Mythbusters: the UK/Spain tax treaty

Writing exclusively for SuperyachtNews.com, Patrick Maflin, of Marine Accounts, advises crewmembers on how best to avoid falling foul of the UK/ SPAIN Double Taxation Agreement…

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 latter 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 have given rise to an increasing number of individuals being resident in more than one country at the same time.

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 following factors 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 14 March 2013 and came into force on 12 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:

– 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 a 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 this sum will be held on account until an agreement is arrived at. In our experience this process can take up to four years and can see 60 per cent of a client’s income being held on account.

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. 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.

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.