E-sport is gaining in popularity, resulting in an increase in the number of players, games and spectators, as well as an increase in revenue from e-sport. Such revenue is taxable, but it is not always clear under which rules.
E-sport as a category of sport
Establishing the tax implications of electronic sports or “e-sport” first requires a determination of what e-sport is.
Since 2017, when the Sports Act of 25 June 2010 was amended to add the definition of “sport” in Art. 2(1a), there should be no doubt that “e-sport” is a form of “sport,” much like football or ski jumping (although traditional sport and electronic sport are not fully equated in the act). Under the new definition, sport also includes “a competition based on intellectual activity with the aim of achieving a sports result.” The objective of the new regulation was to cover competitions such as chess and tournament bridge, but also electronic sports (e-sport).
In light of the aforementioned definition of e-sport, it has two essential elements: an intellectual factor, and the aim of achieving a sports result. Thus for an electronic activity to be considered as e-sport, it must involve a competition based on intellectual activity. As held by the Province Administrative Court in Warsaw in its judgment of 27 March 2019 (case no. III SA/Wa 1079/18), “Not all electronic games should automatically be considered sport. What is relevant here is the wording of Art. 2(1a) of the Sports Act of 2010: a competition based on intellectual activity, not competition in all types of electronic games, can be considered a sport.”
Personal income tax on players’ revenues from e-sport
On tax grounds, putting electronic sport on the same footing as traditional sport means that revenue generated from participation in computer games is taxed on a similar basis to other sports. Thus players’ revenue from electronic sports may be subject to personal income tax:
- Under general rules
- At the flat rate on winnings or prizes
- At the flat rate tax on recorded revenue without deductible costs
- Under the “tax card”
- As part of an employment relationship, if the player earns income from e-commerce under an employment contract.
Activities carried out personally
In particular, an e-athlete’s income should qualified as income from activities conducted personally, referred to in:
- Art. 13(2) of the PIT Act (i.e. revenue from activities performed personally, such as artistic, literary, scientific, coaching, educational and journalistic activities, including participation in competitions in the fields of science, culture, art and journalism, as well as revenue from practising sports, sports scholarships granted under separate regulations, and judges’ revenue from conducting sporting competitions), or
- Art. 13(8) of the PIT Act (i.e. revenue from the performance of services under a contract of mandate or contract for a specific work).
Deductible costs should be recognised pursuant to Art. 22(9)(4) of the PIT Act (on the grounds specified in Art. 13 (2), (4), (6) and (8), deductible costs are recognised in the amount of 20% of the generated revenue, after deduction in the given month of contributions for pension, disability and sickness insurance referred to in Art. 26(1)(2)(b) based on that revenue).
This income is subject to taxation according to the scale specified in Art. 27 of the PIT Act.
Pursuant to Art. 44(1a)(3) of the PIT Act, taxpayers who earn income without the intermediation of remitters, on the grounds specified in Art. 13 (2), (4) and (6)–(9) (subject to Art. 44(1)(1)), are obliged, without demand, to pay income tax advances during the tax year, under the rules specified in Art. 44(3a) (by the 20th day of the month following the month in which the income was earned, and for December, by the deadline for filing of the annual tax return, the taxpayer must pay monthly advance payments at the lowest tax rate specified in the scale referred to in Art. 27(1) (i.e. 17%)). The income referred to in the first sentence of Art. 44 (3a) of the PIT Act is the revenue obtained within the month, after deducting monthly deductible costs in the amount specified in Art. 22(2) or (9) and the contributions referred to in Art. 26(1)(2) or (2a) paid in the given month. When calculating the advance payment, the taxpayer may apply a higher tax rate specified in the scale referred to in Art. 27(1) of the PIT Act (i.e. 32%).
Players professionally involved in e-sport may conduct business activity if the relevant conditions are met. In such case, the taxpayer may choose to be taxed either with linear PIT, i.e. at a flat 19% rate, or under general rules (i.e. according to the tax scale).
In certain situations, e-sport players conducting business activity may also opt for simplified forms of taxation, provided for in the Act on Flat-Rate Income Tax on Certain Income Earned by Individuals of 20 November 1998, i.e. paying a flat-rate income tax in the form of a lump sum on recorded income or a flat-rate tax.
In particular, the provisions of this act may apply regarding:
- Provision of services related to publishing of computer game packages
- Reproduction of computer information carriers, or
- Computer software downloaded from the internet (excluding online download)
—which may be subject to a flat-rate PIT of 17%.
Additionally, in the case of services consisting of publishing of computer games, it is possible to apply a flat-rate PIT of 8.5% of revenue. This approach was adopted by the director of the Warsaw Tax Chamber in an individual interpretation of 3 February 2017 (ref. 1462-IPPB1.4511.1204.2016.1.MM) concerning a taxpayer conducting a business providing the service of publishing computer games for mobile devices and addons to such games. If the services provided by the taxpayer qualified under symbol PKWiU 18.104.22.168 (services connected with publishing computer games downloaded from the internet), the revenue obtained in connection with performance of those services was subject to flat-rate tax on recorded revenue at the rate of 8.5%.
In practice, e-sporters can also tax revenues from their business activity as income:
- From the activity of manufacturing products from material entrusted by the purchaser (8.5%), when the player creates “loot” in the game, or
- From service activities in the field of trade (3%), as long as the player is not processing loot in the game.
Therefore, there is a condition that the rules of the game must include the possibility of winning certain virtual objects and prizes, or shaping and improving characters.
Winnings from games and competitions
Separate rules apply to winnings from games and competitions in the field of e-sport obtained by players not conducting business activity. According to Art. 30(1)(2) of the PIT Act, revenue from prizes won in competitions, obtained in Poland or another member state of the European Union or the European Economic Area, is subject to a flat-rate tax of 10% on the prize or winnings, without reducing the revenue by deductible costs (Art. 30(3)). The flat-rate tax of 10% on the value of the prize cannot be applied in relation to prizes in e-sport competitions obtained outside of the EU or the EEA (in that case, the prize should be taxed according to the tax scale, i.e. using the progressive rates of 17% and 32%).
At the same time, according to Art. 21(1)(68) of the PIT Act, the value of winnings in competitions and games organised and broadcast (or announced) via the mass media (press, radio or television), and competitions in the field of sport, is free of income tax if the one-time value of the winnings or prizes does not exceed PLN 760.
Application of the aforementioned 10% flat rate or PIT exemption is possible for prizes and winnings from direct sports competition, and thus, in particular, on the condition that the competition includes an element of rivalry and was held in accordance with the relevant regulations. Undoubtedly, these premises are met by prizes obtained as a part of e-sport championships or league competitions (domestic or foreign). However, prizes associated with the overall sporting activity of a player or a coach, or prizes awarded by sports clubs to players and coaches for example for winning a specific match or achieving a specific result in a league competition, are not a direct effect of sports competitions. Such prizes should be regarded as a bonus for sporting achievements (in the case of e-athletes) or for achievements in sporting activities (in the case of other persons), and not as prizes for participation in a sporting competition.
Such a prize is subject to settlement by the organiser of the competition (or tournament) as a PIT remitter obliged to withhold income tax on the prizes (Art. 42(1) of the PIT Act). The revenue and the advance payment should be reported in the information about revenue from other sources and income and collected tax advances for the year on the PIT-11 form.
The 10% flat-rate PIT on winnings in competitions is withheld by the remitter and transferred to the relevant tax office by the 20th day of the month following the month in which the tax was withheld. By the end of the following January, the remitter must send the contestant an annual PIT-8AR declaration. However, the taxpayer does not report revenue from winning competitions or the flat-rate tax withheld from them in his annual tax return.
If the winnings are an in-kind prize, not cash, the winner must pay the remitter the amount of the advance payment or the flat-rate income tax due (Art. 41(7)(1) of the PIT Act). However, if an e-athlete receives a statuette, cup, medal, diploma or other prize of only commemorative value for a win, receipt of such an item is not connected with generating tax revenue and therefore is not subject to PIT.
If the winnings are not money, but an in-kind prize, under Art. 41(7)(1) the competitor is obliged to pay an advance or flat-rate income tax due before it is received.
Income from abroad
Income from e-sport earned abroad is subject to an appropriate settlement taking into account the relevant tax treaties.
This income qualifies as artists’ and athletes’ income as referred to in Art. 17 of the OECD Model Convention (2014 version). According to this provision, winnings obtained in tournaments held in Poland may be taxed in Poland regardless of the winners’ tax residence. Additionally, Poland has the right to tax income (or revenue) of its residents in tournaments held outside of Poland. However, in such case, Poland, as the taxpayer’s country of tax residence, is obliged to eliminate any potential double taxation of such income (or revenue) by applying an appropriate method to avoid double taxation.
For example, under Art. 17(1) of the Polish-German tax treaty, income earned by a person residing in a contracting state (here, in Poland) from artistic activities (for example, a stage, film, radio or television artist), as well as a musician or an athlete, from activities performed personally in that capacity in the other contracting state (i.e. in Germany, when a tournament takes place there), may be taxed in the latter state (i.e. Germany). Pursuant to Art. 24(2)(a) of the Polish-German tax treaty, if a person residing or established in Poland earns income or owns property which in accordance with the treaty may be taxed in Germany, then Poland shall exempt such income or property from taxation (subject to Art. 24(2)(b)). When calculating the amount of tax on that person’s other income or assets, Poland may apply the tax rate that would have been applied if the income or assets exempt from taxation had not been subject to such exemption.
However, it should be noted that not all tax treaties to which Poland is a party reflect the current wording of the OECD Model Convention. Therefore, in every case the taxpayer should examine the relevant treaty provisions.
The above illustrates the difficulties that can be faced by players generating revenue or earning income from electronic sport. The rules described only apply to prizes for winning or participating in competitions. Other PIT rules may apply to other categories of revenue, such as revenue derived from streaming of gameplay on channels like YouTube, where players are paid a fee not only for the number of subscriptions or a certain number of views, but also for various types of advertising links.
Joanna Prokurat, tax adviser, Tax practice, Wardyński & Partners