Foul play by illegal state aid?

A sword of Damocles: Public financing of professional sports

By Guido Kleve

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The European Commission has recently investigated state-aid procedures concerning seven Spanish and five Dutch football clubs. The most prominent cases concern Real Madrid, FC Barcelona, PSV Eindhoven and FC Valencia. This heralds the advent of highly political state-aid procedures that extend far beyond just the world of football. Financial benefits or any privileges extended to professional sports organizations could be classified as illegal state aid and, as a result, could prove to pose a material risk to sports clubs. For this reason, stakeholders need to thoroughly review the implications of state aid, as it has become quite an effective instrument of European competition law. Maintaining a level playing field is not only guaranteed and supervised by internal sports competition rules but also highly influenced by European law.

Tax benefits as illegal state aid?

All the clubs mentioned have allegedly profited from a range of state benefits. Four Spanish clubs were, for instance, granted tax privileges in connection with corporate taxes (EU Commission Decision 2016/2391). The clubs concerned were in fact classified as nonprofit organizations by the respective authorities. This classification resulted in a lower tax burden on profits compared with other clubs in Spain, which had to become limited companies. In terms of nonprofit organizations having less access to the capital markets, the inability to sell shares on these capital markets, for instance, does not justify different treatment of the taxable profits for certain football clubs. Once again, the European Commission had found that tax rulings may breach EU state-aid rules because a lower tax rate leads to lower revenues for the state and, therefore, constitutes an advantage derived from state resources. In this regard, these cases are reminiscent of the Commission’s high-profile procedures concerning potential tax benefits in the billions for international companies (e.g. the alleged aid to Apple, SA.38373).

There is a good reason to draw a parallel with transnational companies. The Commission considers professional football to be an economic activity. This is due to the high revenues it generates in various economic sectors, such as advertising, the selling of television rights and player transfers. The sources of revenue are linked to the teams’ performance in competitions like the UEFA Champions League, and the success of a team depends in turn very much on expenditures made on players and coaches. This creates competition among the clubs that could be distorted by state aid. This view is similar to the UEFA Financial Fair Play approach illustrated by the joint statement of UEFA and the European Commission that the FFP rules are “consistent with the aims and objectives of European Union policy in the field of state aid” (European Commission, paragraph seven of a joint statement issued on March 21, 2012). Both approaches are aimed at fair competition between financially independent football clubs. The four Spanish clubs were obliged to repay amounts totaling tens of millions of euros. Even if the actions brought by the Spanish clubs against the Commission’s decisions are still current and have to be carefully analyzed, they already reflect that the Commission is serious about this matter and shows the yellow card to the public financing of professional football clubs. Spain has already adjusted its legislation on corporate taxation to end the discriminatory treatment. This again shows the political effect of European state-aid rules and their enforcement by the Commission. Sports clubs can no longer rely on the goodwill of the municipalities and must instead look to realistic financing for projects. Although state-aid law has barely played any role in professional sports up to now, it has become clear that Member States (and their authorities) may not bestow any economic advantages in this field either. According to Article 107 of the Treaty on the Functioning of the European Union (TFEU), state aid in any form whatsoever is incompatible with the internal market if competition may be distorted by favoring certain undertakings. Such measures must be subject to (prior) approval by the Commission. Without such approval for measures involving state aid, these measures can be rendered null and void.

State-aid law is a very popular and effective instrument for protecting fair competition, including for competitors. The Commission’s numerous investigation procedures in recent years have impressively demonstrated this. Not only traditional areas such as subsidies for establishing businesses and state funding of infrastructure projects like seaports and airports are affected. The Commission does not overlook any sector in its investigations. Even the fiscal sovereignty of Member States has now become the focus of the Commission.

Interdisciplinary competition before the European courts

The current approach may certainly pose an economic threat to government-favored professional sports clubs, and the risk is not limited to football. Other professional sports such as handball, basketball, ice hockey, motor sports or golf may also become the focus of state-aid law. Clubs, shareholders and other stakeholders must ask themselves where they could have received obvious or concealed grants from public authorities.

Various professional sports can also be involved in interdisciplinary competition with regard to state aid. For example, Spanish basketball teams have recently appealed the European Commission’s decision on reduced tax rates to support football clubs (Case T-845/16 QG vs. Commission). They generally agree with the European Commission’s decision on the issue of tax privileges in favor of four Spanish football clubs, but they are concerned about the possibility of consolidating the accounts of clubs that participate in more than sport. Only clubs that were able to participate in professional competitions in different sports were permitted to consolidate their accounts with respect to football and basketball. The receipts from football are, therefore, reduced by the losses from basketball, which leads to a reduced corporate tax burden. In the opinion of the appealing basketball clubs, this also constitutes an unfair advantage. The European courts will have to consider this effect, too.

The different types of state aid

State-aid law goes far beyond typical and formal subsidies under national law. It may concern any kind of contractual service or exchange agreement with public authorities. With regard to professional sports clubs, this could entail tax benefits, advantageous property purchase agreements, stadium financing or rent, the use of municipal real estate or public resources, or direct grants. In the case of three Spanish football clubs from Valencia, the Commission investigated guarantees made by the state-owned Valencia Institute of Finance (IVF). The Commission decided that the clubs should pay back the advantage they received in order to restore a level playing field with nonsubsidized clubs (EU Commission Decision 2017/365). All three clubs have appealed this decision.

As a result, the Damoclean state-aid law hangs over all such measures. The considerable popularity of sports does not, in this respect, protect against European competition law. The measures taken to promote fairness among the clubs are now joined by the efforts of the Commission as a further guard to ensure economic protection against distortions of competition.

What clubs and investors must be aware of now

Professional sports clubs and operators must thoroughly review their contractual relationship with public authorities, bearing in mind the background of European state-aid law. The risk of an aid procedure is high in the case of non-notified support for a sports club, since such proceedings can also be triggered by complaints from competitors, politicians and even individual citizens (supporters). Granting unlawful aid has crucial consequences, as underlying contracts can be rendered null and void. Not all engagements of a public authority could be seen as a fundamental win for the sport. State-aid law is competition law and the Commission is about to ensure that authorities do not distort competition by selectively favoring one market participant over another. A level playing field is crucial for clubs that have to operate without subsidies, therefore state-aid law could also be seen as a tool for competitors or third parties to prevent an authority’s engagement in sports. At the end of the day, a sports infrastructure financed with unlawful state aid is built on a fragile foundation.

guido.kleve@dlapiper.com