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Official recognition of esports
Taxation of video game tournament winnings
In September 2020, Ukraine recognized esports as an official sport, making it a historic moment for Ukrainian esports culture. However, the official status requires not only the recognition of players at the state and professional levels, but also entails a number of obligations, such as paying taxes.
Since esports is a relatively new concept, currently there is no single approach to the taxation of esports winnings in Ukraine. In this article, we will look into some aspects of taxation of e-athletes who receive income from participating in international or local esports tournaments.
International practice in taxation of professional gamer’s income
Since some countries, such as China, India, Russia, Italy, Finland and South Korea have recognized esports as an official sport much earlier than Ukraine, there is already a number of approaches to taxation of income from tournament winnings. Let’s explore some of them.
In Russia, where e-sports gained official recognition in 2016, prizes and winnings from esports competitions are considered as taxable income. If a gamer is a resident of Russia, the income is taxed at 13% or 15% depending on the amount of winning, whereas the tax rate for non-resident foreigners is 30%. There is an official esports organization, the Federation of Computer Sports (Esports) of Russia, which acts as a tax agent for esports team players (i.e. the organization pays taxes on each prize amount and submits respective information to tax authorities). Sometimes the esports competition organizers can act as tax agents, but often the esports team players have to pay and declare taxes on their own.
In China, e-athletes and organizers of e-sports competitions are recognized as a separate profession. Chinese tax authorities treat their income as a regular salary. Therefore, income earned by esports players who are Chinese residents is subject to personal income tax at rates ranging from 3% to 45%. In some cases, they are also required to prepare and file their personal income tax returns.
According to the clarification issued in Austria on tax treatment of income received by resident e-athletes who regularly participate in computer game competitions in the United States on an independent basis, such income is taxed as business profit. If an esports player participates in competition in the USA that is watched by 20,000 viewers in the stadium and by millions on the Internet, he/she is considered as an artist and not as an athlete. Therefore, the prize money received by such a player is taxed as income of an artist.
Tax treatment of winnings received by Ukrainian gamers
Young Ukrainian gamers regularly win in various tournaments around the world collecting prizes and winnings of tens or even hundreds of thousands of US dollars. However, as evidenced in practice, many esports participants do not understand that such income should be declared and properly taxed in Ukraine.
Who needs to file personal income return and when to report income in Ukraine
In practice, professional gaming tournaments are often organized abroad and the winnings are usually paid in foreign currency directly to the winner. If the winner is a tax resident of Ukraine, he/she will need to declare foreign income by filing personal income tax return to Ukrainian tax authorities and pay 18% of personal income tax (PIT) and 1.5% of military tax. Another important point to note is that tax calculation is made using the official exchange rates set by the National Bank of Ukraine at the date when such income is received. As regards PIT return, it should be filed by 1 May of the year following the reporting year (i.e. PIT return for 2020 should be filed by 1 May 2021).
So far, everything seems to be clear: income from e-sports received abroad should be declared as foreign income and PIT return should be filed to tax authorities within the specified term. But what if income from winning in esports competition in another country has already been taxed abroad? This is where double tax treaties between Ukraine and respective foreign state come to the rescue since paying taxes twice is not a great option.
Taxation of gaming tournament winnings abroad in itself does not exempt the gamers from declaring such income in Ukraine. However, the amount of Ukrainian tax can be reduced by the amount of foreign tax already paid, which will reduce the financial burden on esports players and ensure correct taxation of their income in both countries.
The taxes paid abroad can be offset against the Ukrainian taxes provided there is a valid double tax treaty between Ukraine and respective foreign state. To do so, a taxpayer will need to provide a document (a certificate from foreign tax authorities) that confirms the amount of income received from esports winnings and taxes paid on respective amount abroad. In certain cases, this document may require legalization (apostille for countries that have signed the Hague Convention or consular legalization). That is why it is important to check all the requirements for obtaining a tax certificate as they may vary depending on the case. It should be noted that in the absence of a double tax treaty between Ukraine and respective foreign state, the gamer will have to pay taxes both abroad and in Ukraine.
The popularity of e-sports in Ukraine is on the rise. There are even plans to build a multifunctional e-sports arena in the center of Kyiv, which will be visited by many foreign gamers in the future. However, there is no policy on taxation of income received by foreign gamers in Ukraine.
One can predict that in case of payment of esports competition winnings by a Ukrainian company, the competition organizers will act as tax agents and will withhold taxes when paying income to foreigners. If the winnings will be paid directly to a foreigner without the involvement of the Ukrainian organizer, foreigners will be required to file a tax return and pay taxes in Ukraine. However, it should be kept in mind that international treaties provide an opportunity to exempt income of foreign gamers from taxation or offset the amount of taxes paid in Ukraine against taxes of the foreign gamer's tax residence country.
Who pays taxes for underage esports players
Many studies show that the most productive age of e-athletes is 16-25 years. This means that underage players can participate in tournaments and collect some serious winnings. In accordance with applicable legislation of Ukraine, the obligations of persons under 18 years of age to pay taxes and fulfill other cash obligations are assumed by their parents (or by adoptive parents, guardians or caregivers). Therefore, it is the parents’ obligation to pay taxes on winnings received by underage players.
The recognition of e-sports in Ukraine at the official and state levels offers a great potential for players, as well as defines them as athletes on the world stage. At the same time, this status requires that income is taxed correctly. The esports industry is only just starting to develop in Ukraine, but very soon tax authorities may be motivated to check whether the esports winnings are taxed correctly. Therefore, it is necessary to understand the correct mechanism of income taxation to ensure that all taxes are paid in a timely manner and in accordance with applicable legislation.
Source: НВ Бізнес