The choice of flag has, over the last few years, become one of the most important decisions owners and/their representatives must make. The choice of flag can have a direct bearing on privacy, taxes, exposure to liability and boarding, the vessel’s success as a commercial enterprise, and, ultimately, the owner’s enjoyment of the yacht. So how does one decide which flag best serves their purposes? An honest answer would be that there is no simple answer which would apply to every vessel or every owner!
A yacht owner should, however, look to make the best decision based on the information currently available. To make an informed decision, one must first and foremost understand what a flag actually provides. Ultimately, a vessel’s flag represents the state where the vessel has been registered. The flag state is the country or governmental entity under whose laws a vessel is registered or licensed, and has the authority and responsibility to enforce regulations over vessels registered under its flag, including those relating to inspection, certification, and issuance of safety and pollution prevention documents.
Based on this, one can imagine that choosing a particular flag may become a vastly complicated matter. Nevertheless, the industry has in fact seen a shift from vessel owners generally utilising their country of residence as the flag state, to preferring a registry in a country with laws and characteristics that are most suited to the specific utilisation of any particular vessel.
Yacht Operation and VAT Planning
One of the most important considerations at the forefront of the flag state decision is indeed the intended area of operation. Should an owner consider basing the yacht in the Mediterranean and Europe, then VAT will most probably become one of the major considerations. Consequently, most mega yachts based in the Mediterranean will seek to register ownership with a country allowing for VAT to be reclaimed if it is let under a commercial arrangement, or with a VAT rate that is as low as possible if it is run privately. A handful of jurisdictions have emerged as the dominant players in this area, most notably Malta and Cyprus.
As it stands Malta and Cyprus go head to head as yachting jurisdictions and compete on many levels. Malta, however, comes in ahead of most European countries when it comes to the standard rate of VAT, having one of the lowest standard VAT rates in the European Union, as at January 2016. Malta could hence be considered one of the more advantageous yachting jurisdictions within the European Union, based on this fact alone.
Although VAT is a prominent consideration when a yacht is to be based in the Mediterranean/Europe, there are some other basic but important considerations. These factors could ultimately effect the potential for the yacht to be boarded and detained by authorities.
First and foremost, when choosing a flag, one should start with those listed on the so-called ‘Whitelist’ as maintained by the Paris Memorandum of Understanding on Port State Control (Paris MoU). Flags on the Paris Whitelist are subject to fewer boardings when they enter foreign ports. Yacht flying flags of so called ‘rogue states’ that remain outside the family of ‘civilised nations’, are on the other hand not welcomed. To date both the Maltese and Cypriot flags enjoy the benefits of being white listed.
Commercial and Private Yacht Registration
It goes without saying that an owner would need to be with a flag that can provide a solid commercial/private registration that’s accepted in the shipping industry and accepted by the governments of the world. Although Cyprus has a very reputable yacht registry, Malta’s merchant flag is currently ranked as the largest in Europe, and the 6th largest in the world. This together with strategic and central position at the heart of the Mediterranean and its wide range of international maritime facilities and services, allows Malta to provide a flag of confidence and a flag of choice.
Vessels registered under the Malta Flag have no trading restrictions and are given preferential treatment in certain ports as Malta is recognised to have adopted all International Maritime Conventions, and hence the Maltese flag state requirements are well known to the main shipyards and main classification societies.
The reliability and efficiency of a registry should also be a consideration when deciding on the flag state. A straightforward and quick procedure ensures that owners are not caught up in a bureaucratic process which would hinder the operation and use of the vessel. Malta and Cyprus both have professional and highly reliable maritime administration services. Malta does however go one step further in providing a 24/7 service offered in respect of urgent matters. The cost of registration also ties in with the consideration of a registry’s efficiency, although I would argue it is better to focus on quality. Regardless, both Malta and Cyprus have ensured that the cost of registering a yacht and maintaining said registration are low.
Superyacht Ownership Companies
Another matter that should be taken into consideration when choosing where to flag a vessel is the ownership structure which will hold the vessel. Although one may argue that this is not directly related to the choice regarding the flag state of the vessel, the ownership structure of the vessel may affect whether the vessel may or may not be registered in a particular state.
Registration in Cyprus allows for a vessel to be registered in terms of the Merchant Shipping Act, if the vessel is in the name of a Cypriot citizen or a Cypriot legal entity. This is equal to the legal requirements in Malta. In Cyprus, however, more than 50% of the shares in the entity must be owned or alternatively the company must have an authorised representative in Cyprus. On the other hand, there are no restrictions on the nationality of shareholders and directors of a Maltese company. Furthermore, should the owner wish to register a vessel through an international ownership, this is achievable in Malta through the appointment of a Resident Agent, who will act as the communication medium between the owners and the Maltese authorities.
Although the maritime sectors in Malta and Cyprus are regularly compared, I would argue Malta could currently be seen as a more attractive flag because it ensures peace of mind, is more flexible for international ownership, and offers attractive VAT rates.
If you are interested in superyacht structuring and flagging, you may enjoy our Guide to Tri-jurisdicational Superyacht Planning.