject to VAT. Anyone who independently pursues an activity aimed at the sustainable generation of income from services, who appears externally under his own name and generates a turnover of CHF 100,000 in Switzerland and abroad within one year is subject to VAT. If the above-mentioned turnover threshold is not reached, there is still the possibility of voluntarily subjecting oneself to VAT. This is particularly useful if major investments are made at the beginning. In such a case, the input tax incurred on the investments can be reclaimed.

2. Employment relationship with an association

If an e-player enters into an employment relationship with a club, the income earned from that relationship qualifies as income from employment (salary). In this context, gainful employment is characterized by a) work performed for a certain period of time, b) a remuneration is received for the work and c) the subordination of the employee to the instructions of the employer. It is not relevant whether the payment is (partly) performance-related. In this case, the wage must be declared in the tax return. It is also irrelevant whether e-sports are recognized as sports.
The club must deduct social security contributions and tax at source if the player in question does not have a Swiss passport or a C permit for permanent residence but is resident or domiciled in Switzerland for tax purposes.

3. Organizer

a) Tax at source

Tournament organizers in Switzerland must check whether tax at source has to be deducted on payments made to players resident abroad. Although the law only provides for a levy for athletes, it can be assumed that the tax authorities will take the position that e-sportspeople are considered sportspeople for tax purposes and therefore have to be treated equally, although e-sports are not recognised as a sport in Switzerland. However, no decisions have yet been made. On the other hand, social security contributions are typically not owed, as the athletes are not employed by the organizers but are only paid for individual assignments.

b) Value added tax

It is also important for the organizers to know whether their services (tickets, entry fees, etc.) are subject to VAT. According to the strict practice of the Federal Tax Administration, e-sports events do not qualify as sporting or cultural events. Accordingly, both entry and entry fees are subject to VAT and are taxable at the standard rate of 7.7 %. If the organizer offers additional advertising and sponsoring services - which is to be assumed - these are also VAT-liable transactions. If the turnover limit of CHF 100,000 is reached with the services provided, a mandatory VAT liability is established.

4. International Considerations

If e-athletes are subject to unlimited tax liability in Switzerland, they must in principle pay tax in Switzerland on income earned worldwide. This rule applies regardless of whether the income is earned in Switzerland or abroad. However, Switzerland's right of taxation is limited by international tax law. This is because according to Art. 17 para. 1 of the OECD Model Tax Convention (OECD-MA), which applies to both self-employed and employed athletes, internationally active athletes can be taxed in the country in which they perform. All double taxation agreements concluded by Switzerland include the principle of taxation at the place of performance. In accordance with this rule, the income earned abroad by athletes resident in Switzerland is generally (only) taxed in th country in which the performance takes place. Consequently, Switzerland, as the country of residence, will exempt from Swiss taxation the income allocated to the country of performance , subject to progression.

An athlete within the meaning of Art. 17 para. 1 OECD-MA is a person who performs a physical or mental activity under certain rules and in specifically designated forms of organiszion, whereby the term "athlete" is to be interpreted in a broad sense. It can therefore be assumed that an e-athlete is also covered by the definition of an athlete in Art. 17 para. 1 OECD-MA. Furthermore, Art. 17 para. 1 OECD-MA is only applicable if the income is directly related to a personally exercised activity in the public domain.

Prize money paid by the organizers is directly related to the athlete's sporting activity and constitutes performance-related income attributable to Art. 17 OECD-MA. The same applies to entry fees or premiums paid to well-known athletes for participation in the event. Victory premiums or premiums for a specific ranking are also performance-related and are accordingly subject to Art. 17 OECD-MA. In the case of sponsorship income, it is necessary to examine more closely which services are provided, and dependant on that whether the service is taxable in the country of performance or residence.

5. Conclusion

E-Athletes must consider on a case-by-case basis if and how they will have to pay tax on their income from competitions. In addition, it is recommended that receipts of income and expenditure be kept so that evidence is available in case of a dispute with the tax authorities.

Clubs employing e-athletes must fulfil their social security contribution obligations and check on a case-by-case basis whether they have to deduct tax at source..

Finally, Swiss organizers of e-sports competitions must ensure that they comply with their obligations to withhold tax at souce if any of the athletes participating in competitions in Switzerland have their residency abroad, as they are jointly and severally liable for the tax.

Organizers should also pay careful attention to the topic of value added tax.

In any case, the equation 'no recognition as sport = no taxes' does not apply..

The tax and social security team will be happy to answer any questions or provide further information.

Authors: Nadia Tarolli, Veysel Oruclar

Topics: Taxe-sportsVAT liabilityInternational taxation of athletes

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