by Tom Andrews, CPA
Any nonresident crewmember that has worked on a foreign flagged vessel has probably been asked to sign form 8233 “Exemption Form Withholding on Compensation for Personal Services of a Nonresident Alien”. By signing this form the vessel/employer is relieved from the responsibility from having to withhold federal taxes from the wages of nonresident crewmembers while the vessel is cruising in US territorial waters. When a crewmember signs form 8233 they are basically attesting to the fact that they are a resident of a country that has a tax treaty with the United States and that they qualify for the benefits under their home countries tax treaty with the United States. In most cases a crewmember that qualifies for tax treaty benefits may work on a foreign flagged vessel in the Unites States for up to 183 days without the employer withholding tax from their salary.
Unfortunately many employers are accepting Form 8233 from crewmembers without completing the due diligence necessary to determine whether or not the nonresident crewmember qualifies for tax treaty benefits. A common error is that the crewmember is not a resident of a country that has a tax treaty with the United States, if a crewmember is a resident of a country that is not party to an income tax treaty with the United States the employer (in most cases) must withhold federal income taxes from that crewmembers salary. Another common error I have encountered is that the foreign employer is not eligible to accept Form 8233 from nonresidents, this has more to do with how the foreign corporation is organized, just because the vessel is foreign flagged or the employer is a foreign entity does not mean they automatically qualify to accept a crewmembers claim to tax treaty benefits. Lastly another common error is on the part of the crewmember, if a crewmember is requesting that an employer not withhold tax from their salary due to a tax treaty benefit claim, that crewmember must be a tax resident in their country of residency, many crewmembers have declared themselves as nonresidents for tax purposes making them ineligible for tax treaty benefits between the United States and their home country.
Withholding tax from nonresidents is never a popular HR decision however as the yachting community expands and the media continues to scrutinize the personal lives of wealthy yacht owners we are fielding more and more inquiries from the legal and accounting representatives of owners whose sole mandate is to keep their client in compliance with the law. It was not long ago that an owner and crewmember would use an undeclared foreign bank account without fear of discovery, within a shockingly short period of time the US has subpoenaed the names of tens of thousands of US account holders.
In conclusion, 8233 is a great tool to avoid having to withhold tax from nonresidents it is just important that the form is not used as a “tax exemption waiver” as this is not the purpose of the form. While this column only touches on the basics of this topic it is important that a crewmember, owner or management company consult with their tax attorney/CPA regarding any technical questions they many have.