Residency and Tax

Where are you resident?

Where should you pay Tax?

Should you pay Tax?


These questions are usually as easy as “who do you bank with?” However, for some Yacht Crew, they can be as complex as “what is the meaning of life?” The problem with residency and overseas or cross-border tax is that there is nothing in black and white, most of it is a grey area.

Let’s start with the basics :

1) If you spend more than 183 days a year in a European country, you are considered a Fiscal Resident. This means that the country you are living in expects you to pay tax on your Income as well as Capital gains and possibly even Inheritance Tax in that country.

2) If you do not declare residency anywhere then you are usually expected to pay tax where you are considered domicile.

3) Domicile is one’s primary residence for tax purposes. A domicile is established via a driver’s license, voter registration and/or as being the address on record for credit cards and other bills – it could possibly be the country of birth of your father. It is not necessary that one actually lives in their listed domicile, although most people do. Because a domicile is established primarily for tax purposes, it is somewhat controversial. This is due to the fact that many foreign workers establish residences elsewhere to avoid paying taxes. Most countries will argue that you are domicile in that particular country if you were born there or plan to die/ be buried there. Domicile is an extremely complicated issue and I have outlined the very basics only.

A quick example of how complicated it can be :
Person A was born in France where his father was working at that time. However, his father was from Australia and his father’s permanent home was in Australia. The family subsequently moved to the UK for a couple of years and when Person A was 18 he got a job as a deckhand on a boat. He has worked around for a few years on the boats and never really declared residency anywhere or paid tax anywhere. His domicile = Australian.

4) Within Europe if you spend more than 90 days in a country and pay tax in that country, but spend no more than 183 in any other country, then you can pay tax in the country in which you reside for 90 days and not in another.

For example, you work on a boat but are based in Monaco for 4 months a year. You have a house in Spain where you spend 5 months a year and you spend the remaining 3 months at sea. You could then declare your residence in Monaco, as long as you rent a flat there. This is one way of keeping the tax you pay to a minimum.

There are three main taxes that most people don’t particularly like :

  • Income Tax
  • Capital Gains Tax
  • Inheritance Tax

Now I will concentrate mainly on Spain and France as these are the biggest centres for yacht crew in Europe at the moment.

Currently (2014) France Spain
Income Tax 5.5% – 45% 24% – 52%
Capital Gains Tax 21% – 25 % 21% – 27%
Inheritance Tax 5% – 45 % 1 % – 34 %

The level of the taxes depends largely on the amount, the relationship between the parties and your residency.

There are deductions that can be made from these amounts depending on such things as if you have dependents, allowances and, with succession tax, the relationship between the donating and receiving parties.

Property is the obvious one that can prove to sometimes fall into all of these categories.

Assets such as investments can be wrapped in an “assurance vie” or life assurance wrapper. This creates an extremely tax-efficient vehicle for you or anyone else who might be receiving the money. It gives you the option on when to pay your tax on it and how much you pay.

Some of these rules are set to change on January 1st 2015 in Spain.

The following seem to be the relevant (incl. unchanged) points for private banking clients:

  • Wealth Tax and Inheritance Tax are not included in this reform. Although the government initially said they would be, changes have been postponed pending a global agreement with Spanish autonomous regions.
  • Marginal income tax rates are reduced at 45% and corporate ones to 25%. However, the income threshold to reach the new marginal maximum is significantly lower (from 175,000 EUR to 60,000 EUR).
  • The “dual base” approach in Income Tax is maintained: The income tax rate on Savings is reduced from 27% to 24% in 2015 and to 23% in 2016. Savings income threshold is increased from 24,000 EUR to 60,000 EUR.
  • Capital gains in shares and funds held for less than one year will not be taxed at marginal income tax rate from 1 January 2015.
  • Assets acquired prior to 1994 will be now fully taxed on gains if sold after 1 January 2015, without deductions.
Source :  Boletín Oficial 121/000109
This article is written to the best of the understanding of the Boletín Oficial 121/000109 which was realesed to change the  Ley 35/2006 and could be subject to change.

If are interested in finding out if you pay too much tax, if you need more information on residency or domicile or to find out if your assets could be more tax efficient for you, please contact your local adviser

Article by: TOM WORTHINGTON – Adviser in Palma de Mallorca