UK Seafarers Earning Deduction and Tax Treaties

by Tom Andrews, CPA

When a nonresident crewmember is employed on a foreign flagged vessel the employer may be required to withhold federal income taxes from the nonresident while the crewmember is present in United States Territorial waters.  The employer may be exempted from withholding tax from the crewmember salary if that crewmember is from a country that has an income tax treaty with the United States.   

Some of the countries that have tax treaties with the United States include but are not limited to United Kingdom, Canada, Australia, New Zealand, France, and South Africa. Many of these treaties allow the employer to exempt wages that are earned by a resident of the treaty-partner country where (i) the employee is physically present in the United States on fewer than 183 days during any 12 month period that begins or ends during the taxable year in questions: (ii) the employer is not a resident of the United States and (iii) the employer does not maintain a permanent establishment in the Untied States which bears the cost of the wages. In order for the employer to exclude crewmember wages that nonresident crewmember must present the employer a properly executed form 8233. 

The most common reason why a nonresident crewmember might not qualify for a tax treaty exemption is that the crewmember is not considered a resident filer in their home country.  The general rule of thumb is that if you are declaring any paying tax on your worldwide income to your country of residency you probably will qualify for a treaty based exemption.  While this is true in most cases the United Kingdom affords their citizens an income tax exemption for seafarers.  It is possible that a citizen of the United Kingdom may be considered eligible for a tax treaty exemption even though they are not paying tax on that same income in the United Kingdom. 

Our research seems to indicate that if you are a United Kingdom citizen/resident and are claiming the seafarers earning deduction as a “domiciled resident” you may be eligible to claim a treaty exemption under the UK/US income tax treaty.   It should also be noted that any tax treaty position should first be approved by your employer and a qualified tax professional should be consulted to analyze your individual tax circumstances.   Since the potential tax savings can be substantial we do recommend that United Kingdom citizens consult with an international tax attorney to determine how best they can position their tax filings so that they can maximize their tax savings in both the United States and the United Kingdom. 

If you determine you might be qualified for a tax treaty exemption you will want to contact your employer to confirm you have taken the steps necessary to properly execute the form  8233.  These steps will also include the need to acquire an ITIN (individual taxpayer identification number).  We recommend that this research be completed before you arrive in the United States as some documents must be certified at your countries passport office or embassy.

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