Why Choosing a Flag State is so Important & How to Get it Right

As a global business services provider, Vistra Marine operates across a spectrum of specialist legal and fiscal issues in the marine and aviation industries. The choice of flag state can be a particularly murky issue for non-experts in the field, but is no less of a critical one for it. Anthony tells us more.

‘A yacht’s flag is what determines the nationality of a yacht,’ says Anthony. ‘It provides the basis for regulating matters such as standards of safety on board, the qualification of crew, as well as other important aspects.’

Take the EU as an example. Just as with the movement of people, vessels flagged in an EU state will be able to navigate freely around the EU.

The flag state can also determine where you can take your yacht. Post 9/11, the United States tightened restrictions on which states would be granted cruising rights in the country, while vessels registered in all states not on the list are required to register with the various ports they intend to visit.

So, what are the most important factors for owners to consider when choosing a flag state?

Anthony advises all of his clients to first consider the reputation of the state in question. Flag states undergo annual assessments on factors such as their safety record. This has been codified in international convention by the IMO, in the form of a regularly-updated ‘White List’ of quality flag states.

‘However, not all states on the White List will have a huge involvement and strength in the yachting sector so they will not be our first choice for clients. The reason is that the list relates to the shipping sector generally and there is no special list for yachting,’ Anthony tells us, ‘Other flag states have seen an opportunity in yachting, and have been on the forefront of introducing new support measures and guidance for the industry.’

Malta, the Cayman Islands, the Marshall Islands and the Isle of Man - in no particular order - are examples of flag states that fulfil both of the above requirements.

Regardless, this still leaves plenty of flag states to choose from.

At this stage, Anthony will then consider the particulars of the client and intended yacht operations - length, size, year and place of build, builder, Class and other distinguishing factors will all have an impact on the final choice.

‘Even if a yacht has been built beautifully, it may not be adequate for charter operations,’ says Anthony. ‘The builder may have opted for building a fine yacht, without due regard for the additional safety concerns required of charter operations.’

The owner’s nationality and tax residence will also have a bearing on the operations of the yacht, Anthony adds. EU nationals who own a yacht must pay or account for VAT if they want to use and / or operate a yacht in EU waters, non-EU owners will have the additional option to enter EU waters under temporary importation and make use of the yacht in the EU.   

Flag states and operations are intricately interlinked; whether an owner is looking to use their yacht privately or charter it out to third parties will have an impact on the choice of flag, and in turn affect certain areas the yacht is permitted to charter in.

The Galapagos Islands is the best-known example of an environmentally sensitive cruising ground only allowing access to private vessels, although recent announcements signal impending change in this area.

If choosing a flag state sounds like a minefield of variable factors, that’s because it is.

It may help to look at an example of one popular flag state and its implications for yacht and owner.

Maltese flag registration is one of the most popular choices for superyacht owners. For owners based in the EU and navigating EU waters, Anthony points out the following benefits.

Aside from being a reputable member of the ‘White List’ and EU nation, Malta’s legal framework is reliable, solid and tested.

Procedures for registration and deletion are considered far more straightforward than alternate models, while competitive fees including low company formation and yacht registration costs make it a popular choice among owners. Also notably, the Malta model benefits from a solid legal process for the registration of mortgages, a popular feature known by many yacht financiers in the market.

Under the Maltese flag, there are no restrictions on the nationality of the master, officers and crew serving on the vessel. Owners are able to pay social security contributions for crew, and said payments are valid across the EU. Company formation is also a straightforward process and there are no restrictions on the nationality of reputable shareholders and directors of Maltese shipping companies.

‘This is just one example of a flag state that is popular for certain owners, operating in EU  waters,’ Anthony tells us.

Each owner, yacht and circumstance is different. Seeking the advice of experts such as the dedicated team at Vistra is always advisable, to ensure you make the right choice of flag state for you.