Choose
A Flag
10 May 2023
Last revised
minutes
4
Reading time
The first question your naval architect is likely to ask is where your yacht will be registered. That registry’s regulations will do much to determine the design of your yacht. But, beyond that, the registry provides the legal framework for crew employment, and may determine how easily insurance and finance can be obtained. So research this in-depth rather than accepting your architect’s suggestion.
minutes
4
Reading time
10 May 2023
Last revised
The first question your naval architect is likely to ask is where your yacht will be registered. That registry’s regulations will do much to determine the design of your yacht. But, beyond that, the registry provides the legal framework for crew employment, and may determine how easily insurance and finance can be obtained. So research this in-depth rather than accepting your architect’s suggestion.
Registering a yacht in a country's ship registry determines its nationality, owner's responsibilities, and compliance with laws and regulations.
The choice of registry impacts insurance availability, financing options, chartering regulations, taxation requirements, scrutiny from port officials, and service provided.
Unusual flags may reduce insurance options and increase premiums.
Lenders require high maintenance and safety standards and confidence in the country's rule of law for financing agreements.
Chartering requires compliance with international regulations, and certain registries have simplified safety codes for cost-effective compliance.
Cabotage rules may require local registration for commercial operations in specific jurisdictions.
Temporary Admission allows tax avoidance in the EU for non-commercial use, but specific advice is necessary.
Scrutiny by port officials can cause delays and inspections may be prioritized based on flag categorization.
Helpful registries with easily accessible regulations and guidance are preferred.
Local agents and service providers can assist with overcoming time zone difficulties, but may come with additional costs and risks.
Cabotage rules may require local registration for commercial operations in specific jurisdictions.
Temporary Admission allows tax avoidance in the EU for non-commercial use, but specific advice is necessary.
Scrutiny by port officials can cause delays and inspections may be prioritized based on flag categorization.
Helpful registries with easily accessible regulations and guidance are preferred.
Local agents and service providers can assist with overcoming time zone difficulties, but may come with additional costs and risks.
Registering a yacht in a country's ship registry determines its nationality, owner's responsibilities, and compliance with laws and regulations.
The choice of registry impacts insurance availability, financing options, chartering regulations, taxation requirements, scrutiny from port officials, and service provided.
Unusual flags may reduce insurance options and increase premiums.
Lenders require high maintenance and safety standards and confidence in the country's rule of law for financing agreements.
Chartering requires compliance with international regulations, and certain registries have simplified safety codes for cost-effective compliance.
With some limited exceptions, all yachts have to be registered in a country’s ship registry, and fly that nation’s maritime flag, known as an ensign. That registry is often know as the Flag State, especially to distinguish it from the Port State – the latter being the country where a yacht is located when not in international waters.
Registration is about much more than just choosing a flag to wear on the stern: it’s what gives a yacht nationality and frames owner’s, manager’s and crewmembers’ responsibilities. The choice of registry affects the laws and regulations the owner must adhere to, the ready availability of insurance and finance, whether certain taxes must be paid and the attention port officials may pay the vessel. Registration can also prove ownership and is a requirement for international cruising. Notably, there are registries entry into which proves nothing in terms of title. Examples of these include Delaware and the United Kingdom Part III Small Ships Register.
Fees and expenses for registration are relatively small, but choosing the wrong registry can be a very costly error. Making that selection is a complicated process requiring independent, expert advice. A trap for the unwary is the recommendation of a certain flag with which a naval architect, project manager or other adviser happens to be familiar – without due consideration of all the owner’s particular circumstances and wishes.
SIX FLAGGING FACTORS
While the registries themselves are state agencies, many popular ones are managed on a commercial basis and – to an extent – compete with each other. This is a good thing since levels of service must be raised above that which one might otherwise expect from the government departments of certain countries. However, there can also be an incentive to be overly flexible when it comes to the drafting and enforcement of safety regulations.
To an extent, flag choice can come down to a process of elimination. Emotions can be a factor but it’s best to let head rule heart. Here are the six main factors you should consider:
Insurance
Finance
Chartering
Taxation
Scrutiny
Service
INSURANCE
All yachts should be insured and third party cover is normally mandatory. Underwriters will want to understand the risk they’re agreeing to cover, and key to this will be the flag. An unusual flag will not make insurance impossible to find, but it will reduce the number of underwriters with an appetite to write such business thereby pushing up premiums.
FINANCE
Some yachts are financed, by means of a lease or loan, as a means to free-up investment capital for owners’ businesses. As with insurers, lenders will be taking a financial and legal interest in the vessel, and will want to make sure that the owner abides by high maintenance and safety standards. Lenders will also need to have confidence in the rule of law in the country of registration itself, since the mortgages will be entered in the registry.
CHARTERING
For the protection of paying guests, chartering requires adherence to a wide range of international regulations. Fortunately, certain registries have created safety codes to simplify compliance which reduces cost and administration. Certification by a classification society is normally required above a certain size, although this size varies. Some owners may regard classification as expensive and unnecessary (and it may not be possible for some vessels not originally built to class rules) while others choose this route for peace of mind regardless of charter activity. Chartering isn’t possible at all with some flags when the vessel is over a certain size, for example Jersey and Guernsey.
The existence of any cabotage rules should also be considered. These are protectionist measures requiring vessels operating commercially to be registered locally if not engaged in international voyages. The best example of this is the United States. If the plan was to charter in US waters there would no other real choice but to fly the Stars and Stripes.
TAXATION
If not being used commercially, it is possible – where the beneficial owner is not tax resident in or connected with the European Union – to avoid the payment of Value Added Tax and customs in the EU on the yacht itself, for up to 18 months, through Temporary Admission. However, this requires registration outside the EU amongst other conditions. It also requires detailed, specific advice to ensure that the correct information is given and at the right time. VAT can be up to 25% and charged on the hull value. Port officials may detain a vessel pending payment (and any fines and/or interest).
SCRUTINY
Any yacht can be boarded, at any time, by a port official whose job it is to make sure that all the paperwork is in order – which can be invasive and can cause unexpected delays. As their time and resources are limited, inspections are often prioritised according to flag. The Paris Memorandum of Understanding, for example, is a group of 27 European and North Atlantic nations which inspect safety, security and environmental standards of more than 18,000 vessels each year. Other similar such groups exist worldwide. Information is shared between members, and flags categorised into White, Grey and Black lists. White List categorisation should mean fewer inspections but does not lead to immunity altogether.
SERVICE
If a registry isn’t helpful and doesn’t make its regulations and guidance easily available, in a language which managers, captains and crew can understand, then as a matter of common sense it can be ruled-out. Local agents and corporate service providers can be used to overcome time zone difficulties, but at a cost and with the risk of misunderstandings and further delays.
Thank you to all our Members who contributed to this article. Unless otherwise stated, this article broadly describes, by way of illustration, the situation in the United Kingdom waters in respect of United Kingdom-registered vessels. This piece does not provide or replace legal advice.
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