In light of the recent initiative by the Prime Minister of Georgia to raise the tax on winnings from 2% to 5%, we reached out to experts at 4H Agency, a boutique gambling consulting firm, for their insights, analysis of the proposed change, as well as their take on the situation as a whole.
Dmitry Hotsyn, Senior Consultant at 4H Agency, comments:
“Taxation of winnings remains a contentious issue in regulated markets. Drawing insights from various countries, it becomes evident that there is no one-size-fits-all approach to this matter. However, discernible trends toward the regulation of winnings taxation can be identified.
To comprehend the essence of this issue, one must first explore the objectives pursued by states. The primary goal is often the control of money laundering, as untaxed winnings provide a convenient avenue for such activities. A secondary objective is to boost budget revenues through this source. While it might seem logical that higher taxes would be beneficial — curbing money laundering and contributing to the budget — the global gambling market is far more intricate.
This complexity is particularly pronounced in online gambling, where offshore (illegal) operations play a role in almost every market. The level of taxation on winnings emerges as a significant factor influencing the growth or decline in the prevalence of illegal operations.”
How does winnings tax affect the growth of offshore trading?
Let’s consider the player’s scenario. Imagine he has USD 10, which he is ready to bet with the hope of winning. Let’s assume he wins and now has the right to receive the prize. Now the struggle between offshore and legal gambling begins because the offshore operator will not withhold any taxes and the player will receive the winnings in full. But the legal operator, at the time of obtaining a license, agreed to fulfill all licensing requirements, is forced to withhold part of the winnings to pay the tax.
It’s essential to acknowledge that seasoned players comprehend this dynamic and often lean towards illegal operators. Consequently, the state loses control over a substantial market share, leading to a reduction not only in taxes on winnings but also in all other taxes contributed by the legal market (such as GGR tax, profit tax, deposit tax, etc.).
Ukraine serves as an illustrative example of this scenario, where the taxation on winnings stands at 19.5% (18% income tax + 1.5% military tax) of ANY payment from the operator to the player. In this system, the size of the bet itself and the player’s previous losses are not considered. The term ‘income’ (winning) loses its significance. Consider a hypothetical example: a player places a USD 10 bet on sports with odds of 1.1 and wins, theoretically expecting USD 11. But here the tax code comes into play, which means USD 11 by winning and requires the operator to deduct 19.5% of this amount to the budget, which is USD 2,145 and as a result the player receives USD 8,855 into his account. If the player wins, he receives less than he originally bet. In such a scenario, a player, experiencing this situation at least once, may be compelled to either cease betting or, in many cases, turn to illegal operators.
Consider another example – Belgium and the UK, where winnings are entirely untaxed. Consequently, for the player, there is no apparent distinction in choosing between an offshore and a legal operator. Although a legal operator bears the burden of licensing and corporate taxes, this is a facet of the operator’s business model. Is this risky? No, with proper financial control and monitoring tools, this approach increases the share of legal operations.
Below is a table outlining the taxation of winnings in various countries:
| Country | Tax on winnings |
|---|---|
| Hungary | 15% |
| Poland | winnings from online betting, number games and cash lotteries are exempt from tax if they do not exceed PLN2,280 (€484). Meanwhile, any winnings from online betting of more than PLN2,280 (€484) are taxed at the rate of 10%. |
| Bulgaria | Any winnings and merchandise awards received through participation in games of chance organized under a license issued according to the procedure established by the Gambling Act or according to the legislation of another Member State of the European Union, or of a State which is a Contracting Party to the Agreement on the European Economic Area. Therefore, there is no tax rate in Bulgaria. |
| Lithuania | 15% |
| Croatia | For cashable income up to HRK 10,000 (USD 1,330) the applicable rate is 10%.For income between HRK 10,000 and 30,000 (USD 1,330 and USD 3,990) the applicable rate is 15%.For income between HRK 30,000 and HRK 500,000 (USD 1,330 – USD 65,000) the applicable rate is 20%.For cashable income up to HRK 500,000 (USD 65,000) the applicable rate is 30% |
| Serbia | 15% |
| Czech Republic | Winnings are subject to income tax at the rate of 15%, but only if the difference between the total winnings from the relevant type of gambling and the bets or bets placed on the corresponding type of gambling in the relevant year exceeds CZK 1,000,000 (USD 43,440). |
| Romania | For cashable income up to RON 10,000 (USD 2,150), the applicable tax rate is 3%.For income between RON 10,000 and 66,750 (USD 2150 and USD 14351), the applicable tax is RON 300 plus 20% for income exceeding 10,000 RON.For income exceeding RON 66,750 (USD 14,351), the applicable tax is RON 11,650 (USD 2,504) plus 40% for income exceeding RON 66,750. |
| Ukraine | 18% |
| Moldova | 18% of winnings if the amount is more than 240 MDL (USD 12) |
| Georgia | 2%, it is proposed to increase to 5% |
| Great Britain | not taxed |
| Azerbaijan | 10% |
| Armenia | not taxed |
| Belgium | not taxed |
We have already discussed the main difference between the absence of a tax on winnings and its presence at a high rate. In the table above, you may observe another interesting approach: having different rates for different winning ranges (Romania) or the threshold at which winnings tax is applied (Czech Republic, Moldova). Essentially, this can be called a mixed model between no taxation and the presence of a tax on winnings. Why might this model be interesting? On one hand, the state, pursuing the goals we discussed at the beginning, maintains control over potential money laundering and preserves budget revenues. On the other hand, it exempts from taxes or significantly reduces them for less risky winnings, thereby enabling legal operators to maintain competitive advantages over illegal ones.
To summarize, we reiterate that there is no single approach to the taxation of winnings. The only pattern that can be identified is the direct connection between an increase in the tax on winnings and the growth of illegal operations”.
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