A Refresher on the Choice of Foreign Registration or U.S. Documentation

Jun 30, 2016

If you are one of the 200 or so FYBA members who recently attended the 20th Annual Yacht Sales & the Law Seminar, you already heard this refresher course on a topic that seems frequently to confuse or perplex members, especially newer members. However, if you are one of the 1,000 or more FYBA members who were unable to attend the seminar, the FYBA has requested that this topic be condensed and shared with you here.

In this first installment of what will be a two-part series, we will look at some of the most common reasons for choosing foreign registration. In a subsequent installment we will consider some of the reasons against foreign registration of a yacht and in favor of U.S. documentation. Ultimately, the decision in any particular case needs to be based on a very careful analysis, weighing all factors that are important to a particular owner.

Some Factors Favoring Foreign Registration

Potentially Reducing Sales / Use Tax Liability. Perhaps one of the most common reasons, at least historically, to foreign register a yacht that is beneficially owned by a Florida resident, and that anticipates extended visits to or use in Florida, is to possibly avoid liability for Florida sales and/or use tax. Prior to the 2010 enactment of the $18,000 cap on Florida sales/use tax on vessels, foreign registration was a widely used strategy in Florida for avoiding sales/use tax liability. However, the $18,000 sales tax cap has dramatically reduced the importance of this factor in the decision making process, at least for yachts that will be used principally in Florida.

Several other East Coast states have also recently seen the potential benefits of sales/use/excise tax limits on vessels, including: Maryland – 5 percent sales/use tax rate on up to $300,000 of value, tax capped at $15,000 (the cap expires June 30, 2016 unless renewed by the legislature) New Jersey – Senate Bill 2784 pending, awaiting action in the Assembly after the Senate’s concurrence with the Governor’s conditional veto recommendations, would cut sales tax from 7 percent to 3.5 percent on boats, with the taxcapped at $20,000 New York – 8 percent - 8.25 percent sales/use tax rate on up to $230,000 of value, tax capped at $18,000 - $19,000 (depending on any local county surtaxes)

(Rhode Island, Delaware, Virginia, and South Carolina already have either no, or low, sales tax rates or caps) These tax relief developments also reduce the attractiveness of foreign registration for owners residing in, or who principally use their boats in, one of these states.

• Inspection Requirements for Yachts Over 300 Gross Tons. Foreign registration might be the only viable registration alternative for most yachts over 300 Gross Tons. If they were to be U.S.-documented they would be subject to the U.S. Coast Guard inspection requirements under Subchapter “I”, which are applicable to “seagoing motor vessels”. The Subchapter “I” requirements were not developed with any regard to the needs of pleasure yachts. Most pleasure yachts over 300 gross tons are not designed or built to meet the Subchapter “I” standards and simply could not pass those inspection requirements. Thus the only viable option for such yachts is foreign flagging

Although technically the Subchapter “I” standards and inspection requirements also apply to foreign-flagged yachts over 300 gross tons when they are operating in U.S. waters, there is a reciprocity provision in 46 U.S.C. §3303 for vessels of countries that are parties to the International Convention for Safety of Life at Sea (“SOLAS”) if they have an unexpired certificate of inspection from such a country. In practice, if a foreign-flagged pleasure yacht holds a foreign Certificate of Inspection, or a Certificate of Compliance with a respected large yacht safety code, such as the United Kingdom’s MCA LY3 or LY2 Code, or the Marshall Islands Commercial Yacht Code, which certifies to “substantial equivalence” with the SOLAS convention requirements, the U.S. Coast Guard usually will not demand inspection for, or compliance with Subchapter “I”.

Citizenship of the Owner. A yacht’s owning individual or entity may be unable, or unwilling, to meet the U.S. citizenship requirements for documentation of a vessel in the U.S. (See 46 U.S.C. §12103(b)).

Citizenship of the Crew. An owner may prefer to have the yacht operated by foreign crew members. To do so the owner would have to avoid the U.S. citizenship and/ or work authorization requirements that apply to the master and crew of U.S. documented yachts, particularly if the yacht is operating in U.S. waters. There would be very difficult hurdles to overcome in order to obtain immigration authorization for a foreign master and/or crew to work on a U.S. documented yacht while it is operating in U.S. waters. On a foreign registered yacht, however, so long as the yacht is provably foreign based (not just foreign registered), foreign citizen crew members who can prove that they are nonimmigrants, that they have not abandoned their foreign residences, and that they are paid abroad, and who comply with a number of other administrative requirements, may qualify for temporary entry into the U.S. under B 1 visas, to work on board the yacht while it is temporarily operating in U.S. waters.

Legal Obligations to Crew. An owner may wish to avoid liability for certain U.S. legal obligations to crew members, at least when operating outside U.S. waters (e.g., Jones Act, maintenance and cure, federal tax withholding, minimum wage, and seaman penalty wage laws, etc.). Such obligations generally do not apply to foreign-owned and registered yachts when operating outside the U.S., but would apply to U.S. documented yachts wherever they may be operating.

Limited Chartering With Crew by “Private” Yachts. There are several foreign registries that allow up to 84 days a calendar year of chartering with crew (i.e., carrying passengers for hire), even though the yacht is registered as a private rather than a commercial yacht. Flags offering this kind of “accommodation” to yacht owners include Marshall Islands, St. Vincent & the Grenadines, Jamaica, Dominica. The Cook Islands allow a yacht to be dual registered, both as private and commercial, keeping both sets of documents on board at the same time.

Passenger Yachts Carrying Up to 36 Passengers. There are several flags that have developed passenger yacht registration codes, which allow a qualifying yacht to carry up to 36 passengers at a time. Jurisdictions with this registration include the Marshall Islands and the United Kingdom and its Red Ensign registries, such as Bermuda, Cayman Islands, Gibraltar and Isle of Man.

Commercial Chartering in the Mediterranean. U.S. flag yachts face substantial hurdles to engaging in commercial (crewed) chartering in the European Union. As a result, almost all commercial charter yachts in the Mediterranean are foreign registered.

Passenger Vessel Safety Act Inspection Requirements. An owner may wish to avoid the applicability of the inspection requirements under the Passenger Vessel Safety Act of 1993 for chartering (at least while chartering outside the U.S.) The PVSA requirements apply to U.S. flag vessels worldwide, but only apply to foreign flag yachts when bareboat chartering in the U.S

Import Duty. A U.S. resident beneficial owner might be able to avoid liability for federal import duty (at rate of 1½ percent of the value, plus various fees) on a foreign registered yacht arriving in the U.S. under certain limited circumstances if the yacht is not deemed imported into the country. Importation is a very factspecific determination that involves a number of factors, including credible evidence of the intentof the owner at the time of entry, and facts that corroborate the stated intent. If a vessel is U.S. documented, it is much more likely to be presumed to have been imported immediately upon entry.

Penalty Exposures. An owner may wish to avoid risking exposure to the possibility of severe penalties that could result from any violations of U.S. laws relating to vessel documentation and mortgages, which would be applicable if the vessel were to be U.S. documented (e.g., fines, forfeiture of vessel, imprisonment, etc. under 46 U.S.C. §§ 12151 & 31330).

Anonymity. An owner may seek a level of anonymity not available in the U.S. Some foreign jurisdictions permit nominee shareholders and/or directors for the owning entity. Also some jurisdictions do not require any financial reporting.

Reducing Security Risks. An owner may seek to achieve a lower profile under a foreign registration for security reasons, particularly if the yacht will be visiting areas where crime or terrorism directed toward Americans and U.S.-flagged vessels may be a concern.

Availability of Registration for Yachts Under Construction. Registration (and mortgaging) of vessels under construction is available in several foreign countries, such as Canada, the Netherlands, Italy, Sweden, Cayman Islands, and St. Vincent. This may make it easier to obtain construction financing. That often leads to an easy transition to permanent foreign registration in that jurisdiction.

In the next installment we will consider some of the some of the reasons an owner might chose against foreign registration of a yacht, and in favor of U.S. documentation.

 

Mark Buhler, Buhler Law Firm P.A., in Altamonte Springs, Fla., specializes in yacht transactions. He is Board Certified in Admiralty & Maritime Law by The Florida Bar. He may be contacted at: Office: 407.681.7000; Cell: 407.497.0110; E-mail: mark.buhler@earthlink.net © Mark J. Buhler 2015