Is corporatisation, after all, a trend within associations and clubs?

The question of allowing professional sports associations to corporatise has been rejected on a number of occasions at the annual meetings of the Swedish Sports Confederation. In spite of this, we see an increased corporatisation trend within sports, with a number of new companies being registered during last year and there are more on their way. What is behind this development?

Today, professional sports associations often divide their operations into one or a number of limited liability companies. This can involve companies working with marketing, restaurant and conference operations, or companies who own the sports arenas used by the associations. Within soccer, it has also been quite common to establish so-called player investment companies who contribute to the financing of certain players. However, the major portion of professional sports associations undertake their actual sports activities in the association, itself. Previously, one saw a trend towards corporitisation undertaken in conjunction with the external sale of shares with the aim of securing external capital. However, recent corporatisations have taken place without external capital acquisition and the associations’ external financing has, therefore, increased. We believe that the following factors are behind the current corporatisation trend.

Commercial reasons

Many of the associations within professional sports incur large amounts of revenue, millions of krona per year, and have their operations divided between various associations and one or a number of limited liability companies. By corporatising the professional sports operations, many of the associations feel that they have a more uniform structured type of operation with more clearly defined commercial requirements and responsibility for results.

Tax reasons and the Tax Agency’s view of professional sports operations

During recent years, the Tax Agency has driven a number of tax processes vis á vis sports associations having their own limited liability companies (for example, arena companies and marketing companies) and has also signaled that they want to test the question of whether the sale of an association and/or sale of media rights is to be taxed.

The legal situation is uncertain, but if the Tax Agency succeeds with its point of view, the risk is that a large number of associations will experience negative tax effects as parts of their operations will be taxable and, also, due to the fact that the associations have limited right of deduction as regards their costs.

Associations having corporatised their professional sports operations are not impacted by this question as the operations in limited liability companies are liable to pay income tax and VAT. VAT liability usually results in the company incurring right of deduction of VAT on the operation’s costs, such as on purchases of materials and other services.

Prohibition of third party ownership within soccer

A number of soccer associations have previously financed certain purchases of players through so-called player investment companies. In player investment companies, investors combine to finance the purchase of players with the hope that they can be subsequently sold on at a higher price. During 2015, FIFA introduced rules which, in practice, prevent the possibility of financing player purchases in this manner. A corporatisation of professional sports operations can be one means of shutting down player investment companies and taking in capital for new investments in players.

Sports limited liability companies are not high by higher costs for police protection

Sports limited liability companies could previously incur higher costs for police protection than sports associations. These rules have been changed and, consequently, comprise no negative factor in deciding whether to corporatise the operations.

The above are some of factors we believe resulting in the current trend in corporatisation. The premises and reasons for corporatisation of professional sports operations are, however, different for different associations and it is important to review all of the consequences which a possible corporatisation could imply.

Martin Vestman and Jonas Hagström