Despite the weak economic climate, demand from wealthy individuals and company executives for yachts and the services associated with running and maintaining these assets remains strong.
After a difficult couple of years in 2009 and 2010, there is firm evidence emerging of a recovery in the luxury yacht markets, buttressed by a newly emerging class of wealthy individuals in emerging economies like Brazil and China. According to Boat International, 264 superyachts were sold in 2011, 29% more than in 2010, with total asking prices reaching USD2.6bn last year. Statistics routinely announced by the main offshore marine registries showing yearly growth in the registration of yachts and other pleasure craft also suggest that this is a business on the up.
Nevertheless, the path to yacht ownership is not an easy one. Unlike, say, buying a car, where you can simply hand over your cash to the salesman and roll off the forecourt with your new pride and joy, the international nature of sailing means that many financial pitfalls may await the owner of a shiny new yacht, especially in the area of taxation, and it is therefore vitally important that an appropriate ownership structure is put in place to minimise the impact of these potential traps. Thankfully, there is a large and growing industry of service providers with the appropriate expertise to take much of the tax headache out of the equation for the aspiring sailor. However, it pays to have a general awareness of the situation, and in this feature we explore the major tax planning and ownership issues confronting owners and users of yachts.
Normally, boats over a certain size and weight have to be registered in one jurisdiction or another, and with many onshore and offshore jurisdictions offering registry services, this will be one of the most important considerations in the yacht tax planning process. This decision will be guided by where, when, how often and for what purposes (eg private use or chartering) you intend to use your yacht and of course these factors will have an important bearing on tax.
While national boat registries have broadly similar registration rules, the registration process may differ quite substantially, for example in the amount of documentation, such as proof of ownership information that will be required to complete a registration. Almost invariably, initial and ongoing registration fees, usually on an annual basis, will be charged and these too can vary quite widely. Some registries may also restrict the type of activity that may be undertaken by a yacht, eg by prohibiting commercial uses.
In the case of yacht registration some of these requirements might typically include: a bill of sale; a builder’s certificate (if new); a declaration of ownership; and a deletion certificate if previously registered.
Additionally, it is wise to consider the international standing of the jurisdiction concerned, and whether there are issues over its reputation in terms of tax compliance with other countries, especially the country of your residence. While it is not the purpose of this feature to endorse one jurisdiction over another, it is often the case that professionals in this field will recommend using an offshore registry which is affiliated with or has strong links to one of the major onshore countries like the United Kingdom and the United States. These tend to have internationally-recognised laws, rules and regulations in the areas of shipping and aviation and therefore are considered a ‘safer’ choice.
Last but not least are the tax rules in the jurisdiction of registration. This is where registering a vessel offshore has significant benefits as the owner may be able to take advantage of very low – or no – rates of tax. Company tax is set at 0% for most businesses in a number of countries with registries, including the Channel Islands, the Isle of Man, the Cayman Islands and Bermuda. Whether you are able to avail of these tax advantages may depend, however, on how the ownership of the boat or plane is structured, a subject we will tackle next.
Marina Gall, Director of Marine and Aviation at Vistra Jersey, who specialise in designing and supplying the support services required by boat buyers and owners comments, says: “The range of options open to those owning and operating yachts and boats of all sizes is considerable. In our experience, even relatively modest purchases in the sub $250,000 price bracket can benefit from substantial savings in tax, if the most appropriate ownership structure is designed in at the outset. This is certainly not an issue for those operating only at the higher reaches of the market, in our view.”
While it is perfectly possible in most cases to register a yacht in one’s own name as an individual, there are many disadvantages to doing so; indeed, it is certainly the case that the vast majority of owners choose to transfer their ownership to some form of corporate entity or special purpose vehicle.
For example, by using an offshore company to own, run or charter a yacht, it may be possible to take advantage of the above-mentioned low rates of corporate tax on offer in certain jurisdictions, although such a company need not necessarily have to be formed in the same jurisdiction in which the vessel itself is to be registered. Additionally, using a company form has certain other benefits in terms of protecting the owner; confidentiality being one of them, and limiting the liabilities that may arise in connection with ownership of the vessel being another. If confidentiality is a high priority for the owner, an additional option is the use of a trust company, into which the owner (settlor) transfers an asset to the effective ownership of a trustee who manages for the benefit of a beneficiary. In civil law jurisdictions (and now some common law jurisdictions), a foundation company will perform a similar role. The use of a trust structure may also be an effective shield against adverse inheritance tax implications in the owner’s country of residence.
Some financing options can also be used to put distance between the owner and the asset. For instance, by using a leasing arrangement, the bank or finance company buys the yacht from the seller and then leases it to the buyer. With this type of financing deal, the buyer does not actually legally own the asset but is instead granted possessory interest. With a leasing arrangement however, the buyer must also front all the risks associated with owning and operating a yacht and may be liable for loss in the event of damage for example.
This section sounds a note of caution for those intending to purchase or sail their yacht within the territory of the European Union (EU), which could have unwelcome repercussions for owners in terms of EU value-added tax (VAT).
Under EU VAT law, all yachts owned or used by EU residents are liable to VAT and owners must be able to show that VAT has been paid before they may enter EU waters. There is, however, a concession open to non-EU persons, under which vessels purchased outside of the EU may be temporarily ‘imported’ into the Union (or more strictly in the ‘customs territory of the Community’, which includes the EU’s territorial waters) and used for private purposes, without customs duties or VAT needing to be paid. The boats concerned have to be placed under the EU’s ‘temporary importation procedure’ with the customs department of a member state, and the period of use in the EU is typically limited to 18 months. Because the boat is temporarily imported into the EU and not a specific member state, it is permitted to sail from one member state to another with no further customs formalities. When the 18 months have elapsed, the boat is, in the official jargon, effectively ‘re-exported’, although subsequent periods of temporary importation may be applied for. It is also possible to apply for an extension of the temporary importation period if the yacht is to be laid up and not used for a period of time.
It must be emphasised that this concession is only available to non-EU residents, that is, people ‘established outside the territory of the EU’, although there are ways of lessening the VAT blow for EU residents. Important points to be considered for determining whether or not VAT is payable are the place of purchase of the yacht, where the yacht will be used, who is the beneficial owner of the yacht, whether the yacht will be chartered out to third parties, and whether the yacht will be used by EU residents.
In some circumstances it may be possible through careful planning for EU residents to mitigate the amount of VAT paid on a yacht purchase. Although VAT laws are to some extent harmonised across the EU, the rules (and rates) vary considerably from country to country and the overall picture is very complex. It therefore may be advantageous to consider paying VAT in a country which has relatively low rates of VAT, such as Cyprus (17%) or Malta (18%) or importing a vessel to certain territories which are outside the EU for VAT purposes, such as Gibraltar or the Channel Islands. However, with EU member states increasingly cracking down on all forms of tax avoidance, especially by high-net-worth individuals, the penalties for breaking VAT rules, whether by accident or design, can be severe, so it must be stressed that advice from an advisor with expertise in this area must be sought if a vessel is to be used within EU waters, for example in the Mediterranean or the English Channel.
Vistra’s Gall says: “Getting the structuring right at the outset is vital, if complex tax and customs issues are to be avoided later on during ownership. We always advise clients to take advice as early as possible and to have clear understanding how they might operate their vessel, both in terms of geography and whether commercially it will be chartered, for example, as all of this can impact upon the best way of structuring ownership.”