Tax break for German nightclubs
Live performances by house and techno DJs have been officially recognised as ‘concerts’ by Germany’s Federal Fiscal Court, slashing the tax paid on live electronic music events to 7%.
Tickets for club nights were formerly levied at 19%, but are now eligible for the lower rate of sales tax after being redefined as “concert-like” events by the Bundesfinanzhof (BFH).
In a judgment dated 23 July, but published in late October, the BFH affirms that “the performance of techno and house music by various DJs give[s] an event the character of a concert, or a concert-like, event even if the music performances take place regularly (weekly),” according to Berlin-based legal firm Härting.
The majority of dance music shows were formerly recognised as ‘party’, rather than cultural, events.
“Most clubs should be able to benefit from the application of the lower tax rate”
The reclassification for clubs throughout Germany follows a similar move specifically for Berlin’s Berghain in 2016, which was recognised as organising culture events and so eligible for the 7% rate of tax.
For nightclubs to benefit from the new tax rules, DJ performances must be the main purpose of the event (as opposed to dancing, partying and drinks sales), according to Härting.
“Even if these requirements have to be checked on a case-by-case basis, most clubs should be able to benefit from the application of the lower tax rate,” the firm says.
All venues and bars in Germany are currently closed under a nationwide lockdown set to run until the end of November.
Going live on the right side of the law
The Covid-19 pandemic has caused the cancellation or postponement of the majority of concerts and live events, leading to an unprecedented crisis in the events and live music industry. In fact, although the streaming of music through dedicated platforms and apps has boosted the music industry in recent years, a great deal of an artist’s revenue still comes from live performances.
However, even during the months of lockdown, music did not stop, as the absence of live music events has stimulated artists and fans to reinvent the live concert experience by creating and supporting new platforms to discover, listen and share music while social distancing. The music industry has thus recently embraced new ways to encourage fan engagement by introducing the public to what could take the stage as the new normal for live events for a while: remote concerts and tours.
In this scenario, new legal challenges arise. Some of the most relevant issues concern the copyright protection of the works involved in streamed concerts, as well as the arrangement of the relevant compensations.
Firstly, the artist’s right to perform their copyrighted work in front of a public (whether in person or remotely) stands as one of the exclusive rights that a copyright owner is entitled to, along with the right to reproduce and distribute their work. But what if the concert is played by different artists, each from a different location and playing their own part and then synchronised to the moving images of each player or to different images? This is what happened, for instance, in the #Italiasuona flashmob recently organised by Filarmonica della Scala. The outcome of the performance will likely be considered a new audio-visual derivative work including a new live execution.
Thus, those who wish to share these kind of works with the public must check whether their new or existing agreements cover all the new normal rights (eg right of performance, right to communicate to the public through online means new executions of the same work, synchronisation rights over the concerned work). Not to mention the authorisation to use the image rights of each performer and share the content by each performer to maximise the audience.
The most important concern is making sure the livestreaming platforms involved only use authorised content
Further, such rights might run the risk of being infringed: the most important concern will be to make sure the livestreaming platforms involved only use authorised content in each online event. In this regard, some online music platforms and social networks have already been provided with algorithms which are able to automatically detect copyrighted music. Further, making the same performances of an artist available on demand, and thus on a continuous basis, would also involve the need to establish licences from right-holders, as well as licences related to synchronisation, in case videos are involved during the streamed events.
The compensation of artists and staff operating in the live industry is another crucial point of change for the future, which also needs to be taken into account in agreements. In this regard, although a different experience from the usual live concert atmosphere could justify a lower price for each single ticket sold, the online-based approach of such events will undoubtedly profit from a much wider and more diverse reach.
In this new era, the compensation of artists and staff has to be scrutinised under a different – and more digital – tax approach.
In principle, the OECD Model Tax Convention emphasises the need to assess the existence of a close connection between the income and the performance. Such a connection will generally be found to exist where it cannot be reasonably considered that the income would have been derived in the absence of a performance of these activities. The right to receive a remuneration for musicians and artists is strictly connected to their exhibitions.
These issues are high on the agenda of international music managers and artists, as well as tax professionals and authorities.
In this new era, the compensation of artists and staff has to be scrutinised under a different, more digital, tax approach
A recent case involved the analysis of tax treatment of income received by two musicians (tax residents of Germany and Switzerland) engaged by an Italian foundation to perform at two concerts outside of Italy.
According to the agreement concluded between the foundation and the international artists, though remuneration was due in connection with the participation in the concerts outside of Italy, all preparatory activities, such as concert rehearsals, had to be carried in Italy and no specific remuneration – nor a reimbursement of the expenses – was due.
The Italian tax authorities’ view can be summarised as follows: the income paid to the musicians is treated as income from artistic performance carried out entirely outside the Italian territory, regardless of the days present in Italy for concert rehearsals. Therefore, such income is not subject to Italian taxation in the hands of the non-resident musicians. As a matter of fact, concert rehearsals carried out in Italy should not be treated as separate activities from the concert (they are an essential part of it). The conclusion appears consistent with the clarifications provided in the OECD commentary on article 17 of the aforementioned model.
What about the legal and tax issues of compensation deriving from the streaming platforms? These issues might need to be explored more in detail, in light of the new key role of the digital tools for the live industry, especially in the case of concerts involving renowned international artists. Possible means to be considered to assess compensation include earnings calculators, which are unofficial tools already used by influencers, providing earning potential guidelines by taking into account the number of interactions, followers and reach of the shared content.
Antonio Longo and Elena Varese are lawyers in the Milan office of DLA Piper, a global legal firm. This article originally appeared on the DLA Piper website.
This article forms part of IQ’s Covid-19 resource centre – a knowledge hub of essential guidance and updating resources for uncertain times.
Professional esports is taxing
Esports are taking off in Latin America, with the recent creation of national leagues in Chile, Peru, Argentina, Mexico and Colombia. Rapid growth has also seen TV Azteca, a Mexican TV channel, acquire a sports production company with the aim of launching a 24 hour esports channel.
As ever with new technologies, regulation must work hard to keep up with developments. How are tax regimes dealing with the new business models and income streams generated by the boom in esports? We take a look at the tax rules for esports players and industry participants in Colombia, Chile, Mexico and Peru.
Chile has established itself as one of the key LatAm hubs for the industry
The esports community is becoming increasingly important in Chile as the country establishes itself as one of the key LatAm hubs for the industry. Riot Games recently announced that the Latin America North and South Leagues will merge to form the new Latin American League, based in Santiago de Chile, which will also be the host city for the League of Legends Latin America final.
Professional gamers are profiting from new forms of compensation, including gifts, sponsorship and money earned through publicity on YouTube channels. Some have achieved ‘influencer’ status on streaming channels and are attracting attention from companies keen to exploit lucrative marketing opportunities.
The Chilean Tax Administration has taken steps to address the related tax implications. It is focusing its efforts on the digital economy, and has recently launched the Tax Compliance Plan 2019. This centres on tax avoidance business models such as base erosion and profit shifting, with the aim of creating a level playing field for all participants.
Chile’s Tax Administration also announced that income earned by influencers (which includes professional gamers) will be taxed according to general taxation rules (ie a progressive tax rate up to 35%). Failure to comply may lead to an audit and possible monetary fines.
Currently, there is a digital economy tax bill under discussion in the Chilean Congress, but it remains to be seen if this will extend to cover all aspects of the digital economy, including esports.
Colombia’s esports ecosystem is thriving
Colombia’s esports ecosystem is thriving. Last year saw the introduction of the Professional Videogame League’s ‘Golden League’ into Colombia. More and more professional gamers are now looking to Bogotá, which was recently chosen as the headquarters for the Movistar Latin American League of Legends competition, organised by Telefónica and Riot Games.
Despite this, the Sports Leadership and Positioning Organisation in Colombia does not recognise esports as a “sport”. Because most players have an employment contract or some other contractual obligation to provide their services, its players are not treated differently for tax purposes. Unlike in other jurisdictions, the Colombian Tax Authority has yet to issue any regulation differentiating professional gamer income, including sponsorship money, from more conventional earnings.
Taxation rules are the same for players as for any other citizen paying income tax, and if the professional gamer earns additional income through tournament victories, those earnings are subject to prize taxation rules.
There is no fiscal category for esports under existing tax legislation
Mexico’s esports sector has huge potential. Earlier this year, the Mexican Federation of Esports was formally recognised as a sports federation by Mexico’s sports regulator, giving esports official, legal status as a “sport”.
In November 2019, Mexico City will host the first Central America and Caribbean Esports Championship, with the participation of the PanAmerican Esports Confederation and the World Esport Consortium. It will be the first esports tournament in the region to offer sports medals to the winners.
In Mexico, players are typically paid by their teams under a “provision of services contract”, with the players either issuing invoices to their teams or hired as an employee and paid a salary. In both scenarios, players are subject to income tax at the normal rate of 36%, with players responsible for their own tax filings if paid under a services contract.
The age of the player can impact the approach taken. Players under 16 years old face challenges registering with the Mexican Tax Administration, and players aged 16–18 may currently only register under salary schemes.
There is no fiscal category for esports under existing tax legislation. As a result, teams currently prefer services contracts, easing the administrative burden of their tax filings. All stakeholders must match their activities and revenue streams to the most appropriate existing tax code – whether for income derived from marketing, sponsorship or prize money – in order to ensure proper compliance.
Esports is still not considered to be a sport in Peru
The 2017 creation of the Peruvian Association of Electronic Sports and Videogames (APDEV), which promotes the professionalisation of esports, was a significant step for Peru’s esports sector. Companies such as Claro and Riot Games have launched esports tournaments, allowing different brands to be directly involved in the Peruvian esports ecosystem. Nevertheless, esports is still not considered to be a sport in Peru.
Currently, gamers are mostly hired under provision of services agreements for esports competitions. Their income generally consists of payments for their services as professional gamers, prizes divided between all team members, or payment of their travel and accommodation expenses. Players may also receive income as streaming casters, influencers or through event appearance fees.
As players are not currently subject to specific tax regulations, their services do not have a specific tax category. Payments and prizes earned through their participation in competitions may therefore qualify as independent personal services income with a withholding tax rate of 8%. Tax collected may be considered by the taxpayers as part of their annual work income tax, which is subject to progressive rates from 8% to 30%.
In 2017, the Peruvian Tax Court issued a decision which categorised income obtained through sale of advertising space on a blogger’s website as third category income, with a withholding rate of 29.5%. If a professional gamer wants to sell advertising space as the owner of a website, any income obtained from that source (e.g. sponsorship, influencers) may be similarly considered as third category income, but there have been no test cases as yet.
With the popularity of esports growing at a significant pace in Latin America, legislators face the difficult task of ensuring that regulations are suitable for such an important and lucrative market. Stakeholders can expect to see the authorities working together with key esports organisations to make the new rules appropriate for all.
The nine authors of this article are lawyers at CMS Latin America, and include Cecilia Del Pilar Kahn and Cesar Davila, associates at CMS Grau in Peru, and Diego Rodríguez, partner at CMS Carey & Allende. It originally appeared on the CMS website.
Outdoor entertainment tax threatens Glasgow festivals
Geoff Ellis, chief executive of Scottish promoter DF Concerts, has warned Glasgow City Council that he may move flagship Glasgow event Trnsmt festival (50,000-cap.) out of the city, if a new tax on outdoor entertainment comes into force.
Council leaders voted to introduce a new concert ticket tax to raise money for the council’s budget and balance the toll taken by big events on the city’s parks. The levy would result in an additional charge of £2.50 to each ticket.
The council says that the tax would raise £650,000 a year from events such as Trnsmt, which debuted in 2017 and takes place on the weekend formerly occupied by T in the Park, Glasgow Summer Sessions (35,000-cap.) and Kelvingrove Summer Nights (2,500-cap.), with £150,000 dedicated to the upkeep of the city’s green spaces.
Ellis of DF Concerts calls the levy “well-meaning, but ill-conceived and short-sighted”.
Ellis says he now has “some difficult decisions to make” concerning the outdoor events that he runs in the city. The DF Concerts boss states that his events generated an economic impact of more than £10 million last year.
“Quite simply we are now accelerating towards the cliff edge in terms of outdoor events in this city,” Ellis told the Evening Times.
“Quite simply we are now accelerating towards the cliff edge in terms of outdoor events in this city”
“It is of concern to me that promoters and other event organisers will now be encouraged to start events in other cities knowing that our ability to attract strong artistic talent to Glasgow is compromised by hundreds of thousands of pounds per event,” states Ellis. “I now have to decide whether to lead or follow in that respect.”
As long as they put this tax in place, Glasgow’s going to suffer and it will be to the benefit of other cities,” adds Ellis, mentioning that cities such as Stirling and Dundee “are very keen for us to make use of their assets and the rental prices they’re offering us are far less than Glasgow.”
A spokesperson from the Glasgow City Council comments: “The public has told us how much they value our green spaces and how they would like to see a more direct connection between the events we host and income being invested back into our parks.
“The environmental levy is about striking an appropriate balance between supporting our green spaces and using parks to host large events,” adds the spokesperson.
According to the Trnsmt promoter, event organisers already pay “substantial environmental maintenance sums” for the use of greenfield spaces.
Trnsmt returns to Glasgow Green this year from 12 to 14 July. The three-day festival will see performances from Stormzy, Catfish and the Bottlemen, George Ezra, Snow Patrol and Jess Glynne.
Australian artists hit by ‘Instagram tax’
Musicians, celebrities and other ‘influencers’ in Australia are to be forced to pay tax on income made through sponsorships and endorsements, as the government moves to introduce an ‘Instagram tax’ on young people making money through their fame and image.
According to the Australian Financial Review, changes to tax rules, set for introduction on 1 July 2019, will see celebrities, sportspeople, internet personalities and entertainers pay the Australian Taxation Office (ATO) for all income made through advertising, sponsorships, free products, public appearances and promotions, especially when they can take advantage of tax savings by licensing their image or fame through a business separate entity.
“There is evidence that, currently, individuals are splitting, or apportioning, lump sum payments to shift more income outside of their personal assessable income,” according to a paper prepared by the Australian treasury. “Income-splitting arrangements can be central to contract negotiations with high-profile individuals.”
The Industry Observer suggests the new rules will hit young Australian musicians, many of whom are making money through advertising and sponsorships on social platforms such as Instagram.
In the US, the Federal Trade Commission is cracking down on influencers who fail to make clear which social posts are promotional – most notoriously the Instagram models and others who were paid to plug the ill-fated Fyre Festival.
Entertainment ticket tax proposed in MI
Lawmakers in Detroit are mulling the introduction of a US$3 tax on concert tickets as a way to fund the city’s cash-strapped emergency services.
The proposed law, dubbed Senate Bill 884, would levy a $3-per-ticket tax on all entertainment events at venues with at least 5,000 seats in Michigan cities with a population of at least half a million (of which only Detroit would qualify). The revenue raised, says the bill’s sponsor, state senator Coleman Young II, would be equally distributed between the city’s police force, its fire brigade and its emergency medical services.
“This is not a tax for revenue raising purposes,” says Young. “I’m levying it so police officers, firefighters and emergency personnel can provide their services at an optimal rate.”
However, according to local paper Detroit Free Press, the bill is unlikely to pass the Republican-controlled Senate and House of Representatives – especially at a time when Republican president Donald Trump is slashing taxes on a national level.
Corporates face ticket price rise after Trump axes deduction
The days of American businesses hiring boxes for clients at concerts and other live events could be coming to a close, after a recent tax overhaul eliminated a 50% deduction for entertainment-related business expenses.
The headline figures from the Tax Cuts and Jobs Act of 2017, signed into law on 22 December, include reduced rates of income tax (until 2025) and corporation tax (permanently), predicted by Trump to deliver a surging economy and thousands of new jobs.
However, the new legislation also eliminates a 50% deduction for business expenses for “entertainment, amusement or recreation”, meaning firms will see a doubling of their costs for concert tickets and hospitality for clients.
Eliminating the deduction “is really going to hurt the small businesses that need to promote their business by entertaining clients”, Charles Capetanakis, a lawyer at New York legal firm Davidoff Hutcher & Citron, tells Bloomberg Politics.
The loss of the entertainment expenses is “painful”, adds Washington, DC, lobbyist Ryan Ellis, although he notes with relief a 50% tax break for client meals was left untouched by the Tax Cuts Act.
Chicago approves controversial ‘ticket tax’ rise
The cost of many concert tickets in Chicago is set to rise after councillors voted overwhelmingly to increase the city’s amusement tax by 4% in 2018.
Chicago City Council on Tuesday approved mayor Rahm Emanuel’s 2018 budget by a 47–3 vote, setting the stage for tax hikes on venues with a capacity over 1,500, from 5% to 9%. Currently, a 5% levy is imposed on tickets to any “live cultural performance in a for-profit venue.
Emanuel – the brother of WME co-CEO Ari – expects the tax increase to bring in an additional US$15.8 million for the city, reports the Chicago Tribune.
Mayor Emanuel expects the tax increase to bring in an additional $15.8m
Stop Higher Amusement Taxes, a coalition of thousands of Chicago entertainment-industry workers, opposes the rise, saying “higher concert amusement taxes will drive shows to venues outside of Chicago to more tax-friendly local cities – or worse: some shows may bypass Chicago altogether.”
However, venues with a 750–1,499 capacity – previously taxed at 5% – will be exempt, while those with under 750 seats will similarly pay no tax. The amusement tax made headlines last August after it emerged two venues – both of which will now be exempt – were being chased for $200,000 in “crippling” back taxes.
Other tax increases coming into effect on 1 January include hikes on property, water, sewerage and ride-sharing services such as Uber and Lyft.
Italian promoters welcome concert VAT cut
Italian promoters’ association Assomusica has welcomed a reduction in VAT on concert professionals to 10%, saying the move, enshrined in Italy’s 2018 budget law, recognises the “new reality” of the modern, production-heavy live music business.
“We welcome this measure, which we have expected since 2007, absolutely,” comments Assomusica president Vincenzo Spera. “We worked with parliamentarians and ministers to come to this conclusion [and] thank the government for adopting this law, and all those who have worked for us.”
The budget law extends the favourable reduced rate of value-added tax (VAT) currently enjoyed by concerts and other live entertainment to “related services provided by intermediaries”, such as production and suppliers.
“Many years ago, live entertainment was different to what we have today”
“Many years ago, live entertainment was different to what we have today,” continues Spera (pictured). “In the past there was a singer in a theatre, where there was already an artistic director and stage design. Today is different: today, concerts are performances that travel all over, with lighting, production designers, directors, sound engineers, everything that comes with the artist.
“It was necessary to bring the discourse up to date and to align VAT with live performance as a whole.”
VAT in Italy is currently charged at 22%.
The tax cut in Italy follows a similar developments in Spain, where VAT on live entertainment has recently been reduced to 10%, down from 21%.
Tax reward for promoters in France
While the French concert industry is facing significant higher expenses due to increased safety standards, the live music community is benefitting from a unique tax break scheme for promoters.
It is one of the very few positive examples of how an entrepreneur-friendly tax law for smaller and midsized concert companies could look. The so-called Crédit d’impôt pour les entreprises de spectacles vivants musicaux (Tax credit for performing arts companies) is a French tax law that enables eligible promoters to be rewarded for their investment in new talent and live entertainment formats.
As elsewhere in Europe, the development of new artists is under pressure. While shows with headliners and popular artists are doing reasonably well, it’s the business with new and less prominent artists that is becoming more difficult and financially risky, due to increased competition.
Ten years after the French government installed a similar tax law for French record companies, it last year implemented a crédit d’impôt for live music companies.
Smaller and midsized concert companies are now able to apply for a tax credit of up to €500,000 per show or a ceiling of €750,000 per year
Similar in design to the existing incentives for music labels, smaller and midsized concert companies are now able to apply for a tax credit of up to €500,000 per show or a ceiling of €750,000 per year and per company on deductable expenses.
The law is applicable for live entertainment events within the market segments for concerts, comedy or spoken word events, but excludes shows with more than 12,000 visitors. Deductable amongst others are expenses for staff, royalties, rental fees for venues and investments related to the digitalisation of an event such as recording or post-production.
Eligible companies must pay earnings tax and have managing directors that do not earn more than €50,000 per year. However, promoters need to apply beforehand at the Ministry of Culture to obtain a certificate to make use of the law. The tax credit itself is partitioned over three years.
No official figures have yet been published on how many companies are benefitting from the new tax law, but the legislation is being welcomed as an interesting model in terms of support programmes for smaller concert companies.