Electronic sports (esports) are booming, despite the fact that videogames have existed now for more than 30 years. The number of international esports tournaments and the prize money is increasing from year to year. However, as professional esports is a fairly new phenomenon, some legal questions remain unanswered. This article gives an overview of the legal areas relevant for esports in Austria and provides a legal analysis on the taxation of esports tournament winnings under domestic and international tax law.

What is esports?

Esports is attracting more and more attention from players who want to play professionally and generate their income from it. Worldwide championships cater to the demand of professional players around the globe.

The difference between sports and esports can be boiled down to the environment in which the sporting activities are held. While the outcome-defining activities of normal sporting events will manifest themselves in the real world, the outcome defining activities of esports will manifest themselves in the virtual or electronic world.

The world of esports consists of various forms of competitive video gaming, stretching over different games (e.g. Starcraft II, League of Legends, Fortnite, FIFA), different devices (e.g. console gaming or computer gaming) and different formats (e.g. individual or team-based tournaments) in which professionals compete with a specific goal (i.e. winning a prize). These tournaments are usually played in an offline setting, such as this year's Fortnite Championship Final, where an Austrian player and his partner won EUR 3m in prize money.

Legal challenges and issues

Even though a considerable amount of money is involved in the esports business, legal writing about this issue has been scarce and special legislation is almost entirely absent. Therefore, existing laws and regulations and their principles have to be transposed and applied to the esports world. This leaves many questions, as these laws were not made with the emergence of esports in mind. Among others, the following fields of law are to be considered when discussing esports.

Constitutional law: In Austria, competences which are not specifically allocated to the Federal Government (Bund) remain with the Federal States (Länder). It may be asked which public body has the authority to enact legislation in the field of esports. In Austria, there is already talk of qualifying esports as a "sport", where the legislative competence would fall to the federal states.1 It remains to be seen how the new government in Austria will deal with the classification of esports.

Employment law: Esports players are often under contract with a professional esports team. Sometimes an employment contract is even a pre-condition to be eligible for a tournament. But issues can arise regarding the qualification of such a contract. Is the esports player self-employed or an employee? Many esports players "train/work" during the night in order to train/play with other esports players all over the world. This raises questions under the Austrian Working Hours Act. When does playing represent working time and when is it leisure time? Also, tournaments usually take place in different countries, which may lead to an excess of the maximum working hours (depending on the travel distance and working/travel time). From a labour law perspective in particular, there are many questions that for the time being remain unanswered.

Tax law: As esports players can earn a considerable amount of prize money, questions arise primarily with regard to how such income should be taxed under the applicable domestic tax law and, in the context of international tournaments, which country has the right of taxation. This article will focus only on the income tax treatment of tournament winnings ("Prize Money") of professional esports players ("Pro-Gamers").

Intellectual property law: Video games are protected under copyright law as computer programs or cinematographic work. Therefore, unlike traditional sports, the consent of the publisher is required to hold esports tournaments. The publisher can also alter the rules of the game and the game itself. This can raise issues for esports tournaments which require a certain degree of continuity for players to prepare for such events. Here the question is whether the streaming of a tournament already falls under the duplication. The presentation of the tournament on a big screen or live streaming on the internet can under certain circumstances interfere with the author's exploitation rights. In practice, this means that the organiser of the tournament should obtain the copyright holder's consent. The esports player himself cannot claim any copyright protection.

Competition law: Questions can arise on the demarcation and outline of the esports market, as the esports world consists not just of one but of several games. Moreover, as esports players are getting more and more sponsorships, issues can arise regarding advertising and labelling requirements.

Gambling law: In certain games like FIFA or CS:GO, the publisher offers players so-called "loot boxes" which give them the opportunity to obtain a unique virtual object in the game. As the reward is based on chance and since keys must be purchased (with real money) to open the loot boxes, it is possible that these loot boxes will fall under the scope of Austrian gambling law and as such be subject to permits and gambling fees. Furthermore, since the rise of high-value esports tournaments, online betting sites have begun to allow wagers on the outcome of professional esports games. Under the law of the Federal States, such online betting site operators might be subject to licensing requirements if they maintain servers or have a physical establishment in the respective Federal State. Nonetheless, betting laws in Austria are generally not applicable to foreign betting operators without a domestic physical presence.

Events law: Under the law of the Federal States, event organisers are required to obtain a permit for certain events. Hence, it is possible that organisers of esports tournaments are also subject to such regulations and approvals, depending on the local law of the Federal State.

Criminal law: Due to the money involved in esports, there is a risk of esports tournaments being manipulated. Doping, cheating, game manipulation, money laundering and betting fraud are all issues which can arise. How should these be dealt with in practice and do these rules even apply in the context of esports tournaments?

Over the next few years we will see how esports and its effects can be integrated into our legal system. A first step in this direction is the following classification of tournament profits under international and domestic tax law

Issues of Austrian and international taxation

Austrian tax law

The main question that arises with regard to esports is how the Prize Money should be classified for tax purposes. This certainly depends on how frequently these esports players attend tournaments and therefore how "professional" they are. Under Austrian tax law, a distinction must be made whether the Prize Money received is viewed as "source of income" (Einkunftsquelle) or "hobby activity" (Liebhaberei). A hobby activity is defined as an activity of a taxpayer carried out for personal reasons or interests without the intention to generate profits. Income resulting from a hobby activity is, generally, not subject to Austrian income tax.

On the contrary, professional athletes practice their sport professionally and the income they generate is part of their professional sports activity. In this respect, it could be argued that esports must be treated similarly to other sports because victory or defeat is determined by the player's ability, not luck. Hence it is fair to conclude that the Prize Money of Pro-Gamers should be viewed as a source of income rather than a hobby activity.

To be able to determine which type of income the Pro-Gamer earns, the Pro-Gamer's contracts with the esports organisation, club or team need to be assessed in detail on a case-by-case basis. Depending on the contract and its actual implementation, the Pro-Gamer could either be qualified as an employee or as self-employed. If the Pro-Gamer qualifies as an employee for tax purposes, the employer (i.e. the esports organisation, club or team) is responsible for the withholding and remittance of wage tax and social security contributions.

Pro-Gamers who play individually without being in an employment relationship and with the intention to realise profits (Gewinnerzielungsabsicht) shall be treated as self-employed for tax purposes. In such a case the Prize Money shall be considered as income from commercial activities (Einkünfte aus Gewerbebetrieb). The Pro-Gamer must declare such income in their annual income tax return and is liable for the payment of tax. If the esport is qualified as a sport and the Pro-Gamer participates mainly in tournaments abroad, it will be possible to apply for a beneficial tax treatment for sportspersons, where only 33 % of the income derived by the Pro-Gamers would be subject to Austrian income tax. Assuming a maximum income tax rate of 50 – 55 %, the effective tax burden in case of the beneficial tax treatment for sportspersons would be approximately 16 – 18 %.

As a result, Pro-Gamers who are resident in Austria for tax purposes shall be subject to Austrian income tax (unlimited tax liability). This applies equally to non-Austrian resident Pro-Gamers who participate in esports events in Austria. Such non-Austrian resident Pro-Gamers will be subject to Austrian income tax on the Prize Money received in Austria (limited tax liability).

As Austrian resident Pro-Gamers are subject to taxation in Austria on their worldwide income, tournament winnings received abroad could lead to potential double taxation.

International taxation

As professional esports tournaments are often held outside of Austria (i.e. the country of residence) and since both the country of residence and the country in which the tournament is held (i.e. the source state) have the sovereign power to impose taxes on the Prize Money, a double taxation situation could emerge. Thus, Pro-Gamers could be taxed twice in different jurisdictions for the same Prize Money.

To avoid such double taxation, Austria has entered into double taxation treaties with many countries, almost all of which are based on the OECD Model Tax Convention ("MTC"). Art. 17 of the MTC sets out that income derived by sportspersons from performing activities may be taxed in the state in which the activities are performed, regardless of whether these sportspersons are residents of that state.

Traditionally this provision applies to participants of more classical, athletic sports (e.g. runners, swimmers). However, the commentary on Art. 17 of the MTC stipulates that the provision also applies to less classical sports, like golf and car racing, and even activities which are usually regarded as entertainment, such as billiards and snooker, chess and bridge tournaments. But what about esports? Can the Pro-Gamer be considered a sportsperson? In light of the broad nature of the term sportspersons given by the OECD, there are good arguments that Pro-Gamers should be considered as sportspersons within the meaning of Art. 17 of the MTC and that Prize Money should be taxed in the state were the tournament is held. Depending on the applicable double taxation treaty, Austria may exempt the foreign source income from tax or tax the foreign source income, but credit the foreign taxes paid. The credit method does not apply if the Pro-Gamer opts for the beneficial tax treatment of sportspersons according to Austrian tax law.

While Art. 17 of the MTC lends itself more easily to offline events that take place at a certain location, it is more complicated to decide where online events are located. An example of this is the FACEIT Pro Series: Apex Legends, an online tournament in which 16 professional teams have a chance to take home part of the weekly USD 5,000 prize pool for the game Apex Legends. So, where are the activities performed for such a tournament? The country in which the servers are located? The place where the players take part in the event? The location of the organising company? This remains unclear, meaning that tournament winnings might be subject to either double taxation or double non-taxation.

Furthermore, it is not uncommon for tournament organisers to enact their own tax and payment policies with regard to the Prize Money in order to comply with local tax requirements.

In summary, it is apparent that Pro-Gamers should follow the advice of their tax professional to determine the best way to structure the Prize Money they receive. Nevertheless, while some might find the magnitude of tournament winnings surprising, the Prize Money only makes up a small portion of Pro-Gamers' actual earnings. Other sources may include sponsorship deals, income from streaming through partnerships with streaming websites and donations from their viewers. The value added tax treatment on all of these transactions must also be considered. These topics will be examined in forthcoming articles.