The choice of a flag state is an important issue for yacht owners since it has a direct impact on the acquisition cost of the yacht, the obligations of the owner or even the value of the yacht. What does imply to register a yacht under a flag and how does this depend on the size of the vessel? What are the main decision factors for the choice of a flag? What are the most popular flags and why?
Flagging and registration of pleasure boats: Definition and facts
It is broadly known that for centuries commercial and military vessels used to fly the national flag of the state of the owner to avoid confusion and conflicts while sailing in open seas. Nowadays, the flag of a vessel, whether commercial, military or pleasure- implies the recognition of its nationality and the fact that it remains under the jurisdiction and control of the flag state. Under the procedure of registration, the state authorizes and documents the vessel. At the same time, states are responsible of registering all vessels flying its flag and ensuring that they comply with international standards in terms of safety and pollution. These standards are defined by international organizations such as the IMO for larger vessels with length over 24 m.
In this regard, in general, the states have developed registration procedures for both pleasure boats under 24m and those over 24m (superyachts) that shall comply with national and international regulations. The general practice of states is to require the registration of all boats over 7-12 m of length, while smaller units, which always remain within territorial waters at a certain distance from the shore, are usually not required to follow a formal registration. Hence, they just have to complete a more simplified procedure that usually consists in providing them with a serial number that lets the state identify the boat and its owner.
Flag states are free to set the requirements to access their registry. In fact, most of the countries nowadays do not require a link with the nationality or residence of the owner of the boat and are called open registries. This practice has led to the establishment of a registration market of pleasure boats and yachts, in which the owners – demand side – choose where to register their craft among a list of countries – supply side – with different requirements in terms of fees, taxes, inspections or navigability restrictions, etc.
The world yacht fleet: Largest state registries by vessel sive
The global pleasure boat fleet reached 32.3M units in 2018, according to the data collected from ICOMIA (International Council of Marine Industry Association). This figure includes all types of boat units, from small inflatable boats and pleasure watercrafts to large sailboats and superyachts (length ≥24m). In fact, the superyacht segment only amounts to ca. 11k units, less than a 0.05%.
At a global level, the countries with the largest fleets of registered boats are those with high purchasing power (in terms of GDP per capita) and large coastlines that have developed a great sailing tradition. Therefore, these countries, mainly USA, Canada, Australia, Norway, Sweden, Italy or the UK, show high ratios of registered pleasure boats per inhabitant, and their fleets are highly dominated by small boats of lengths lower than 8m. As a result, it can be concluded that there is an immediate relationship between the population of the country and its registered fleet.
However, when looking at the fleet of registered superyachts, it can be seen that they are almost fully concentrated in five countries (Cayman Islands, Malta, United Kingdom, Marshall Islands and USA). This ranking of superyachts registry differs completely from the one of global registered pleasure boats mentioned above. Thus, it is clearly observed that there is no relationship between the population of the country where the superyachts are registered and the size of the country’s fleet.
Top states with largest fleets of all kind of pleasure boats
Fuente: ICOMIA, ALG
Top states with largest fleets of registered superyachts
Main drivers in the yacht registration market
There are multiple factors that influence or condition the choice of where to register a yacht. These are mostly related to the corresponding fiscal and legal system for owning and operating a yacht, as well as to the inspection and regulatory compliance applicable regimes. Some of these factors result especially relevant in the case of large crafts given its high acquisition and operational costs, and their high mobility around the globe. This has motivated yacht owners to choose offshore flags that have designed reputed and appealing registries.
Superyacht owners have started to go for top-ranked flags in terms of reputation, as they usually cover long distances across multiple countries and are subject to inspections by local port authorities whenever they enter waters of a country different to its flag. In this sense, a yacht flying a flag well positioned in the Paris MOU Lists (International ranking of most renowned flags measured by the level of compliance with international conventions) will be less likely to be inspected and will have lower insurance costs.
In order to ensure its flag reputation, best-ranked registries require regular technical surveys. Among these countries, owners will choose those with more flexible and simple survey systems, which at the end result on lower costs and a greater yacht availability.
Another relevant driver for superyacht owners are the VAT or similar import taxes that are due in the country of registration. The rates of these taxes can vary significantly among regions and the amount to be paid by owners sometimes can reach a high proportion of the yacht acquisition cost (>20%), especially in the case of superyachts.
Moreover, the election of the flag must not only consider the amount to be paid, but also the customs regime of the registration country, which determines the freedom to navigate under certain waters. For instance, the entrance in EU waters is considered an import and the European VAT has to be paid – no matter if they have paid a different VAT previously – in the case of commercial yachts, while private ones can avoid the tax if they stay less than 18 months.
Main drivers for the election of a flag and its relevance for small pleasure boats and for superyachts
Success cases: Cayman Islands, Malta and Marshall Islands
The most relevant drivers for the election of a flag clearly match with the offer of the most popular registration countries for superyachts. In fact, Cayman Islands, Malta and Marshall Islands, despite its limited size and influence in the global economic and political dynamics, have managed to attract ca. 40% of the global superyacht fleet.
All three countries are present in the Paris MOU White List and require annual surveys for yachts that can be easily carried out by recognized organizations at multiple locations. Moreover, Cayman and Marshall Islands have no VAT, while Malta has implemented a system to reduce its VAT to only 5.4%. Moreover, as it is an EU member, Malta flagged superyachts are allowed to sail in EU waters without the restriction of private use nor the 18 months limitation. Nevertheless, Cayman and Marshall do not lag behind and, for example, they have reached an agreement with the French government to allow its private vessels to charter for up to 84 days in EU waters.
Value proposition of most popular superyacht registries
The present of the superyacht registration market
Choosing a flag state is not an irrelevant issue and the election of a certain flag has some consequences that differ depending on the size of the yacht. Small and medium pleasure boats are usually registered under the flag of the owner’s country of residence or nationality. However, superyachts, given their high costs and their mobility around the globe, find more reasons to look for a flag that that best covers the needs of their owners and that comply with international standards.
This has motivated the appearance of popular flag registries in competition that have developed some optimal value propositions regarding the most relevant drivers for superyacht owners. Factors influencing that include flag reputation, attractive fiscal and legal frameworks and customs regimes, and qualified flexible and simple survey systems.
About the authors
Ibai Erdozain holds a MSc in Industrial Engineering and is a Port and Maritime Principal at ALG. firstname.lastname@example.org
Gonzalo Grande holds a MSc in Management and in Civil Engineering and is a Port and Maritime Consultant at ALG. email@example.com
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