Article published by our international consultant Stefano Malvestio in the WyScout blog.
On 8 May 2019, FIFA published its 2019 Edition of the “Regulations on the Status and Transfer of Players” (“the FIFA Regulations” or “FIFA RSTP”) which, having entered into force on 1 June 2019¹, amended the definition of ‘third-party’ in relation to art. 18-ter of the FIFA RSTP, excluding “players” from it.
Art. 18-ter of the FIFA Regulations is the provision by means of which FIFA put into effect² a complete ban of third-party ownership.
Such a small amendment is expected to have significant consequences on the football transfer market since it essentially reintroduces the possibility for players to hold a share of their own economic rights, a valuable tool in the hands of agents and clubs when properly used.
However, the author believes that at least in the first transfer window which followed the entry into force of the amendment (i.e. mainly the European 2019 summer registration period), a relatively small number (or at least not “high-profile”) of transactions were structured while contemplating the assignment of economic rights to players, although precise data are not available since there is no obligation for clubs or players to declare such assignments via FIFA Transfer Matching System (“FIFA TMS”).
Conversely, even those market operators who are aware of the provision have posed us a number of different questions, which might be indicative of the lack of information or clarity still spread in the market on the possible use of the mechanism, another potential reason for the apparent still relatively low recourse to it.
Considering the above, and while the mid-season transfer window is coming closer, this article will briefly outline why such an apparently minor amendment has important consequences on contractual negotiations in the football market, answering some of the main questions we received from operators while structuring their business and providing some suggestions on how to make the best of such newly (re)introduced legal mechanism.
Third-party ownership (“TPO”) refers to the circumstances in which a third-party invests in the economic rights of a professional football player, potentially in order to receive a share of the value of any future transfer of that player.
It is therefore essentially an investment (whether financial or not) made by a party other than the club holding the player’s registration, or any previous club where the player was registered, into the transfer value of a player, which is eventually monetized the moment the player is transferred to a future club.
Until May 2015, the FIFA Regulations did not prohibit TPO practices. Until then, FIFA had only introduced art. 18-bis, which primarily aims at preventing clubs from entering into agreements that grant third parties (or other clubs) the possibility to “influence in employment and transfer-related matters” and to consequently, influence the independence of a club, its policies or the performance of its teams.
The provision is binding at the national level and, as of 01 April 2015, reads as follows:
“1. No club shall enter into a contract which enables the counter club/counter clubs, and vice versa or any third party to acquire the ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams.
2. The FIFA Disciplinary Committee may impose disciplinary measures on clubs that do not observe the obligations set out in this article.”
The rationale of the prohibition included in art. 18-bis is mainly to protect the player-club relationship from the external interference of third-parties, often for mere financial and not sporting-related purposes. With this, the provision aims at preserving contractual stability, while protecting players and clubs freedom to freely negotiate the terms of their contractual relationships.
However, in 2014, FIFA determined that art. 18-bis alone was not enough to deter third-party influence in organized football and thus took the decision of banning all TPO transactions by issuing Circular no. 1464 on 22 December 2014, which added art. 18-ter to the FIFA Regulations.
With the introduction of art. 18-ter, FIFA put into effect a complete ban of third-party ownership. The rule prohibits clubs and players from assigning to a third-party any rights or participation in the compensation payable for the future transfer of a player.
The provision is binding at the national level and its relevant portion reads as follows:
“1. No club or player shall enter into an agreement with a third party whereby a third party is being entitled to participate, either in full or in part, in compensation payable in relation to the future transfer of a player from one club to another, or is being assigned any rights in relation to a future transfer or transfer compensation.
6. The FIFA Disciplinary Committee may impose disciplinary measures on clubs or players that do not observe the obligations set out in this article.”³
Unlike art. 18-bis, the provision is not solely restricted to clubs but also applies to players.
As such, as of 1 May 2015, clubs and players are strictly prohibited from entering into agreements pursuant to which a third party is entitled to receive any compensation in connection with the future transfer of a player, or an assignment of rights in connection with the same.
To the best of the author’s knowledge, there have been only 4 (four) cases of clubs sanctioned by the FIFA Disciplinary Committee for violating art. 18-ter of the FIFA RSTP, the most prominent of which involved the Belgian club RFC Seraing, which was sanctioned with a transfer ban of three registration periods⁴ and a fine of CHF 150,000, thus evidencing the importance of complying with art. 18-ter of the FIFA Regulations and the risks connected to a possible violation.
Art. 18-ter of the FIFA Regulations prohibits the assignment of “compensation payable in relation to the future transfer of a player from one club to another” to a “third-party”.
According to the provisions of the Regulations, a third-party is any natural or legal person other than:
I. the player’s new club in the context of a transfer (i.e. the “buying club”);
II. the player’s old club in the context of a transfer (i.e. the “selling club”);
III. any other previous club, with which the player has been registered; and
IV. the player.
Clubs belonging to the third category are excluded from the definition of third-parties since they include:
FIFA thus considered the said situations worthy of legal protection and decided to exclude them from the definition of “third-party”. In particular, while similar to TPO deals in certain aspects, the inclusion of sell-on clauses in transfer agreements maintain the circulation of money exclusively within the football family and allow, for instance, a club that has contributed to train a player to transfer him while retaining a potential reward in the event that his value increases in the future.
Otherwise, all-natural and legal persons, except for the categories listed above, are included in the concept of ‘third-parties’: this includes, in particular, intermediaries and football clubs not expressly excluded from the definition.
The definition of “third-party” in relation to art. 18-ter of the FIFA Regulations did not, in its original version mention the players, which, according to a literal interpretation initially offered by FIFA’s representatives, were to be considered as included in the prohibition.⁵
Later on, the FIFA Disciplinary Committee settled the question by deciding, in four decisions taken on June 2018 that players are not to be considered a “third-party” in the definition number 14 and art. 18-ter of the FIFA RSTP.
A FIFA press release issued on 26 June 2018 explained that the amounts promised to the players were “seen as part of the remuneration due to the players under their employment relationships with their clubs”.
For this reason, “the Disciplinary Committee found that the players could not be considered a third party with respect to their own future transfers and, therefore, the fact that they may receive a specific compensation – regardless of it being a lump sum or a percentage – in relation to their future transfer to a new club…is not considered a violation of FIFA’s rules on third-party ownership of players’ gy rights”.⁶
On 15 March 2019, the FIFA Council approved the 2019 edition of the FIFA Regulations, which entered into force on 1 June 2019 and excluded “the player being transferred”from the definition of “third-party”⁷.
In light of the interpretation provided by the FIFA Disciplinary Committee and of the amendment subsequently intervened, players are entitled to hold a percentage over their own future transfer.
Since art. 18-ter of the FIFA RSTP states that “No club or player” shall enter into an agreement with third parties granting any rights in relation to future transfer compensation, any subsequent contract between a player and a third-party in relation to the economic rights he received from a club might be considered a violation of the provision.
While this has not been specifically clarified by FIFA, a literal interpretation of the FIFA RSTP will also prohibit a company entirely held by the player from holding economic rights, since only the player is strictly excluded from the concept of “third party” for the purposes of art. 18-ter of the FIFA RSTP.
As such, whereas practice suggests that economic rights are often assigned to a company (ultimately fully owned by the player), the player would seem to be entitled to hold such rights as a natural person only.
Players are not included into the list of TMS Users pursuant to Annex 3 of the FIFA RSTP and thus have no TMS-related obligations. For clubs, it is not a requirement to disclose any economic rights assignments realized in favour of players. However, if the agreement is included as a clause in the player’s employment contract, clubs shall have to disclose it in the TMS, pursuant to article 4.3 of Annex 3 of the FIFA RSTP.
FIFA’s press release qualified the amounts received by players as “remuneration” under the employment relationship; a legal qualification that might have implications under a tax perspective, although it remains to be seen whether tax authorities would equally consider such payments as remuneration.
Also, in international transactions, attention shall be paid on the effective country of residence of the player and on the risk of double taxation, depending on factors such as the moment (in the year) when the transfer is done, the club realizing the payment and the countries involved.
When borrowing money, in addition, or in alternative to other securities, players might be entitled to use their economic rights as a security to a loan, provided that the loan rate does not exceed legally accepted interest rates.
Also, the lender that shall take into account the above-mentioned tax implications in order to make sure that the amount of money effectively received after tax as a consequence of the future transfer of the player is not inferior to the value of the loan.
The question is interesting and, to the best of the author’s knowledge, still not settled by jurisprudence. Intermediaries (previously agents) are prohibited from holding percentages over the future transfer of players⁸.
However, pursuant to art. 7.1 of the FIFA Regulations on Working with Intermediaries, the amount of remuneration due to an intermediary who has been engaged to act on a player’s behalf shall be calculated “on the basis of the player’s basic gross income for the entire duration of the contract”.
Considering that FIFA has qualified the amounts received by players as “remuneration” under the employment relationship, an intermediary who obtained such a financial benefit in favour of a player, when negotiating an employment contract for him, might reasonably claim to be entitled to commission over it.
As a second step, since the current regulations (at least those implemented by FIFA at an international level) do not contain any cap in relation to commissions (which FIFA plans to introduce by September 2021 into the new FIFA Agents’ Regulations), intermediaries have questioned us if they would be entitled to agree with the player percentages of commission over the economic rights so high that they would essentially be put in a position of co-owners of the player’s transfer value.
In the author’s opinion, the limits in this respect are set by the fact that similar schemes may result in circumvention, fraud or simulation against the rules prohibiting intermediaries to hold share of transfer fees, coupled with the possible limitations on the amount of the agreed fee imposed by the application of rules on the proportionality of the commission (for instance, in CAS 2016/A/4517, the Panel reduced the amount of the commission granted to the agent, in application of art. 417 of the Swiss Code of Obligation).
In light of what has been said so far, players are entitled to hold a percentage over their own future transfer but are prohibited from further assigning it to any other third party. This essentially means that, when negotiating transfer or employment contracts, clubs, players and agents acting for them, may rely on an additional source of potential income for players, opening up a series of alternative scenarios to make a deal happen.
The clearest and more direct consequence is that assigning a player a right to compensation related to his future transfer may mean, for a club, to reduce the amount of salary needed to convince him to accept an employment offer; for instance, this may be the case for a club that is unable to spend large amounts on wages and thus may “compensate” a lower salary offer with a portion of the player’s future transfer fee.
On the player’s (and his agent’s) side, being entitled to a portion of his transfer fee might potentially mean receiving, in the future, a substantial amount of compensation; this might be an attractive negotiation strategy, for instance, for players who are “free agents”: since the club acquiring their rights does not need to pay any amount as transfer fee, free agents may demand to remain entitled to a right to compensation related to their future transfer (potentially in addition to the immediate payment of a “sign-on fee” and a substantial commission to their agents).
Clubs (and agents) might also rely on the assignment of economic rights to attract young players at the time of signing their first professional contract, offering them a percentage of their future transfer fee as an incentive or reward for registering with them.
A club with limited resources interested in maintaining a player, who received a more lucrative employment offer, may also offer him an incentive to stay, and to bet in the future increase of his own value, by offering him a percentage of his future transfer fee, rather than being forced to accept the third club’s offer.
In a completely different situation, a club may offer a player a percentage of his own economic rights as an incentive to accept a transfer offer from another club. This might be the case, for instance, of players on high wages and long-term contracts who are not motivated to grant their consent for a transfer: offering them a percentage of their transfer fee might appeal to them, as they would potentially monetize their value upfront rather than over the course of their contract.
In any event, agents shall also be mindful that, whenever a player is assigned a portion of his economic rights and, in the context of a future transfer, it is mainly his desire that of moving (for instance because of a higher salary offer or better sporting opportunities), the club might make its acceptance to the transfer offer subject to the player withdrawing his right to a portion of the transfer fee; in other words, economic rights assigned to players are not so “strong” (not legally but on a purely negotiation level) than those assigned to “third-parties” under the old system when TPO was not forbidden.
Finally, while the above examples represent a legal mechanism for the use of player’s economic rights, the exploitation of such rights through the “back door”, with their further assignments to agents, funds or other third parties, is hardly to be monitored by FIFA and thus cannot be precluded, for the reasons that will exposed in continuation.
Investment in third-party ownership is currently a practice forbidden by the FIFA Regulations. Several courts in Europe have confirmed the validity of the TPO ban under different jurisdictions. Sanctions imposed on clubs that violate the provisions can go as far to ban clubs from registering players during several registration periods.
Excluding players from the definition of “third party”, although essentially representing a codification of existing jurisprudence, undoubtedly had repercussions on the football transfer market to an extent which, for the reasons exposed in the present article, has not yet reached its full potential.
As said, players are not be entitled to re-transfer the portion of economic rights they are assigned to other third parties. However, this prohibition is more difficult to monitor since, contrary to football clubs, players are not FIFA TMS Users and also not subject to a number of other disclosure and reporting obligations (either towards their shareholders, fans, football regulatory organizations or State entities).
Also, imposing a sanction on a player (and not on the third party itself) may not necessarily have a sufficient deterrent effect to prevent the practice since most players may not have sufficient knowledge of the connected risks. It is also for this reason that the author is in favour of regulating rather than prohibiting the TPO practice, including third parties within the “football family” through a system of registration/affiliation, thus subjecting them to federative obligations such as that of respecting transfer regulations.
In light of all these factors, the author expects third-party ownership to reacquire substantial importance in the football transfer market in the months to come, while governing bodies and regulators will face the harder task of monitoring players (in addition to clubs), if they intend to ensure effectiveness of the ban (which remains) in place under art.18-ter of the FIFA Regulations.
For more information on “Third-Party Ownership”: S. Malvestio, M. Motta, Third-Party Ownership, in Transfer of Players, O. Bellia -M. Colucci (eds), SLPC, 2019.
¹ Art. 29, FIFA Regulations on the Status and Transfer of Players (2019 edition).
² As of 1 May 2015.
³ The competence to rule on violations of both art. 18-bis and 18-ter rests with the FIFA Disciplinary Committee and, in appeal, with the FIFA Appeal Committee and then the Court of Arbitration for Sports (CAS).
⁴ FIFA initially sanctioned RFC Seraing with a transfer ban of 4 registration periods. CAS subsequently reduced this to 3 registration periods as “the violations were committed during a transitional regulatory period for the TPO”.
⁵ See answer given by Mr O. Ongaro – former FIFA Head of Players’ Status Committee – in a Q&A with the European Professional Football Leagues:
“Possibility of players to have a percentage of the of future transfer fee? Player able to own part of his economic rights? No, a player cannot have a percentage of his future transfer fee, because the player is considered as third-party under the new regulations. Reasoning: If the player owns e.g. 20% of his future transfer, the player will most likely not stay with the club until the end of the contract, which is against the fundamental principle of contractual stability (but lump sum should be in line with the regulations…”.
⁶ FIFA, “Latest decisions of the FIFA Disciplinary Committee in relation to third-party rules”, 26 June 2018, available here.
⁷ The 2019 FIFA Regulations on Status and Transfer of Players are available here.
⁸ Art. 7, par. 4 of the FIFA Regulations on Working with Intermediaries:
“Clubs shall ensure that payments to be made by one club to another club in connection with a transfer, such as transfer compensation, training compensation or solidarity contributions, are not paid to intermediaries and that the payment is not made by intermediaries. This includes, but is not limited to, owning any interest in any transfer compensation or future transfer value of a player. The assignment of claims is also prohibited.”