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ONBOARD MAGAZINE LOOKS AT ENSIGNS FLYING FROM THE STERNS OF SUPERYACHTS AND ASKS: WHAT IS THE DIFFERENCE FOR THE OWNER, YACHT AND CREW?

Any superyacht, regardless of her geographical location, is subject to the control and jurisdiction of the state in which she is registered. So, it behoves the owner of that yacht to choose the flag under which his or her yacht is registered with care.

This is because on the high seas, beyond the control or jurisdiction of any particular country, the yacht is still bound by the laws of her country of registration.

As she moves from one country to another she leaves and enters the control and jurisdiction of various countries’ legal systems. Coastal states exercise jurisdiction over a sea area adjacent to their coast to a maximum of 12 nautical miles, with a limited jurisdiction extending to 24 miles. Owners/operators and individual crew members are always also subject to the laws of their national state, regardless of the nationality of their ship or its location.

FLAG STATE – NATIONALITY OF A VESSEL

The nationality of a vessel is important because it controls which country has the right to prescribe and enforce laws governing the operation of that vessel. A ship must sail under the flag of one state only. The most common method by which a yacht is granted the nationality of a state is by formal registration with that state. Upon registration the she acquires rights and duties as a result of registration and these vary depending upon the state and the conventions and treaties to which that state is party.

The rights will normally include action in an international court if there is violation of international law against the vessel by another state and representation at international conferences and organisations. The duties include the upholding of the law of the flag state aboard the vessel wherever she may be in the world.

Quality flags will also provide a recognised reputation for excellence helping the vessel to avoid lengthy Port State Control inspections in foreign ports, worldwide support from embassies and consuls of the state and protection by the navy of the state. Each state sets its own conditions for the allocation of nationality to a ship, but generally there is an international requirement for a genuine link between the flag state and the vessel concerned.

Legislation that governs how a yacht is operated is dictated by the Flag under which she sails. The choice of what flag a yacht will fly is in turn governed by many differing factors and owners will choose flags as best suit their own particular requirements.

CREDENCE
Dr Clayton Fenech is a Director at Credence in Malta, a specialist corporation born out of a strategic alliance between two commercial law firms and an accountancy services firm. The firm was conceived to create an accessible team of experts to advise on the increasingly sophisticated structures offered to superyacht owners by Maltese financial services legislation.

Clayton specialises in superyacht law and regularly advises owners and prospective owners on the financing, acquisition and structuring of the ownership of their prized assets. He says, “Typically the choice of flag depends on a number of considerations, not least the intended registration status and operation of the yacht whether it be private or commercial.” Then he adds, “You must take into account the intended base port and main cruising areas the yacht will enjoy. The nationality of the owner is another consideration. Are they or could they become ‘established’ in the EU, be it through either first or second citizenship or by taking up permanent residence?” Clayton cautions, “These 3 points are particularly relevant form a VAT perspective.”

He continues, “The manner in which the crew shall be employed (whether directly by the owning company or via a crewing agency, is important too. In the case of the latter case the specifics of the arrangement need to be well established because they could have an impact on social security issues. Finally, he adds, “You must look into what form the ownership structure is envisaged. Will it be through a company or owned outright by an individual?”

COMMERCIAL YACHT
If the yacht is intended for commercial use, VAT will not be payable on the acquisition of the yacht if she is transported from one Member State (Netherlands where she is under construction) to another Member State in which the owning company will have a VAT number.

This will constitute and Intra-Community Acquisition (ICA) with the place of supply being the country to which the yacht is delivered, where input VAT is claimed in the same VAT declaration recording the acquisition, resulting in a VAT neutral transaction. Under this scenario, VAT on the consequent use of the yacht would be payable, whether the yacht is used by a third party charterer or the owner, in which case VAT on arm’s length charter prices is payable.

For a yacht to be registered as a commercial yacht under the Malta flag, she needs to be compliant with the Maltese Commercial Yacht Code. Being built to LY3 specifications, there is no doubt that she will be compliant.

PRIVATE YACHT
Here there are three options. The first is where the client’s EU connections (or lack thereof) become relevant. A yacht which is registered in the name of a non-EU owner, owned and used by a non-EU UBO and flying a non-EU flag may enter EU waters without triggering payment of VAT, for periods of up to 18 months each. Since the yacht is being built in the EU, to avail of this Temporary Importation (TI) regime, the yacht would need to be formally exported upon delivery by the builder, and re-imported by the new owner, satisfying the aforementioned conditions. No commercial activity is permitted whilst the yacht maintains TI status.

The second option, from a VAT perspective, for private ownership is the outright payment of VAT applying the Dutch rate (as the place where the supplier is established), unless the yacht is formally exported and imported in another country, in which case VAT would be payable in the country of import, applying that country’s VAT rate (18% in Malta).

Finally, the third option in Malta for private operation is leasing, whereby the yacht is delivered in Malta to a Maltese VAT-registered owning company, who will then lease the yacht to a ‘third party’ be that the owner himself or a second company. The lease will be for, say, a period of 15-20 years, with VAT (at 18% since the lease will commence in Malta) being payable on instalments amounting to roughly the value of the yacht, spread over the lease term.

This option presents significant advantages of a cashflow nature for larger, more expensive yachts. Of course, VAT is only relevant if the yacht is intended for use within EU waters, which is being assumed in all three of these options.

EAT CAKE
There are of course always owners who want their cake and want to eat it too! For them there is the wheeze of Duel Use where the yacht is both private and commercial. In this scenario the owner pays the VAT on the acquisition of the yacht, so that he may freely use her without the hassle of charter agreements and payment of VAT on such use but might also wish to offset some costs against charter income. In such cases, it is important to choose a flag which allows seamless switching between private and commercial registration, with Malta being a tried and tested option.

Vessels change flags for many reasons and with the adoption of differing industry standards some yachts that are unable or unwilling to comply have sought other flags under which to seek cover. This process is often referred to as flagging out under a Flag of Convenience (FoC). Those who prefer to be more polite, call these flags; Open Registries.

Because now, almost all the commonly used registries are signatories to IMO. And they each agree to enforce regulations which encompass SOLAS, MARPOL & ICLL, it means that owners can now safely choose which flag best meets their own particular requirements. Or in other words, it is the most convenient flag for to them to fly. If I were to be not so polite, I might suggest that means all states offer a flag on convenience but each and every state will throw their hands up in horror that I have dared call them that!

Open registries have long been criticised, by trade union organisations. One criticism is that owners who want to hide their ownership may use them to be legally anonymous. Some ships with flags of convenience have been found engaging in crime, offering substandard working conditions, and negatively impacting the environment. Other ships seek out an FoC which offers measurement rules that reduce the certified gross register tonnage in order to reduce subsequent port of call dock dues. Proving that even the much praised Red Ensign can also be termed a FoC on occasions, one passenger ship company switched all of its ships to fly the flag of Bermuda which, among other considerations, enabled its captains to marry couples at sea because they considered that weddings at sea were a lucrative and therefore profitable market. If you do not want to think of the Red Ensign as a FoC then ask yourself this question: Why are Italian marinas filled with so many Italian flagged small yachts registered in London? The answer is they are left alone unmolested and are unchecked by anyone.

The somewhat contentious term ‘flag of convenience’ has been used since the 1950s but you can trace its history back a little before that. The practice of ships being registered in a foreign country dates back to the 1920s when shipowners in the USA seeking to serve alcohol to passengers during Prohibition began to register their ships in Panama. They soon began to perceive the advantages in terms of avoiding taxes and increasingly restrictive regulations and continued to register their ships in what they began to refer to as tax havens. As US legislation began to be applied to wages paid to American seafarers the practice gathered momentum and Panama was quickly joined by others keen to get their hands on the owners’ cash and registries popped up in some of the most unlikely places including perhaps the most famous of all: Liberia.

The continued use of open registries steadily increased into the 1960s, and Panama and Liberia were joined by the Marshall Islands, Honduras, Belize, Cyprus and Singapore.

The dominance of the British Red Ensign as the flag of quality began to fade as fleets of ships left the registry seeking a more convenient flag under which to sail.

Despite offering the protection of the British Royal Navy, the Red Ensign was, until that time, recognised globally for its maintenance of high standards, maritime safety and the welfare standards of seafarers. Now the number of superyachts flying the red duster out numbers the Royal Navy ships by a factor of about 14 to one.

In the late 1960s, British Overseas Territories, the likes of Hong Kong, Gibraltar, Bermuda and the Cayman Islands, began to offer advantages to ship owners and their flags became very popular and the beginnings of what we now know as the Red Ensign Group began to form.

RED ENSIGN GROUP
The Red Ensign Group (REG) is a group of British Shipping Registers. It is made up from the United Kingdom, together with the Crown Dependencies of the Isle of Man, Guernsey and Jersey. The UK Overseas Territories of Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, St Helena and the Turks & Caicos Islands are also members and each operate their own shipping registers from their own jurisdiction.
Between them they produce and maintain the REG Yacht Code with the Cayman Islands acting as Secretariat for that Code. The flags work closely together and have a specialist group of yacht policy members from each Administration to ensure the Code is consistently applied and is kept up to date. They claim not to compete on standards and endeavour to apply the same high standards across the REG. Those of us who have had dealings with them have differing stories to tell!

UNITED KINGDOM
In the UK the Flag Administration is the Marine Coastguard Agency (MCA) and is the overarching Maritime Administration overseeing the Red Ensign Group. The MCA sits at the IMO and represents the REG Flags where one of their tasks is to ensure that the REG – Yacht Code continues to enjoy international acceptance as an equivalence to the International Conventions that of SOLAS, MARPOL and STCW.

Adam Jackson is the head of MCA’s Large Yacht Services and he maintains that for yachts choosing to flag in the UK, there are many benefits. “The main benefit,” he says, “is its international respect as a maritime authority.” He adds, “A yacht arriving in almost any port in the world flying the undefaced Red Ensign is viewed as a high standard of safety, respectability, and trustworthiness.” Jackson believes the UK flag to be perhaps the most ethical of flags and cites, as an example, their crew repatriation efforts during the recent Covid pandemic. He said, “Where other Flag States have, on occasion, abandoned their responsibilities, the UK has stepped up and supported our seafarers regardless of the flag of ship they are on. As a Flag State, we do things right.”

The MCA does not delegate Large Yacht Code surveys and supplies their own specialist MCA yacht surveyor to attend annually for survey. Those surveyors spend time providing guidance, support and clarification where needed.

CAYMAN ISLANDS
Situated in the western Caribbean, about 480 miles south of Miami, Florida, the location of the Cayman Islands has played an important role in the Islands’ development as a highly competitive tourism and international financial centre. Its capital, George Town, has been a British registry port since 1904 following the passing of the British Merchant Shipping Act in 1894. In those days the register comprised of a few wooden sailing schooners, most often locally built. Today the registry claims to dominate the superyacht flagged market.

At the end of 2018, they had a total of 2,215 vessels on their register – 1,897 pleasure craft and 318 commercial vessels in a fleet that had grown 8.5% in 12 months to a total of 5.6 million gross tonnes. Of the superyachts over 30 metres in build during 2018, 45% of those, roughly 150 in total, were under CISR supervision.

Without doubt they are the most commercially aware of the red flag registries and captains joke that they even charge a fee if you want to sneeze on your own bridge. When I was a superyacht Master, I found them to be consistently the most inconsistent of registries and I quickly learned that if you did not like the opinion or decision of one surveyor you asked another and another until you got the answer you wanted to hear.

JERSEY
Neither Bermuda, Guernsey or Gibraltar seem to actively tout for superyacht business but at the smaller end of the market, Jersey has a case to offer and a drum to beat. A category two registry, it can register Large Yacht Code and 13-36 Passenger Yacht Code compliant yachts up to 400 gt. The island is attractive to yacht owners because it sits outside the UK and EU.

This means it can offer VAT-free Temporary Importation into EU to yachts owned by non-EU residents. The added fact that Social Security insurance exemptions are available to non-resident crews and for company-owned vessels, no corporation or tonnage tax is charged, make this flag all the more attractive.

Unlike the UK, which offers a 5 year registration period, Jersey offers 10 without charging an annual fee. The fee is currently £480 and included an online Provisional Certificate prior to full registration, to enable the vessel to sail if required before all the other papers are submitted for full registration. After 10 years there is a renewal fee of £100 for a further 10 year registration.

Angela Luce of the Jersey Ships registry says of her office, “We do have a relatively fast turnaround of work and give a more personal service generally, as there are two members of staff in the office so you will always know that the registration work is being dealt with in a more personal manner. We have our own Surveyor on hand for any technical advice, and also our Manager Stanley Richard-dit Leschery is always available for other safety or maritime standards guidance.”

BRITISH VIRGIN ISLANDS
The British Virgin Islands (BVI) joined the Red Ensign Group in 2014 and thus offers the option to register a private, commercial or merchant vessel under the UK red ensign. Despite geographically being a small group of islands in the Caribbean Sea, the BVI is well known as an offshore financial centre. An active participant at the International Maritime Organization (IMO), all major maritime conventions have been extended to the BVI Government and enacted through BVI law. The Virgin Islands Shipping Registry (VISR) has a satellite office in London and a network of surveyors available around the globe which means VISR can attend to any need on a 24 hour basis. This farming out of services to freelance professionals mostly works well but can produce some strange outcomes. Richard Claymore, a captain colleague, is currently supervising the build of a 65 metre yacht for Russian owners. When he contacted the offices of the VISR they referred him to a commercial agency called the ABM Group, where a Mr Mark Dubois rather disloyally offered Captain Claymore the choice of either registering with the BVI or the Cayman Islands. He did concede however, “Pricing for all services is very competitive with a strong BVI advantage cost wise.”

The relatively small size of the BVI superyacht fleet does however, allow for a good working relationship with the owner, manager and captain which leads to a pragmatic approach to resolving any issues that may arise during the life of the yacht.

ISLE OF MAN
It is this same attention to customer care that makes the Isle of Man (IoM) registry stand out. Captains I spoke to while conducting the research for this feature consistently praise the IoM for their technical expertise, their in-house survey and policy teams who are on hand for advice and consultation all the time. Captains praise the network of surveyors in key global locations, their pragmatic approach to regulation that is coupled with a focus on solutions. Other praise was given to the registry’s rapid, on-line process for STCW endorsements and other crew documentation. Of all the registries this is the only one that did not receive a single negative comment in my small circle of survey respondents.

Cameron Mitchell, the Director of the Isle of Man Ship Registry (IOMSR ), told Captain Richard Claymore his registry has invested heavily in systems and people using a database designed specifically for them. “It is,” he said, “Far ahead of other REG Category 1 members such as Cayman and the UK on our digital journey.” He added, “We now produce all yacht and seafarer certification in a digital format with electronic signatures. This means that certification can be with the yacht or seafarer within minutes. We are the only REG member which can offer this service to date. This makes the life of the Master much easier.”

Because the registry is a division of the IOM Government it is a not for profit division of Government and as such this allows them to set fees at rates which are highly competitive. Without doubt the IOMSR takes a quality over quantity approach. As a bespoke registry, it does not play the numbers game. Instead it provides what it believes to be the best customer service from any ship registry and in doing so attracts quality owners and operators and the PSC record and safety record confirms this.

Interestingly, the IOMSR is also in the process of designing and launching a crew welfare app, the first Ship Registry in the world to have designed and built an app specifically for the seafarers which serve on its yachts.

The app is designed to provide a holistic approach to the physical and mental health of and provide unique live streaming training opportunities alongside a host of other useful features.

DÖHLE
Susana Phillips is a Corporate and Trust Services Manager with Döhle Corporation in the isle of Man. Originally from Madeira, Susana holds a Diploma in Ship Management – Operational Management, delivered by Lloyds Maritime Academy. A keen linguist who can communicate in six languages, she is well versed in the sale and purchase and day to day administration of superyachts working closely with owners’ project and legal teams and our captains and has developed a close working relationship with captains, maritime lawyers, project managers and ship registries. She says, “Here at Döhle Corporate and Trust Services we work closely with all major Flag States and with highly reputable Tax advisory firms in order to ensure superyacht owners have all the necessary information to make a very well-informed decision at outset and to secure a registration with the most suitable Flag.”

She adds, “When considering which Flag would suit their asset best, superyacht owners should take into account various operational aspects for example will their superyacht be operating under temporary admission in the EU; what is the general regulatory environment where their superyacht will be navigating; will their superyacht charter in the EU and/or worldwide; which Flag will be more cost effective and less onerous in terms of overall regulatory requirements and yet still be internationally respected, just to name a few important factors.”

OTHER REGISTRIES
Try as they might to keep a grip on the lucrative large yacht flagging industry, the REG is not the only show in town. Other jurisdictions have recognised the financial potential a fleet of superyachts flying their flag can bring. Some are good and some are bad. Trust me I know! For a short period in my otherwise gloriously untarnished career as a superyacht captain I was briefly in command of a yacht flying the flag of Belize. The shame of doing so came rushing to mind every time a glance aloft and saw the ensign flying from the gaff. But I have to say dealing with issues as they arose was wonderfully easy. I simply told the Registry what I wanted to do or receive, paid the fee and the job was done. Never in all my time did a 10 year survey proceed so effortlessly!

MARSHALL ISLANDS
The Republic of the Marshall Islands is a group of coral atolls and islands in the South Pacific. It became an independent and sovereign state in 1986 and in September 1991 was admitted to full membership in the United Nations. It has created a flag register that is run as a commercial-for¬profit organisation. It is operated from a head office in Virginia USA and has worldwide representation.

The registry is actively encouraging yachts to fly their flag and have even issued their own code of practice for large yachts. It has a good safety record and offers easy to use tax free corporations based on Delaware (USA) laws. It is a fast growing registry established using a team of aggressively profit motivated sales folk who target American owners luring them away from the red ensign. In July 2001 there were just 2 yachts over 24 metres flying the Marshall Island Flag. Eighteen months later there were 10 and in early 2020 there were a staggering 620 yachts flying the Marshall Island Flag.

The RMI allows, through its national legislation and its own Yacht Code, a ‘Pick n Mix’ style registration of private yachts, private yachts limited charter, commercial yachts, and passenger yachts. It also allows for RMI flagged private yachts to charter in French and Monégasque waters without the need for commercial registration by requesting a Temporary Certificate of Registry for Yacht Engaged in Trade.

Yacht owners can choose the home port of either Bikini or Jaluit. Two yachts may share a common name as long as they are registered in different home ports. Ownership of yachts registered in the RMI must be through an RMI corporation, limited or general partnership, limited liability company, or a qualified foreign maritime entity. With an office in Fort Lauderdale, and regional offices around the world, they are able to provide same-day service to the superyacht community, regardless of location and time zone.

PANAMA
Panama has been registering all types of ships, boats and yachts since 1917 and accounts for the largest tonnage of registered vessels in the world. With a fleet containing 81 million tons making up nearly 22% of the world’s total tonnage only a small percentage are superyachts. The majority of the 8,000 plus vessels are registered as fishing boats, cargo ships, and tankers.

Lucia Hurnikova is the Secrétaire Administrative at Consulat Général du Panama in Marseille. Hers is one of a network of global offices that includes 9 Regional Segumar Offices, 64 Private Merchant Marine Consulates all around the world and more than 200 flag inspectors. With 24/7 availability Lucia and her team at the Consulate offers an open ship registration to owners, regardless of their nationality.
The owner of a ship can be a natural or legal person, Panamanian or foreign, based in Panama or any other party. Owners benefit from low and competitive fees and any income derived from the operation of yachts engaged in international trade is exempt from tax.

Panama allows dual registration of both foreign vessels and Panamanian registered vessels with another country. This means a foreign ship under charter for a period of two years (renewable) can be registered under the Panamanian flag without losing its original registration; Panamanian ships also can have a special foreign registry without losing the Panamanian flag. Lucia says, “Dual flag registration is a great advantage to the shipping community that wants to retain the benefits of an open register and local register. This is considered an advantage for European ships which could otherwise be forced to register with many other European countries at a greater expense versus an open registry offered by Panama.”

BAHAMAS
With more than 700 islands, rocks and cays, The Bahamas is truly a maritime nation. Bahamian culture, heritage and history have long been associated with the sea. The country’s centuries-old trading traditions and its modern prosperity and affluence owe their success to seafaring and the sustained growth of maritime services. Today, The Bahamas is an international maritime centre whose centres of excellence in shipping law are based on English law. A comprehensive maritime cluster of island based financial services, insurance and ship brokering is enhanced by the absence of income tax and corporation tax. Popular with owners of new yachts the Bahama Marine Authority (BMA) actively discourages older vessels from joining the Register. The BMA has published its own Bahamas Yacht Code to cover the statutory requirements for commercial yachts under its flag. This is based on the REG Large Yacht Code and has been tailored to fit the requirements of owners seeking to flag outside Europe.

DOMINICA
The Commonwealth of Dominica International Maritime Registry offers yacht owners, both commercial and private, cost effective yacht registration with no tonnage tax or size restrictions. Despite the lack of supportive evidence, the Dominica claims to be one of the largest private yacht registries in the world and so its website claims: “is fast becoming recognised as one of the top five.”

It offers registration to yachts through a network of Consulates dotted around the globe. One of these is in Athens Greece. There, Christos Vardikos, the consul for Dominica offers clients the ability to customise the length of registration periods to better convenience the customer and keep documents up to date. He says, “Registering a yacht under our flag is fast, simple, and cost-effective.”

In addition, the Registry provides a free self-inspection programme to help private yacht owners ensure that safety and security on their craft is they claim ‘Of paramount importance’. The Commonwealth of Dominica International Maritime Registry even offers a Yacht Masters License (Operator of Uninspected Passenger Vessel for Twelve (12) Passengers or Less) through mariner and seafarer training program delivered by Northeast Maritime Institute – College of Maritime Science comprehensive maritime learning management system, Northeast Maritime Online – NEMO.

André Harpes says, “Our full services range from your first planning to the choice of flag, the financing and registration of your yacht including mortgage registration if necessary. We provide yacht owners with property and operating structures in terms of corporate and tax compliance, both with respect to direct taxes as VAT aspects reflecting the most balanced solution to their very personal interests.” With offices located in the heart of Luxembourg City, within walking distance of the new Court houses and main government agencies, the firm defines success in meeting their clients’ objectives as efficiently and effectively as possible.

TUVALU
Perhaps one of the more exciting and certainly one of the most proactive registries in this sector is that of the Tuvalu Ship Registry run by Jonathan Leach out of offices in the UK.
Made up of nine atolls scattered over a million square kilometres across the western Pacific Ocean, it lies just south of the equator. With its northern most and southern most islands separated in between them by about 600 nautical miles of ocean, Tuvalu gained its independence in 1978, after more than eighty years of British colonial rule. It is now an independent Constitutional Monarchy.
The Tuvalu Ship Registry opened its doors to foreign ownership through the adoption of the Open Ship Registry Bill in 2004. The Government of Tuvalu appointed the Tuvalu Ship Registry as the Authority to issue all certificates necessary for a yacht to sail and trade under the Tuvalu flag.

Jonathan Leach told me, “We do not do ships. We are yacht people, dealing with other yacht people.” He added, “Ours is a ‘one stop’ service. We do everything, any size, any age, any location, including yacht conversions from commercial vessels. We
arrange the surveys and do not require the yacht to be classed or even used for commercial purposes, provided it is in good condition and well managed.”

“Significantly we have had wooden yachts over 100 years old operating commercially without problems and with over 30 years of yacht survey experience we do not run away from these yachts. The beauty of our relatively small registry is that we can offer discretion, privacy and security. We get to know all our points of contacts like captains, managers and (where appropriate) owners. We do everything, from pre-completing the application forms to carrying out any of the surveys and issuing electronic certificates. The client deals with one UK office for everything.”

Here is one registry that can truly claim to ‘have gone the extra mile’ for a client. Jonathan explains, “I once had a panic request from the captain of a large charter yacht operating in the Eastern Mediterranean when his First Officer suddenly received National Service call up papers at the beginning of the peak season. We sent a detailed and friendly letter explaining that he was needed to safely manage the yacht and suggested he could attend at the end of the season, which was accepted. His mother was very pleased!”

Jonathan was the quickest to respond to the request of my Captain Colleague Richard Claymore who was seeking information about registering a yacht.

For that, Tuvalu gets a gold star in my book.