Esports tournament winnings: when and how are they taxable?

As a lawyer who represents many tournament organizers, esports players and esports teams, I realize that the issue of taxation of esports tournament winnings is currently very relevant. In this blog post, I would therefore like to explain when and how winnings from esports tournaments are taxable and whether an invoice with VAT is required for the payment of winnings. I will also address the special requirements that arise for streamers and esports players when they provide services for sponsors or agencies. This is because it is often unclear whether there is a service relationship that requires invoicing or whether it is a payment in a triangular relationship or as third-party money. I will also present a recent ruling by the Federal Fiscal Court on placement-based prize money and explain why it is so important to work properly in esports with regard to taxes and contracts, even if the clarification of these legal issues is often unpopular. Incidentally, my article Tax law and esports in 6 problem areas provides a good overview of the various tax law problem areas in esports. Among other things, I address the question of when players are to be treated as self-employed or employees, which has a significant impact on taxation and social security obligations. The VAT treatment of prize money and sponsorship payments as well as the special features of international situations are also discussed there.

When are esports tournament winnings taxable?

Whether esports tournament winnings are taxable depends on whether the esports player is acting with the intention of making a profit and is involved in general economic transactions. This must be assessed on the basis of the circumstances of the individual case. Indications of an intention to make a profit can be: repeated participation in competitions with a certain chance of winning, personal skills, conclusion of sponsorship agreements, level of awareness, consistent player success in the past, self-promotion/self-marketing, streaming of games, time spent on the activity and amount of income. If there is no intention to make a profit, it is a hobby and the tournament winnings are not taxable. However, streamers and well-known esports players who regularly take part in tournaments and make a profit will in most cases have to assume that they intend to make a profit. It is therefore important for them to deal with their tax obligations at an early stage and, if necessary, to seek professional advice in order to avoid liability risks. If you would like to find out more about the history and development of esports and the associated legal challenges, please read my basic article Esports. What is it? recommended. Among other things, I discuss how esports has developed from a niche phenomenon to a global billion-dollar business, which players and interest groups are involved and which legal issues arise from this, for example with regard to contract design, broadcasting rights, data protection and the protection of minors.

How are esports tournament winnings taxed?

If the intention to make a profit is confirmed, the tournament winnings are taxable as income from business operations. The esports player must then submit an income tax return and pay tax on the winnings. In the case of cross-border situations, e.g. because the esports player participates in tournaments abroad, double taxation agreements may have to be observed. Streamers and esports players should therefore document exactly what income they have earned and where. Prize money paid by foreign organizers or sponsors may also be taxable in Germany if the esports player is resident here. It is advisable to seek tax advice at an early stage in order to correctly assess the tax liability and avoid double taxation. This is because high prize money in particular can quickly result in considerable tax payments, which you should be prepared for. Incidentally, I explain how to structure esports business models and marketing optimally from a tax and legal perspective in my article Esports business models and marketing. Among other things, I discuss the sources of income in esports, how to structure sponsorship contracts and what to consider when marketing broadcasting rights. The tax treatment of prize money, appearance and success fees and merchandising income is also discussed there.

Invoice and VAT for tournament winnings?

Whether an invoice with VAT is required for the payment of tournament winnings depends on what exactly has been agreed between the player and the tournament organizer. Clear contractual regulations are important here. If it is only a pure tournament prize, there is usually no exchange of services, so that no invoice has to be issued and no VAT is due. The Federal Fiscal Court recently confirmed this for placement-dependent prize money. However, if the esports player also provides services for the organizer or sponsor, e.g. as a well-known streamer, there could be an exchange of services subject to VAT. An invoice with a VAT statement would then be required. This is often a tricky question, especially for streamers and influencers in the esports sector, and must be carefully examined. This is because contracts are often concluded with agencies or sponsors where it is not always clear which specific services are owed and whether these are connected to the tournament winnings. A good overview of the various legal issues in esports, from contract and employment law, copyright and data protection to competition law and the protection of minors, can be found in my article in the knowledge database on esports law. There I also explain which laws and regulations are relevant in esports and what players, teams and organizers need to consider in order to minimize legal risks.

Invoicing in relation to sponsors and agencies

Many successful streamers and esports athletes have contracts with sponsors or agencies that provide them with prize money or other payments. This raises the question of whether invoices with VAT must be issued for this. This depends on whether there is a VATable service relationship. If the sponsor only pays out the prize money without the sponsor providing a specific service in return, there is no exchange of services. In this case, the sponsor is not liable for VAT. However, if he provides services for the sponsor, e.g. advertising, product placements, participation in events, etc., there is an exchange of services subject to VAT. The streamer must then issue the sponsor with a VAT invoice. The same applies if the streamer works for an agency and receives a fee or commission for this. Cases in which the sponsor or the agency pays the prize money for the organizer (payment in a triangular relationship) or the sponsor offers prize money but the streamer does not provide any specific service in return (prize offer/payment as third-party money) are difficult. In this case, it must be carefully checked whether there is a service relationship with the sponsor or agency that requires invoicing. If in doubt, you should seek tax advice in order to avoid liability risks. By the way, I explain how to draft player contracts in esports in a legally compliant manner and what needs to be considered in my article Player contract (esports). Among other things, I discuss the most important contract contents, such as duration, remuneration, training and competition obligations, sponsoring and merchandising, rules of conduct, image rights and contract termination. The importance of professional legal advice for players is also discussed there.

Incidentally, I will go into more detail elsewhere about what must be included in a proper invoice:

An invoice must contain the following information in accordance with Section 14 (4) UStG:

• The full name and address of the supplier and the recipient of the service
• 2. the tax number issued to the supplier by the tax office or the VAT identification number issued to him by the Federal Central Tax Office
• The date of issue
• A consecutive number with one or more series of numbers that is assigned once by the invoice issuer to identify the invoice (invoice number)
• The quantity and type (customary designation) of the delivered goods or the scope and type of other services
• The time of the delivery or other service or the period over which the other service extends
• The consideration for the delivery or other service, broken down according to tax rates and individual tax exemptions, as well as any reduction in the consideration agreed in advance, provided it has not already been taken into account in the consideration
• The applicable tax rate and the amount of tax due on the consideration or, in the case of a tax exemption, an indication that the delivery or other service is exempt from tax
• When the invoice is issued by the recipient of the service or by a third party, the note “credit note”

However, it is important to note that invoices are only relevant in the service relationship. If there is no exchange of services, no invoice needs to be issued. This is often the case with tournament winnings, as explained above. You can find out more about the special features of esports contracts for professional players in my article Esports contracts: Professional players. Among other things, I go into the regulations that should be made regarding training and tournament participation, remuneration, sponsorship, equipment, additional income and social insurance and what needs to be considered in international contracts.

Conclusion

Whether esports tournament winnings are taxable is a question of the individual case. Esports players and organizers should seek advice on this at an early stage and make clear contractual arrangements, also with regard to VAT treatment. As a lawyer with experience in the esports sector, I will be happy to help you avoid tax pitfalls. I know that clarifying these tax and civil law issues in esports is often unpopular because it requires a lot of specialist knowledge and detailed work. Nevertheless, it is extremely important to work cleanly and carefully in order to minimize liability risks for all parties involved. After all, subsequent tax payments and contractual disputes can quickly threaten a company’s existence, especially when high prize money is involved. Seeking professional advice from the outset and observing the legal rules will save you a lot of trouble and allow you to concentrate on the essentials: Successful streaming, playing and winning tournaments. My team and I will be happy to assist you as competent partners. How to draft legally compliant esports contracts

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.