How to choose a flag for a Super Yacht?
One of the most widely-used saying about yachts is that "the happiest day of a yacht owner's life is the day they buy the yacht and the day they sell it." Although many people believe this axiom to be true, it does not necessarily have to be the case if you approach yacht ownership with an understanding of what is involved. This is particularly true in Asia where despite an increasing interest in yachting potential owners are still on a learning curve. The majority of potential buyers do not understand the complexities of yachting and when coming to buy, they only consider the cost and are reluctant to incur the cost of advice. But a yacht is not only a luxury toy, its purchase, ownership and operation, give rise to a number of legal, fiscal, financial, technical issues and contractual relationships which require careful planning and consideration.
One of the most important decisions to make once the yacht has been chosen is the ownership structure and registration.
Using a company, whether onshore or offshore, to own and operate a yacht (in comparison to registration under the yacht’s owner name) not only provides some privacy to the ultimate owner, but will also limit his liability in the event of a claim. The use of a suitable yacht owning company may also facilitate legitimate tax mitigation, as well as asset protection and estate planning.
As for choosing the most suitable jurisdiction(s) to own and register a yacht, which can be two different jurisdictions, a number of factors to bear in mind including the place of residence of the owner, area of navigation, use (pleasure, commercial or dual), characteristics of the yacht (year of built, length, tonnage, conformity with commercial code and International Conventions), VAT/tax status of the yacht, nationality of the crew, will need careful analysis.
The chosen jurisdiction should be universally accepted, whilst providing political and economic stability without subjecting the owner and the yacht to unnecessary regulation and bureaucracy. Choosing a registry with a poor reputation or one that is targeted by Port States and Customs could have a detrimental effect on the smooth running of the vessel.
Lenders and insurance companies will also review a Flag State’s enforcement of international environmental, safety, procedures, standards, compliance with international regulations and casualty record. A poor record will inevitably affect the decisions of the lenders and underwriters.
The political stability and reputation associated with the British Red Ensign jurisdictions (which include Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey and Turks and Caicos) make these jurisdictions a popular choice. As well as having reputation for efficient management and administration, they also benefit from British Consular support which may be useful in connection with crewing matters. However, there are differences between the Red Ensign jurisdictions e.g. as to registration fees and with some imposing more onerous manning constrictions than others, or requiring vessels to be within a certain age range to be eligible for registration. The relative merits of the flags would therefore need to be compared in each case.
Beyond the Red Ensign group, the Marshall Islands is a popular choice reflecting the Marshall Islands benefit as an offshore jurisdiction. The jurisdiction has adopted many of the IMO regulations, while working closely with the US Coast Guard to ensure that Marshall Islands registered yachts have automatic rights to a cruising permit for sailing in US territorial waters.
In common with St Vincent & the Grenadines, the Marshall Islands allows qualifying private yachts to charter up to 84 days a year, but subjects them to detailed surveys heavy on lifesaving, safety, firefighting and a minimum safe manning certificate when on charter. These two registries could be a good option for yacht owners who are not ready to play a real commercial game.
For navigating within the EU, the pragmatic approach of Malta with tax advantages for commercial yachts and a leasing scheme for pleasure yachts has become an inevitable registry.
For navigating in Asia, Hong Kong is a very popular registry even though, at present it does not distinguish between pleasure and commercial yachts. Langkawi is the only registry in the South East Asia to have adopted a real commercial yacht registry. Most of the main offshore registries have enhanced their presence in Asia including the Marshall Islands, Isle of Man and Cayman which also should be considered for navigating in Asia.
It should be noted that pleasure vessels in commercial service (i.e. commercial yachts) need to comply with stricter rules than yachts that are only used privately. Private yachts are defined as being used solely for the recreational purposes of their owners and guests, while commercial yachts are intended to carry for reward a maximum of 12 to 36 passengers, the number depends upon the registry, and are subject to stricter safety requirements. Among other matters, commercial yachts must be in Class and comply with the Commercial Yacht Code Regulations, in accordance with the chosen registry, and International Conventions and Regulations (ie: SOLAS, MARPOL, Load Line, STCW 1995, ISM and ISPS, MLC…) and minimum safe manning requirements for yachts over 24m.
While introducing a stricter set of rules and regulations, commercial registration enables yacht owners to profit from the chartering activity of their boats and to take advantage of all the other fiscal benefits derived from commercial operations.
Superyachts must usually meet the same requirements as a commercial vessel, if they host helicopters.
After purchasing, structuring, registering, insuring...it’s finally time to cruising! Once again, yacht owners must do their homework before cruising and/or importing vessels as each country, each region have specific navigating rules whether in the EU, the US, the Caribbean or in Asia. Whilst a number of countries have or are starting to recognise the benefits of operating a VAT and duty free temporary importation scheme for pleasure yachts, others have yet to distinguish between pleasure yachts and commercial vessels, especially in Asia.
This article appeared in the Guest Column in the November/December 2013 issue of the Asia-Pacific Boating magazine.
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