The Seafarers Earnings Deduction (SED) is arguably the taxation scheme of choice for most Seafarers nowadays working on foreign going yachts. It is open to all EU member states whose citizens qualify as resident in the UK under the Statutory Residence Test (SRT).
However as the UK and Spain have different fiscal years the former running from April to April and the later according to the calendar year it is possible to be resident in both ‘contracting states’. In the event of this happening the Double Taxation Treaty must be considered.
Residency lies at the heart of any tax question; it is the deciding factor when establishing where an individual owes tax. Globalisation and the freedom of movement has given rise to an increasing number of individuals being resident in more than one country at the same time. This in turn presents its own series of problems, which this article will explain with suggestions as to what can be done to avoid them.
Seafarers are arguably one of the most likely professions to experience problems from Double Taxation. Those who have been in the industry for several years may still file returns in the UK but may now have family living in Palma. Spanish Residency law clearly states that if your spouse lives in Spain irrespective of whether you spend less than 183 days a year there you are considered a resident for tax purposes. Additionally the factors highlighted below are to be considered when evaluating one's residency status:
- Spends more than 183 days a year in Spain
- Centre of Vital Interests (Personal & Economic Interests)
The UK/ SPAIN Double Taxation Agreement (DTA) was signed on 14th March 2013 and came into force 12th June 2014. The treaty is designed to help citizens from both countries to avoid a situation by which Double Taxation occurs and is based on the OECD Model. The residency Article in the DTA provides ‘tie-breaker’ rules for determining residence, where an individual is resident in both countries under their respective domestic laws.
The ‘tie-breaker’ rules outlined in Article 4 consist of a series of tests to be applied successively until residence for the purposes of the agreement is attributed to one State or the other:
Permanent Home: An individual is a resident of the State in which they have a permanent home available to them (though not necessarily owned by them). If they have a permanent home in both States it is necessary to look at the next test:
Centre of Vital Interests: An individual is a resident of the State to which their ‘personal and economic relations’ are closer. If it is not possible to determine this, or they have no permanent home available in either State, then it is necessary to look at the next test:
Habitual Abode: An individual is a resident of the State in which they have their habitual abode. If they have an habitual abode in both States or in neither, then the final test must be applied.
Nationality: An individual is a resident of the State of which they are a national. If they are a national of both States then the agreement below applies:
Mutual Agreement: The competent authorities of each State shall settle the question by mutual agreement.
It is imperative that an individual does not arrive at a point by which contracting States ‘settle the question by mutual agreement’. This in turn means that both States can claim tax at source and will be held on account until an agreement is arrived at. In our experience this process can take up to 4 years and can see 60% of a client's income being held on account.
This article highlights the perils that crews face when exceeding 183 days in Spanish waters or establishing a permanent home while continuing to file under the Seafarers Earnings Deduction. It is advisable if you feel that you are in breach of any of the points highlighted in Article 4 of the DTA that you either relocate your permanent home or centre of vital interests or contact the Spanish authorities and notify them of your wish to become resident.
The Spanish authorities are even more aware nowadays of yacht crews who flaunt the system to reap the mutual benefits of living in Spain and filing in the UK. If your case were ever to go to treaty you will find in spite of the treaty that exists that the process will be lengthy and drawn out.
Any tax advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.