Benefits of yacht ownership through offshore corporate structures

2015-01-20By Michael T. Moore
A superyacht can bring much pleasure to an owner, if they take care when establishing the vessel’s ownership structure and registration.

Imagine entering a room where every person in the room stands to make or lose money depending on secret codes known only to you, codes that you sincerely wish to convey, but the codes only work if the person receiving them stays in one place.

Adding to the complexity of the situation, the people in the room do not know they need or want the codes, or they’re supposed to stay put. Moreover, even if they did know that moving around will disrupt the secret codes, they would still do it because they’re having a great time, enjoying the moment and generally living large.

In short, they keep moving around the room creating a moving target. This is the environment in which an admiralty lawyer often operates.

The codes to which I refer are the laws that apply to those who own yachts. The room to which I refer is Earth and the countries on it. The applicability of the codes varies depending on the countries involved and even to the location of a vessel on a given day, its home port, its flag state, and the nationality of the beneficial owner.

Only by unlocking those secret codes and getting a rationale for their application, will you get a better understanding of your yacht ownership and registration options.

Head offshore

Should a yacht owner, irrespective of nationality, create a corporate structure which is domiciled in a country of a different nationality to hold the yacht? The answer, almost always, is yes. Most of the principles set forth here work irrespective of the flag or beneficial owners’ nationality.

‘Personhood’ is a status conferred upon corporations under law that allows corporations to have rights and responsibilities similar to those of a natural person.

In 1819, in Dartmouth College v Woodward, the Supreme Court of the United States recognised that corporations have the same rights as natural persons to contract and to enforce contracts.

Corporations, like people, have nationalities, domiciles and citizenship. But whatever is ultimately decided with respect to these underlying issues, almost invariably, it is simply foolhardy to fail hold a vessel in a corporate structure.

This is a fundamental legal principle based on the hallmark of corporate vehicles: limited liability.

Operating a superyacht in charter brings with it exposure to liabilities no right thinking owner would accept on his own.

Limit your liability

No right-thinking person exposes their entire net worth to unlimited liability if they can avoid it.

The yacht world has borrowed from the investing world the concept of ‘beneficial owner’. As in the investing world, corporate structures are used for a variety of reasons, but when you closely examine them, all corporations are made up of people who enjoy the benefits of ownership even though title may reside in another person.

This other person may be a natural person, or there may be additional levels of corporate involvement, but at the end of the day, there will be a real live human being in there somewhere. These individuals, either directly or indirectly, have the power to influence votes within the corporation or otherwise influence the transactions regarding held assets.

So if you drill down far enough, you will find human beings directing and operating any corporation.

While the wealth of the corporate entity in almost all cases is limited to the assets held in the corporation, the people managing and running it – whether the officers or directors or the owners of equity – all are protected. (It should be noted that all employees, managers and directors serve at the pleasure of the equity owners.)

The risk to the shareholders is limited to the assets of the corporation. If the corporation’s liabilities exceed its assets, or if the corporation is unable to pay its debts as they come due, in most cases the corporation is simply dissolved.

Properly set up and maintained corporate yacht structures, whether onshore or offshore, limit the liability of the beneficial owner to the value of the assets in the structure

Importantly, the beneficial owner’s other assets will be unavailable, which is to say, not available to satisfy judgements against the corporation. The limitation of one’s liability is a prudent legal objective.

Assuming it is almost always wise to create a corporate structure to protect assets, why would a natural person who is the beneficial owner of a yacht, form a corporation with a citizenship or domicile different from his own?

Why do so many American citizens create, for example, Cayman Islands corporations to hold their yachts? Or why do so many EU citizens create Isle of Man structures to hold theirs? In both cases, the corporate structures have nationalities and domiciles different from those of the beneficial owners.

The current trend is for countries to charge superyacht owners for the use of their waters through taxes.

Benefits of offshore ownership

Some would say an offshore company is simply one that is incorporated in a country where there is little government control and/or low tax rates, but this is too simplistic. Offshore companies do have other hallmarks and benefits such as protecting privacy.

Properly set up and maintained corporate yacht structures, whether onshore or offshore, limit the liability of the beneficial owner to the value of the assets in the structure. They also work well to insulate the owner’s other assets from creditors.

Offshore entities often do a better job of maintaining the anonymity of the beneficial owner and defeating efforts to pierce the corporate veil.

Offshore structures may be more important for what you don’t get with the selection of a given flag state. With the selection of the nationality of the corporation comes a regime of law. In the context of yachting, we often hear this referred to as ‘flag’ selection, which is to say country selection.

Stated differently, if you select the Cayman Islands flag, you have selected to run your yacht according to Cayman Islands’ laws.

While application of law can sometimes be a complicated analysis of multiple factors, the flag is almost always among the most important factors when it comes to application of law.

Flag selection

The flag, with certain limited exceptions, establishes the law under which the yacht conducts its business.

For example, if you fly a true French flag, you have just bought the French farm, so to speak, including the entire regime of French civil law. You can’t just pick and choose the laws you like and disregard the ones you don’t. You get, and are subject to all of them.

Flag selection is serious business. Don’t get too creative and don’t buy into the sales pitch of an obscure country looking to create some cash flow with an offshore registry. For example, certain flags require that all crew have the same nationality as the flag state. If the laws seem uninviting or harmful, don’t fly that flag.

Superyachts at sunset during the Newport Charter Yacht Show.

Chartering yachts

More and more we see yacht owners engaging in the prosperous business of chartering (renting their yachts to paying guests).

To make a profit, you will most certainly need a recognized and accommodating flag state and offshore corporate structure. The accommodation comes in the form of prompt surveys when called for by maritime incidents, or the willingness of the flag state to readily allow change of status, for example: from commercial to pleasure use and back depending on the location and actual use to which the vessel is put, etc.

Offshore structures are most assuredly suitable for chartering operations and can produce tremendous benefits to the beneficial owners if the structures are properly created and maintained.

For example, there is no provision in the tax codes of most seafaring nations (the US, England, France and Italy, to name four) that prohibit the use of a yacht as a business. Vessels of all shapes and sizes can be used in a true business, provided the rules are followed in the creation and operation of a true business.

Properly created, organized, marketed and managed yacht chartering operations can result in substantial benefits to the beneficial owners.

Because a proper offshore structure and business will be recognized as valid by most governmental taxing authorities, so-called ‘pass-through’ structures, where the tax benefits and detriments inure ultimately to the benefit or detriment of the beneficial owner and intermediate corporate structures, are disregarded.

In short, a proper chartering business can greatly benefit the beneficial owner by reducing personal income taxes, but this subject is beyond the scope of this article.

Purchasing a superyacht is a complicated business, but once it’s yours the pleasures make it worthwhile.

Paying for water

Whether the structure is onshore or offshore, the nature of the yacht world is its mobility. The clear and unmistakable trend is toward governments everywhere taxing ‘use’.

Succinctly stated: if you use the waters of a state or nation, you must pay to use the waters. Witness the recently enacted (but still in flux) efforts by Italy to tax visiting vessels and aircraft.

This point also calls for the selection of an informed and educated charter broker to understand the issues relating to offshore structures and flag selection based on your situation.

The negative financial result of bad advice to an owner can be serious. A word to the wise: Stay with the tried and true selecting a flag, offshore structure or charter broker.

We are also seeing an increased sophistication with respect to financing yachts. The old paradigm that every yacht loan is a personal loan, no longer applies. Sophisticated banks, particularly those with expertise in true ship finance, have entered the new and growing world of chartered yachts. Many of these finance sources actually prefer recognized offshore structures for the financing.

Flag state matters

These trends in chartering and finance are linked to commerce and are being facilitated by the ever-more sophisticated global insurance market. Insurance products designed to cover the risk confronted by yachts flying the flag of seafaring nations, irrespective of corporate structure, are readily available.

So a yacht’s flag state matters and popular ones usually offer an attractive start-up cost, cost of maintenance, and annual fees. But the real benefit can be the protections and reduced government intervention in the offshore structure.

Conversely, the hidden cost of selecting the wrong offshore structure can be expensive on many levels. Many small and emerging nations would love to have a lucrative new revenue stream. You should question whether these nations are prepared to make the kind of investment needed to support a global fleet in these challenging times as an http:// offshore structure, while providing many benefits, is only as good as the recog http:// nition that civilised nations extend to it.

Having said this you should always consult a professional, knowledgeable and specialised in the appropriate area of expertise, if you or your advisers have a concern.

Michael T. Moore has practised maritime and aviation law for more than 30 years. He is the founder and chairman of the marine and aviation law firm of Moore & Company, Florida, USA

Originally published in Superyacht Owners’ Guidebook 12.

SPONSORED LISTINGS