With the transfer window about to open, a lot of speculation regarding the futures of a lot of European footballing superstars is about to arise. Rumours will be circulated, particularly over the Internet, with every website, blog and publication talking about how Club X is going to sign Player Y for Z amount.
It’s become common these days, particularly in the cases of transfers from the Spanish Liga BBVA, to discuss a player’s buyout clause while talking about his potential transfer. Some publications also use the phrase release clause to refer to this. At face value, it seems rather straightforward. Pay Z amount, and Player Y is now yours. However, it is rarely as simple as this.
Before getting into an analysis of the other factors involved in the workings of a buyout clause, it’s important to note that the transfer of a player involves three parties – the buying club, selling club and the player himself. A simplified version of how this process works is that the two clubs must first reach an agreement as to the transfer fee, and then the buying club must negotiate personal terms (i.e wages, image rights, etc.) with the player himself.
Difference between buy-out and release clauses
A release clause, simply put, is a clause in a player’s contract which automatically requires a club (subject to qualifying conditions dependent on each individual contract, such as non-participation in the Champions League, a specific date, or a bid from a Champions League club) to accept an offer of a pre-determined amount set out in the contract by the buying club. If the minimum amount is triggered, the player is indeed allowed to speak to the buying club.
Release clauses are not particularly common in the Premier League, although, in the recent past, a few examples come to mind. Joe Allen’s £15 million move to Liverpool was reportedly based on the fact that the release clause in his Swansea contract allowed him to move if the bid came from one of five clubs, which included Liverpool.
Demba Ba’s move from Newcastle to Chelsea was possible for £7 million due to the fact that he had a release clause that allowed him to move to a Champions League club if a bid of that figure was received. When Marouane Fellaini made the move from Goodison Park to Old Trafford on deadline day, Manchester United had to pay £4 million more than they might have if they had moved early due to the expiry of Fellaini’s release clause.
A buy-out clause is a different proposition. In Spain, buy-out clauses are mandatorily inserted into every player’s contract, as given by the Real Decreto 1006/1985 of 26 June (For the Regulation of the Employment of Professional Sportspeople).
This has created a tendency in Spain to insert huge release clauses into the contracts of star players. Lionel Messi has a rumoured buyout clause of €250 million while Cristiano Ronaldo is said to have a buyout clause of €1 billion. These are not so common in England due to the differences in legal systems and the way in which English courts are likely to look at these clauses, which in most likelihood is to hold them null and void.
A buyout clause, simply put, is the valuation that a club has of a player. If an offer equal to the buyout clause is met by a purchasing club, the selling club must accept the offer and the player may move. The key difference here is that under Spanish law, it is not the purchasing club that makes the payment, but the player himself. It is this small detail that creates a lot of the complications and technicalities involved in triggering a buy-out clause.
Buy-out clauses examined
A buy-out clause, or "cláusula de rescission”, is literally what it claims to be. A player must buy out the pre-determined value of his contract. They had existed in Spain for about 10 years before the landmark Bosman judgement, but post-Bosman, it became a way that nervous clubs thought they could protect themselves against a possible legal and financial meltdown wasn't heading their way with players coming and going as they chose.
The idea here is that when a player signs for his new club, he and the club agree on a set fee, which, if paid, allows the player to leave and his employers cannot prevent that.
Each individual contract with a player will have a differently worded buy-out clause. Some buyout clauses would be triggered simply if an offer of the stipulated amount was received while others would have other factors that would be needed to complete the transaction. Either way, the important thing to note here is that if the buyout is activated, the amount must be transferred by the player to the selling club. This is where things get interesting.
Most players, despite earning large sums of money, don’t have £30-40 million to buy out their contracts. This must be provided by the purchasing club, who would transfer the money to the player, who then uses those funds to buy out his contract. Now, when the purchasing club transfers the money to the player, that amount is subject to tax. In Spain, the rate of tax payable on this transaction, which would have to be borne by the purchasing club, can be anywhere from 20 to 47 per cent.
If the selling club are okay with allowing the transfer of the player, then they might reach an agreement for an amount slightly over or under the buyout clause, depending on their relationship with the purchasing club. Usually, what then happens is that a sum is reached that is midway between the value of the buyout clause and the amount that would have to be paid if the taxes payable on the buyout clause were also due.
If the transfer is a hostile transfer, i.e the selling club does not want to sell and is forced into it due to the triggering of the buyout clause, it becomes a very different proposition. The selling club may take the stance that if it is an unwelcome bid, they will force the legal application of the clause. The legal application of the clause creates a very different price.
This can mean one of two things, both of which will vastly inflate the price. In the first case, it can mean that the Value Added Tax (VAT) is added. The rate of VAT in Spain is 18 per cent. There has been precedent for clubs agreeing to include VAT in the invoice of the transfer, which can then be claimed back from the state.
However, if the selling club feels that it is a hostile bid, it will not. This will mean that the buying club will have to pay the clause plus the 18 per cent. Thus, a footballer who has a release clause of €40 million will now cost a club €47.2 million.
The second option is for a club to refuse any transfers until it is absolutely forced to. This is where Decreto Real 1006/1985 kicks in and becomes applicable. However, this legal provision is exactly what it claims to be – a legally enforceable buyout clause. These exist to protect the “community rights” of footballers (i.e that a contract can be unilaterally broken subject to satisfaction of various conditions and a reasonable notice period) under various European Community Treaties.
The player deposits the stipulated amount in the contract with the Spanish football regulatory authorities and unilaterally breaks his contract. As mentioned earlier, that sum is given to him by the buying club in order to buy himself out. As soon as that money is transferred to his account, however, it is liable to taxation at a rate that ranges from 20 to 47 per cent. Thus, a player with a buyout of €40 million would now have a real-life cost of €58.8 million.
From this simplified analysis, it’s clear that there is a veritable myriad of regulations that have to be complied with for a club to purchase a player through activation of a Spanish buyout clause. It is a transaction that requires systematic planning through both legal and tax frameworks, and cannot be rushed through on deadline day.
Manchester United found this out the hard way last season, as their move for Athletic Bilbao’s Ander Herrera was scuppered not due to “imposters”, as is often reported, but due to their unwillingness to try and hastily rush through a deal that involves a highly complicated system of regulations.
Successful navigation of this system can be seen in the way that Bayern Munich were able to secure the signature of Javi Martinez from Bilbao in 2012, which was a patient, nearly month-long approach to ensure that all the formalities were adhered to.
A buy-out clause offers protection to a club and its management. It allows them to set exorbitant numbers for players deemed valuable, to prevent them from being poached by larger clubs. It also serves as a sleight of hand.
In modern football, nearly every player has a price. The buyout clause sets the price for a player in the market and also gives them the answer when fans question why a star was sold.
The answer is simple – it’s because the buyout clause was met. The willingness of the selling club to part with the player will go a long way in determining the actual figure that the purchasing club will have to pay to secure their target.