Swimming in debt, Brazilian football clubs want to become corporations

In March, Eurico Miranda passed away at the age of 74 from a brain tumor. He was the epitome of a Brazilian football cartola, or “top hat,” the term used for the administrators of the country’s clubs and synonymous with corruption, financial opacity, and amateurish management practices.

Eurico Miranda’s club was Vasco da Gama, one of the biggest sides in Rio de Janeiro, and for a large part of his life, it really was his club. From 1980 until a year before his death, he was the leading power broker within Vasco, serving as a controlling vice president under Antônio Calçada for 20 years, and occupying the top job himself from 2001 onward.

Mr. Miranda was famously caught walking home after a Vasco match in 1997 with the game’s gate receipts stuffed into his jacket. He later claimed the cash was stolen in an armed robbery, and BRL 75,000 of the club’s money simply vanished into thin air.

At the end of the day, Eurico Miranda loved his football club. And by hook or by crook—though more often by crook—he did everything in his power for his Vasco da Gama to rise to greatness. His death, however, could signal the end of an era in Brazilian football, ushering in a very different standard of club administration.

How Brazilian clubs work

The reason a person like Eurico Miranda could ever make it to the highest position of a major Brazilian football club lies in how these institutions are run. Unlike most of their European counterparts, Brazilian clubs are not limited companies; they are sports clubs in the strictest sense of the word. They have members who pay dues and can enjoy the club’s facilities, its swimming pool, gym, bar, and restaurant. The organization is made up of a number of different teams of various sports, with the football team (which, in some cases, have millions upon millions of supporters) being only a part of this structure.

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As a result, the directors of Brazilian football clubs do not respond to shareholders, they answer to the wealthy whiskey-soaked gentlemen in the cigar bar, they respond to the pushy parents dragging their children along to tennis class every weekend.

Without a financial responsibility to shareholders, this model leads to amateur administrations and mismanagement. Presidents serve terms of two years, and feel free to run up debts to secure re-election, when they leave the club, they have no personal liability.

From FC to LLC

A change could be on the horizon, however. This week, representatives of 14 Brazilian clubs met with the House Speaker, Rodrigo Maia, to discuss the creation of a bill that would turn football clubs into corporations.

The idea is that clubs, which are currently classed as non-profit organizations, would become corporations or limited-liability companies, with the opportunity to be floated on the stock exchange.

Several of Brazil’s biggest sides have expressed this desire, but there are set to be many sticking points on the legislation itself.

Currently, football clubs are exempt from paying income tax and a trio of social security contributions, the proposal being studied would force all clubs to pay full tax, regardless of whether they become corporations or not.

As things stand, the 20 teams in Brazil’s first division owe a combined total of BRL 1.8 billion of tax to the federal government. Atlético Mineiro alone, a major club from Belo Horizonte, has a tax bill of over BRL 300 million.

Over the years, clubs have simply ignored the tax authorities, investing their money in purchasing players, offering wages and going after trophies. The situation got out of hand decades ago, and now the football teams are in a cushy situation of unpaid tax: they cannot pay their bills, and they are too important to go under. As a result, the government has offered a series of refinancing packages to Brazilian clubs, each one negotiated with highly favorable terms for the debtors. 

In order to attract clubs to become businesses, the brains behind the soon-to-be submitted bill in Congress are planning another refinancing program, even more beneficial than those which preceded it.

Currently, 40 percent of the interest on late payment of clubs’ tax bills is forgiven by the government. The new proposal would increase this discount to 50 percent. Furthermore, clubs would be allowed to record tax credits by way of merging with third-party companies.

Showing your colors

Among the Brazilian clubs working toward this new model of turning clubs into businesses, the biggest advocate for the change is the Rio de Janeiro side Botafogo. With difficulties paying the wages of its employees, Botafogo is the Brazilian champion in terms of debts, being an estimated BRL 750 million in the hole. At the beginning of discussions to transition clubs into corporations, Botafogo already went about preparing a business plan, which it sees as its salvation.

Rodrigo Maia, one of the most powerful political actors in Brazil and a backer of the new legislation, is coincidentally a die-hard Botafogo fan, giving him added incentive to push this bill through.