Superyacht ownership and the importance of flag state selection

Superyacht ownership and the importance of flag state selection

The purchasing of a superyacht has become something of a status symbol, reserved for the ultra-wealthy; nothing screams success quite like traveling the world aboard your very own floating palace.

The superyachts of today are filled to the brim with luxurious extras, from toys to fine art, while the annual running costs can be a seven-figure sum. However, one of the most important decisions any yacht owner must make – and one that may significantly influence their enjoyment of the yacht – is where the vessel is to be flagged.

What is flagging?

Under international law, all vessels operating on the high seas must be governed by the law of a particular jurisdiction, thus affording them a nationality – or flag state. ‘Flag state’ refers to the country or governmental entity under whose law a vessel is registered or licensed. This can be the owner’s country of residence or, more commonly in the superyacht world, an offshore ship registry in a jurisdiction with laws more attuned to the complexities of yacht ownership and charter requirements. Flag registration also provides a mechanism by which ownership can be evidenced.

An owner who intends to operate their vessel as a private yacht may simply choose to register/flag in his or her home country, though it is important to note that not all jurisdictions have flag registries appropriate for superyacht registration. Alternatively, yacht owners may opt to flag their vessel offshore, using a corporate structure to hold the asset. There are many benefits to flagging offshore, from confidentiality of ownership to the mitigation of some tax burdens. In addition, using a corporate structure can allow yacht owners to operate within the VAT system: a welcome benefit for those wishing to charter their superyachts within the EU and cruise the Mediterranean.

Selecting the right flag state

Popular international flag states such as Jersey, the Isle of Man, Malta, the Cayman Islands and the British Virgin Islands have appealing and relatively simple avenues for setting up offshore corporate structures to hold yacht assets. In some cases, these avenues also offer favourable tax regimes and liability protections – and all within a well-regulated environment that can serve to streamline the process of owning and operating a large yacht.

When choosing a flag, a logical starting point is the ‘White List’. Maintained by the Paris Memorandum of Understanding on Port State Control, it consists of 27 participating maritime administrators and covers both the European coastal states and the North American Basin. Flags on the Paris White List have and continue to demonstrate their willingness to meet all international safety, security and environmental standards and strive to ensure that crew aboard these vessels have adequate living and working conditions. As a result, flags on the White List are subject to less scrutiny and fewer boardings when entering a foreign port.

Further, lenders and insurance companies will also review a flag state’s compliance and enforcement of international regulations and standards, which in turn will influence their decisions and/or premium levels.

Flag registries are, of course, in competition with one another and will therefore offer various solutions depending on the needs of the owner. For example, the Marshall Islands allows yachts registered privately to generate an income from chartering for up to 84 days a year. These funds may then be used to cover costs associated with the ongoing maintenance of the yacht. If an owner would like to recoup some of the yacht’s maintenance costs while keeping it as a privately registered vessel, the Marshall Islands may be a good fit for them. This jurisdiction also subjects all yachts on its registry to rigorous safety surveys, giving comfort to all involved (including the insurers).

Don’t go it alone

Beyond ensuring the selected flag state represents a reputable and highly regulated jurisdiction with rules that suit the yacht owner’s individual requirements, it’s also vital to ensure the flagging process is completed correctly. The actual cost of flagging a yacht offshore is not significant and the process relatively straight forward, providing that the vessel meets the flag state and class requirements of the jurisdiction. Failure to meet the specified requirements, however, can be very costly to rectify.

Flagging is undoubtedly one of the most important aspects of superyacht ownership. It is therefore best undertaken with the assistance of professional advisers and administrators who have significant experience in the maritime industry.