Cayman Islands: Yacht Registration - What's in a Flag?

Last Updated: 14 December 1998

The following article addresses the most frequently asked questions on yacht registration. Topics include:

  • Statistics
  • Establishment of title
  • Prevailing law
  • Privacy
  • Tax
  • Yacht financing
  • Flag state restrictions
  • Assistance in foreign ports
  • Protection at sea
  • Insurance considerations
  • Representation at international maritime conventions

The Cayman Islands are now the number one offshore register for superyachts, with about 150 yachts over 100 ft LOA and some 250 yachts over 75 ft LOA. Although the average length for all yachts on the register is 76 ft, the incidence of peak registration lies between 40 ft to 55 ft, marking the register's attractiveness to smaller yacht owners as well. So, why do owners, over such a broad range, choose the Cayman Islands?

In essence, the purchase of a yacht comes down to a question of money and how best to safeguard the asset purchased with that money.

For a start, registration of a yacht provides proof of ownership. Clear title in international waters and foreign ports is obviously very important. Once registered, the vessel is subject to the laws of the country of registration. Therefore, the quality of the registry and the applicable legal system could be vital in a number of ways. The chosen flag state should not only have an internationally recognised system of admiralty law, but also a legal infrastructure that embraces the many other needs of yacht owners.

Privacy and confidentiality are usually important to owners. Some jurisdictions, especially those with tax treaties and information exchange protocols, are entirely unsuited to privacy. Other countries, such as the Cayman Islands, protect confidentiality by law.

Tax is always a major consideration. On purchase of a yacht, the ability to avoid VAT, sales tax, use tax, import duty and other taxes on purchase can save as much as 40% of the purchase value, depending on the country in which the yacht is sold. Generally speaking, when a yacht is sold for export (to a foreign register) these taxes on purchase are waived. Of course, one has to ensure that the country chosen for registration does not impose taxes of its own.

The absence of income tax, personal property tax, estate tax, wealth tax, corporation tax, or other ongoing taxes will be a further objective in selecting a flag state. Crew taxes may also be important. A jurisdiction that enables the crew to be paid salaries free of income tax, social security tax, unemployment tax and other overhead charges, may be very attractive, both for the crew and for the owner.

Ideally, the flag state selected should impose no taxes whatsoever and, to cater for this objective, offshore jurisdictions generally impose little or no tax on non-resident owners. However, the absence of tax alone may not be enough. For example, since the introduction of the unified system of VAT in the EU, many owners registered in tax havens close to the EU such as Malta, Gibraltar, and the Channel Islands, have elected to shift registration further afield to tax haven countries that are not subject to EU pressure and have no tax or other treaties that could relate to the EU. Some EU countries have said that they will look to the port of registry as a determinant for VAT, which is payable on the full value of the yacht. Hence, a yacht registered in the Channel Islands or Gibraltar, but with a hailing port of London or Southampton, could find that it is assessed for VAT on entering EU waters. On a US$10m yacht this could amount to US$1.75m

Where a yacht is to be financed, the lender will want to know that his mortgage is secure, and that he has powers of repossession in the event of default. This requires a jurisdiction with well established admiralty law. British admiralty law, which extends to its Dependent Territories, has a very high reputation worldwide and has provided a model for many other countries including the US.

Restrictions imposed by the flag state will also require careful consideration. Some countries, such as the US, require crew and bareboat charterers to be citizens of the country of registration. Other countries, such as France and Japan, require yachts in commercial use (chartered) to be built to passenger ship standards with all the added expense that implies. There are countries that limit the movement of their registered yachts together with exchange control restrictions on where the yacht can be sold and in what currency. Some countries make it difficult to transfer a vessel off their register or to export the proceeds of sale to a country of choice. In certain flag states, import duty or other taxes may be imposed if the vessel sails into home waters, or stays in those waters beyond a given length of time. Rights and likelihood of requisition should also be checked.

Assistance in foreign ports is rendered by the consular and diplomatic networks of the flag state. States with very small networks will not be able to give much assistance, especially in remote areas where it might most be needed. Knowing that there is a local representative you can call is very comforting, especially in the event of loss of documents, a medical problem, a death, crew repatriation, crew replacement, the need to expedite import of vital spares, or even a misunderstanding or dispute with local authorities.

Protection is normally provided by military vessels of the flag state. The effectiveness of such protection will depend on the size of that country's navy or coast guard. Many flag states are not equipped to offer any protection outside own coastal waters, if at all. Other flag states, with strong naval presence, have been used specifically because of their ability to offer protection in hazardous waters. For example many Arab owned tankers have transferred registration to the British flag in times of difficulty in the Persian Gulf.

The reputation of a flag can even affect insurance costs. Where perceived risk is higher, insurance premiums, which are based on risk, will also be higher. In addition, vessels flagged in countries with poorer reputations are far more liable to boardings and inspections as part of the drugs war or other official patrol work.

Finally, owners who wish to have a voice in maritime affairs may best do so through a flag state that has strong representation in international shipping circles, including membership of such organisations as the IMO and the major shipping conventions.

So, what does all this tell us? Evidently, the object is to find a flag state that addresses all the above issues in a way that gives maximum benefit to the yacht owner. The central question then is, which are the flags in greatest demand by owners? This is best answered by looking at the statistics. A report by Malcolm Wood of Wood's International Yacht Register shows that 40% of the world's super-yachts over 100ft are British registered, 22% are US registered, with the remaining 38% split up amongst a further 55 countries.

British registration includes certain British Dependent Territories in what is called the Red Ensign Group of registries comprising: Great Britain, Bermuda, Cayman Islands, Hong Kong, Isle of Man, Channel Islands, Gibraltar, British Virgin Islands and Turks & Caicos Islands. These are further divided into Categories 1 and 2. Category 2 registries are limited to vessels up to 150 gross tons. Hence, the large yachts will need a Category 1 registry and these reduce to Great Britain, Bermuda, Cayman Islands, Hong Kong and Isle of Man. Hong Kong will cede to China in 1997 and is subject to special provisions. Great Britain is a high tax jurisdiction and not normally chosen. Due to problems associated with EU VAT, there is a migration away from registries in close proximity to the EU. Of all the jurisdictions, the Cayman Islands has arguably the most secure asset protection law.

As a result of their approach taken to address all these and numerous other factors, the Cayman Islands now stand in a pre-eminent position as the offshore registry of choice*. Of course, there are conditions that occasionally warrant the use of other registers, which we also handle from this office. A good example was when Canada engaged in its fishing dispute with the US and EU. One of our fishing vessels was drawn into the dispute with the result that Cayman registered vessels were temporarily refused sport fishing licences by Canada (along with many other countries). The matter has since been resolved and the ban lifted.

So, when you next stroll along a quay and admire the yachts, pause to examine their flags. You will be able to look knowingly and understand why people of one country so often choose to place their yachts under the flag of another.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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