So, the owner is in a dreamy mood just after supper. He and his wife are sitting on the terrace watching their children filling in the white blanks of their new Flag Ship State colouring books. “Which flag state shall I choose for our new yacht?” he asks them. “Mozambique!” cries the boy. “With the AK-47 and bayonet!” “I like Bhutan with the dragon,” says his daughter “Look! He’s lovely!” His wife smiles, “Maybe you should get some sound advice. It might actually matter quite a bit.”

Wise words from the Mrs. Because the flag that flutters on the back of a yacht matters. A lot.

To explain the pros and maybe cons of various flag states ONBOARD talks to some flag representatives and law firms deadling with private and commercial superyacht activities.

Binta Jallow, from the BVIs says, “A yacht owner looking to register his yacht has as many options as anyone wishing to buy a yacht. Therefore some thought and research has to be carried out by the owner or their representatives before he decides on a flag that would suit him. It is usual practice to consult a legal professional for advice.” Some of the questions Jallow hopes the expert would ask include: Where does the owner reside? The EU has some very complex taxation rules. Where would the owner want to operate the vessel? The US Coast Guard has rules that are different from other international requirements. However, if operating only in the Caribbean then there are not many challenges. Is the vessel for pleasure or commercial use? What nationality are the crew? How is the boat financed? Will there be a mortgage on the vessel? Where was the yacht built, by whom, when and where was it delivered?

It’s important to choose a registry with a good reputation. Choosing a registry with a poor reputation or one targeted by Port States could have a detrimental effect on the smooth running of the vessel. Julia Attard from law firm Chetcuti Cauchi Advocates explains, “ Yacht owners need to choose a flag registry that is safe and secure, both economically and politically. Stability is key. Just view the MoU White list, you’ll see that jurisdictions such as Malta and the UK are two of the most sought after registries, with Malta being the largest in Europe. And remember that a poor record will inevitably affect the decisions of the future lenders and underwriters.”

“One must consider the political stability and reputation of the registry. Owners should find out where disputes can be settled and under what jurisdiction”. Advises Jallow, “The choice of the registry will come to the fore only when the yacht encounters disputes and problems. Will the yacht get Consular access in distant foreign ports? Will the yacht get naval protection in piracy and strife prone areas? Will the yacht get security information from the flag state? These are some of the questions that a yacht owner must ask before deciding on a suitable ship register.”

Once the yacht owner decides on what is important for him/her then the relative merits of the flags can be compared. Mag. Virna Ayala echoes this advice: “Choose a ship registry that offers security, transparency and rapidity to owners. Where you would be sure all your rights will be respected because there is legal security and a real legal system under the flag and with courts specialised in maritime law. This is fundamental in your flag choice.”

Should it run as a private or commercial vessel is a simpler question to answer: Explains Jallow, “There are very strict definitions for being called a pleasure vessel and be registered as such. Pleasure vessels in essence usually mean that the owner operates the vessel for their personal use and does not make any profits out of the operation. The vessels are only required to few maritime legislations.”

Once the owner decides to operate a vessel commercially, things get more complicated: The yacht must comply with international laws relating to its construction, outfitting and manning. Says Jallow, “The rules are very complex and it needs a trained surveyor to certify them fit for commercial operation.” Attard echoes this by confirming, “Certificates of compliance are required, registration and maintenance fees are generally higher as are fees for insurance. Therefore the cost of buying and maintaining a yacht for commercial use is much higher. More certification is required and there could be more restrictions on crew.”

In the EU, the choice between private and commercial has become very complex as each state has its own customs and tax laws that must be followed. So yachts prefer to switch between commercial or pleasure depending upon the state that they are in. “The Virgin Island Ship Register VISR) is happy to provide such a facility’, says Jallow. “For example, we have a client wishing to change the registry between pleasure and commercial in the European Union. According to new French customs regulations, the owner is authorised to charter non-EU residents under the temporary admission relief but under a commercial certificate of registry.”

“In France, it is perfectly possible to remain under temporary admission and under a commercial certificate of registry. In Spain, it is also possible, but it requires obtaining a chartering license which is very difficult to obtain. As a consequence, the client would like to have a commercial certificate of registry when renting the boat out in France to non-EU resident charterers and a pleasure certificate of registry when using his boat privately in Spain.”

If at this point in the game, the owner hasn’t decided to ditch the idea of buying a boat, Mag. Virna Ayala points out that at the Panama Ship Registry, there are no pros or cons of commercial or private registration. A private yacht has to pay a fixed tax of $1,000 (if Panamanian national) or $1,500 (for a foreign company) every two years.

Once an owner chooses a flag state to approach for registration, is there a chance he will be rebuffed at the door? Jallow explains, “Every registry has their own criteria on who they will accept on to their registry. Firstly it depends on the type of registry: traditional or open. Certain registries may not accept persons from countries in any UN sanctions list or the black list of the Financial Action Task Force. The BVI has its own eligibility list as well.” The Panama Ship Registry doesn’t have any owner’s nationality, age or vessel tonnage criteria, once the owners comply with the requirements.

So we’ve got this far, but we’re still a marathon away from flying a flag. Now the owner has to choose the ‘type’ of registry he/she wants: Open? Traditional? Offshore? Onshore? What does all that mean? “There are many differences between the types of registry,” says Ayala, “the most significant of which are the taxes…”

A Traditional Closed Registry is open only to ships of its own nation. “In other words they allow only vessels that are owned by companies or persons that are residents of that country,” advises Jallow. “Traditionally, closed registries have a two¬fold requirement, firstly, incorporation in country of registration and secondly, principal place of business in country of registration. In a closed registry, the tax is charged on the earnings as compared to open, wherein the taxes are on the basis of tonnage.”

An Open Registry has virtually no restrictions, “However, this has led to allegations of sub-standard ships,” warns Jallow. ‘Open registers denote flags of convenience for ships”.

A ship registered in a country is required to fly the flag of that country and is entitled to the privileges and protection of the country. Registration provides title to a ship which is important for the ship to enter into trade relations.

Offshore Registries permit, as an economic incentive, the hiring of foreign crews at wages lower than those payable to domestic crews. Says Jallow, “It was viewed as an alternative to open registry, to counter its effects on shipping. Prior to the advent of secondary registry, traditional maritime countries were offering various forms of financial incentives to ship owners, thus the main objective of secondary Registry was the phasing out of subsidy and incentive schemes.” Attard confirms, “States such as Malta and Cyprus offer an open, or international registry. Owners opt for registration under these open registries for a variety of reasons including reliability, stability, reputations, fiscal planning and opportunities for crew employment.”

Hybrid Registers offer attractive combinations of national and open registry features designed to lure shipowners. Just as open registers developed in response to national registries, so hybrid registers have developed in response to open registries. Jallow explains, “They are easier to access and have fewer entry requirements than most national registries. They tend to maintain a nationality link between beneficial owner or management of the vessel and the flag State. In general, hybrid registries tend to offer financial incentives and advantages similar to open registers.
Some hybrids allow foreign shipowners access to the registry once certain technical standards are met. The Norwegian and Danish International Ship Registers, the Isle of Man, and Madeira permit foreign owned or controlled vessels in certain circumstances while the German and the French International Ship Registers do not have nationality requirements. But, what about changing legislation?

The new Red Ensign Group (REG) Code came into force on 1 January 2019. The code consolidates an updated version of the Large Yacht Code (LY3), and the latest version of the Passenger Yacht Code (PYC). The new Code also has what is known as a ‘retrospective application clause’. This means that there are sections within the Code that will be applied not just to new vessels, but to existing vessels also that are currently certificated under the existing Large Yacht Code or Passenger Yacht Code, from the first annual survey after 1st January 2019. The revised Marpol Annex 5 under regulation MEPC 70 came into effect on 1st March 2018. The main change for yacht owners is the additional category (E-Waste) to be included in the garbage record book. The Republic of Panama decided to adopt the REG YACHT CODE, edition January 2019, part A, for the yachts up to 12 passengers and part B, for the yacht up to 36 passengers.

Binta Jallow sums up succinctly the reasons a yacht would register with the British Virgin Islands: Its reputation and expertise flies high internationally; It’s easy for a vessel and any mortgage to be registered with ensured security in a politically stable environment with a British-based legal system and infrastructure. The (VISR) is a member of the Red Ensign Group. Any vessel registered within the REG, is a ‘British ship’ and is entitled to fly the Red Ensign flag and reap the benefits.

Why Panama? We ask. Mag. Virna J. Ayala looks aghast. You ask me this? She replies. “Because, Panama yacht registry is a public institution, not a private office. Our clients may pay their taxes and other services directly in any of 64 Marine Merchant Consulates around the word, at the same official price as the Panama Maritime Authority, without any intermediaries. Moreover, the Consulates provide the Seaman Books offer official log books for Panamanian vessels and yachts. Our registry has a tradition of more than 100 years and we are an A Group member of the IMO”.

Attard from Chetcuti Cauchi Advocates warns, “It is vital to keep a close eye on the benefits for each possible flag. New legislations and regulations are constantly being proposed and put forward for the betterment of security, environmental protection and for improving transparency in the maritime sector. Proper planning and trusted partner are vital.”

Clear? The owner draws a slug from a large glass of whisky. “Tell me again,” he says. “From the top. And slowly this time.”