Companies are said by lawyers to have their own 'legal personality' a curious phrase that simply means they are able to buy and sell goods and services in the same way as an individual person.
Although the idea was dreamt up to enable entrepreneurs to raise money without the fear of losing all their remaining wealth should their businesses fail, companies can also be used in a non-commercial way to own assets such as yachts.
Trusts are a different concept. They have no such personality but are simply an arrangement whereby property is handed over by one person (the 'settlor') to another (the 'trustee') for the benefit of another (the 'beneficiary'), on the basis that the property will be held and used as the settlor wishes. Although legal title is transferred from the settlor to the trustee, the settlor's and beneficiary's rights are recognised and can be enforced through the courts.
Trusts were first used to protect the property of medieval knights while they were away on crusade, and like companies, their use has come along way since their invention. Until recently the concept of trusts was only recognised in UK Commonwealth countries and other former English colonies, but it is now possible to establish trusts in countries with very different legal traditions, such as Russia and China.
companies and trusts can help to isolate ownership when wealth is derived from developing or unstable countries where there is a risk of political rivals attempting to expropriate personal possessions
Establishing and administering a company or a trust is not without expense, but they make a lot of sense when it comes to buying and owning a yacht. Most importantly, companies and trusts can be used to lawfully reduce an individual's apparent wealth and subsequent personal tax exposure.
Companies are also used to form the basis of VAT-avoidance structures by putting the use of a yacht on a commercial basis and by using cross-border leases.
Occasionally yachts are involved in accidents, in which their liability can easily exceed their value. Should an owner be held liable, his or her other assets will be at risk, so it seems more sensible to ring-fence any such source of liability by owning the yacht through a company.
Similarly, companies and trusts can help to isolate ownership when wealth is derived from developing or unstable countries where there is a risk of political rivals attempting to expropriate personal possessions. And even for owners in the most stable surroundings, protection from creditors is usually desirable if they want to indulge in large, commercial risk-taking.
Ownership via companies
By law yachts must be registered somewhere, and as shipping registers are open to inspection by the public, details of yacht owners are readily available.
Most owners don't like the idea of tabloid journalists or perhaps former spouses knowing what they own, so while the identity of company directors and shareholders is often a matter of public record, many jurisdictions allow directorships and shares to be held in the name of nominees.
The beauty of undertaking transactions through a company is that it is not the directors or shareholders who undertake the transaction but the company, meaning that the former can bask safe in the knowledge that they are largely immune from personal liability.
Arrest of a yacht
This comfortable state of affairs cannot, however, prevent the arrest of the yacht itself. When this happens the yacht is legally prevented from leaving its mooring. Typically, police or customs officers present the yacht with the court papers a process that used to involve the nailing of a writ to the mast.
Yachts are often arrested following a collision, an allegation of pollution, or when a good or service has been provided to the yacht without the provider (including crew) having been paid.
There is no need for judgement to have been given and there may be little or no warning before the yacht's arrest potentially leaving the owner in an awkward and embarrassing position in the middle of a busy charter season.
The only way to release the yacht is either for the claim to be paid or security provided. Security may only be acceptable if provided or supported by a large bank. In turn, the bank will require a personal guarantee from the yacht's ultimate owner.
International treaties on the exchange of information relating to criminal activities, including tax evasion, can allow even the strongest privacy laws to be brushed aside
Privacy of ownership
On occasion, it may be possible to look behind the company at the individuals involved, a process known as 'lifting the corporate veil'.
For example, the laws of certain jurisdictions state that when it appears that in the course of winding-up a bankrupt company transactions have been carried out with the intention of defrauding creditors, a court may declare the individuals involved liable. Criminal sanctions can also apply. The burden of proving the necessary intent lies with the creditors and 'creditors' here includes only those owed money at the time the transfer was made, not future creditors.
The same principle applies when it looks as if a company was set up to frustrate a court order to freeze assets.
Furthermore, companies cannot be used to circumvent legal obligations. This does not mean that individuals will be liable if a company's legal obligations are breached, but if the company was set up just because a legal obligation (such as complying with safety requirements in respect of a large yacht) was inconvenient or expensive to comply with, then the veil could be lifted.
The use of nominees only prevents the true identity of directors and shareholders being made available to the public. It is not normally possible to offload liability onto the nominees. There is also likely to be a clause in the setup agreement obliging the directors and shareholders to indemnify the nominees.
Neither can privacy be entirely guaranteed. Not unreasonably, international treaties on the exchange of information relating to criminal activities, including tax evasion, can allow even the strongest privacy laws to be brushed aside.
Moreover, if a trust is not recognised, property placed in it may still be made the subject of an asset-freezing order or a court judgement, although if the property is physically located in the same country that the trust is administered from, this will be difficult. Several countries, including the UK, are party to the Hague Convention an international convention that recognises trusts with certain conforming characteristics.
Selecting an offshore jurisdiction
Offshore jurisdictions still have a reputation as being sun-baked islands where dodgy deals can be concluded in an unregulated financial free-for-all. But for the majority of commonly used locations nothing could be further from the truth. In fact, virtually all the world's leading multinationals use offshore companies and trusts to undertake business in a private, tax-efficient, yet entirely legal way.
'Offshore' simply means a jurisdiction other than the one where an individual is resident or domiciled for tax purposes. They certainly don't need to be sunny or insular, although many are as it can be a lucrative boost for small, remote and tourist-dependent economies.
For yacht owners, the principal advantage of using a respectable, well-known offshore jurisdiction is that there is rarely a need to reinvent the wheel in the midst of time-sensitive purchase negotiations: these places are geared up to provide yacht-owning structures.
As these activities often provide a sizeable proportion of their foreign income, the governments of these jurisdictions make it a priority to make matters simple for those looking for this type of service.
Ideally, guidance in the earliest stages should be sought from an independent, trusted source capable of providing a truly impartial, global overview
It is vital to choose a jurisdiction with care, however. No two are the same and there are bad apples in the barrel, especially when it comes to the integrity of local practitioners. With companies, but more particularly with trusts (where legal title is transferred to a local trustee who may have discretionary powers), opportunities exist to extract more from clients than they might have expected.
Other factors to consider include initial and ongoing costs (including local taxes), international reputation and the strength of a jurisdiction's rule of law in other words how tough its courts are.
Political stability is another important factor, as is the time zone, the exchange controls and any escape provisions which allow companies to change jurisdictions while maintaining their legal personality, and trusts to be transferred without needing to be rewritten.
Working with the local branch of an international accounting or legal group may provide reassurance but you could just end up being steered towards those places where it happens to have an office. Ideally, guidance in the earliest stages should be sought from an independent, trusted source capable of providing a truly impartial, global overview.
Benjamin Maltby is an English barrister with consultants matrixLloyd, providing impartial guidance on all aspects of large yacht purchase, building, ownership and operation.
Originally published: June 2007. Revised: August 2012