How to finance buying a superyacht

2015-01-20
The method of financing a superyacht can have added benefits of additional privacy protection and a reduced tax burden.

Would-be superyacht owners seeking finance fall into two groups: those who need to borrow the money to purchase, and those who want to free up investment capital for their various business projects.

Most lenders only cater for the latter group: they just won’t lend to those who don’t already have sufficient funds or assets. But there are other sound reasons for seeking finance, even for those who have amassed significant wealth and who have bowed-out of business altogether.

Finance can form the foundation of leasing structures which can be used to avoid the payment of value added tax (VAT) on yachts in the European Union (EU). Further, surplus funds generated by financing can be transferred to specialist asset managers to provide positive returns to help with the running costs of the vessel.

There are also strong legal and practical arguments in favour of financing: privacy and personal security can be greatly improved, and the risk of the owner being successfully sued reduced.

For simplicity, the term ‘owner’ is used in this article to mean the beneficial owner in the broadest sense, rather than the legal (usually corporate) owner.

Security for finance

The types of security needed vary, depending on the yacht’s build stage.

For those still on the drawing board, owners will normally have to pay for the first two or three stages themselves. The lender will then fund the remainder of the build, in return for an assignment of the build contract and the yard’s refund guarantee.

Should the buyer default, then the lender should have a saleable project to sell, capable of being towed away for completion elsewhere if need be.

Marine mortgages

When buying a completed build (whether new or used) the best form of security – from the bank’s point of view – is the marine mortgage, registered on the yacht in her flag registry, by which title is conveyed to the lender, but which becomes void under certain pre-determined circumstances.

Because the mortgage is automatically governed by the law of the vessel’s flag, the choice of registry is a key factor in build planning as it affects the ease with which it may be purchased by another party later.

Other forms of security include charges, assignments and pledges, although these are generally considered to be less effective. Even where the security is the vessel itself, a personal or corporate guarantee will normally be requested.

The lender may also require charter money and any insurance pay-outs to be paid directly to it first, and for further insurance in case the yacht’s insurance becomes invalid. The vessel must normally be maintained to certain standards, with surveys and independent valuations being carried out from time to time.

Although it is not easy to think of yachts as being ships, that is exactly what they are in the eyes of the law. A greater concentration of shipping lawyers and case law, coupled with an innovative banking culture and a legal regime which promotes settlement over argument, may help save legal costs and maintain good relations among the parties.

So as the centre of the world’s ship finance sector is London, it makes sense to ensure that all the contractual relationships are governed by English law and subject to English jurisdiction, as far as this is compatible with any wider tax avoidance scheme.

By convention, mortgages are governed by the law of the country where the yacht is registered, and there may be no way round this under the law of that flag state.

The method of financing a superyacht can have added benefits of additional privacy protection and a reduced tax burden.

Legal VAT avoidance

For would-be owners perhaps the greatest benefit to be gained from financing is that it can form the basis of a structure for the effective avoidance of VAT.

It is sometimes possible not to pay this by relying on ‘temporary importation’ provisions, which allow those resident outside the EU to use yachts in the EU for up to 18 months. However, the application of this rule – especially the definition of residency – varies across Europe.

Those owning real property, or with family or business connections, in Europe may well be caught out.

Tax-avoidance experts are forever thinking-up new stratagems and schemes to help their clients work their way around the complex legislation. Tax authorities are, of course, aware of this, and frequently issue guidelines condemning this scheme or that. So cautious buyers may prefer a scheme which only reduces or defers tax payments. But even such less aggressive schemes are neither simple nor cheap, requiring expert knowledge and management.

Privacy issues

Many owners are concerned about privacy, personal security and being sued. Having a bank as the owner of ‘their’ yacht can help guarantee this more effectively than just using an owning company by itself, or by using trusts.

The ‘corporate veil’ of an owning company can be lifted and trusts can be set aside under certain circumstances. Where the yacht is mortgaged to the bank, that bank will often rank higher than any of the owner’s creditors in the event of anyone bringing an action against the creditor, depending on the jurisdiction in which the legal action is taken, thereby helping to ring-fence the yacht. Leasing arrangements are often made by owners based in the US with these concerns alone in mind.

It must be noted, though, that no structure can ever remove the possibility of a claim being brought against the yacht itself, as a result of liens arising from unsatisfied claims by suppliers or crew members for example. These could also result in the detention of the yacht and ultimately judicial sale, for which any bank would doubtless want redress.

Other financing sources

It is, of course, always possible to borrow the money and secure the loan on assets other than the yacht, but this would negate most of the specific benefits of financing.

Different lenders cater for different sizes of loan, and the larger the amount of funds provided, the more flexible the terms will be. The possibility of being able to build a wider relationship with the client is a trump card to be played deftly by owners.

An area for possible future growth lies in ethical marine finance – especially for superyachts which incorporate, or are being used to test, novel, green technologies.

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: October 2007. Revised: 5 August 2012

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