A REFRESHERS ON THE CHOICE OF FOREIGN REGISTRATION OR U.S. DOCUMENTATION - PART 2
The first installment of this article, published in the December 2015 issue of FYBA COMPASS, addressed some of the most common factors that might lead an owner to choose foreign registration over U.S. documentation of a yacht. In Part Two we will look at the other side of the coin, and consider some of the potential disadvantages of foreign registration that might cause a U.S.-based owner to choose U.S. documentation over foreign registration.
Disadvantages of Foreign vs. U.S Registration
1.) Restrictions on Lawful Uses in the U.S.: The privilege of engaging in the coastwise trade in the U.S. (i.e., carrying either merchandise or “passengers for hire”, which term includes crewed charter guests, from any port or place in the U.S. to any other port or place in the U.S.) is restricted to vessels that (i) were built in the U.S., (ii) are owned by U.S. citizens, and (iii) are U.S. documented. Thus one of the greatest disadvantages of foreign registration is that there are substantial restrictions on the legal uses of a foreign registered yacht within the U.S., such as:
- Foreign registered vessels are prohibited from engaging in the “coastwise trade” in U.S. waters, and thus they cannot engage in crewed charters in the U.S. The only charters permitted are valid bareboat charters for pleasure purposes only.
- Carriage of business guests is considered by U.S. Customs to be the carriage of passengers. Thus carrying business guests on a foreign registered yacht from one U.S. point to another U.S. destination. may be deemed to be the carriage of passengers for hire, in violation of the coastwise trade laws. (See, 50 Customs Bulletins and Decisions, Vol. 36, No. 23, pp. 50-56, June 5, 2002). It should be noted with caution that any U.S.-built vessel of more than 200 gross tons that has ever been placed under foreign registry will permanently lose any U.S. coastwise trade eligibility it may have had, even if returned to U.S. documentation. (46 U.S.C. §12132(a))
2.) Geographic or Time Limitations on Use: If foreign registration is used as a strategy to attempt to avoid any liability for state sales or use tax, or U.S. import duty, it can substantially hinder the owner’s ability freely to use the yacht either within a particular state, or within the U.S. generally, because the owner must avoid any acts that would constitute importation of the yacht either into a state, or into the U.S. This can significantly limit the length of time a foreign registered yacht can be used or even physically be present in a particular state, or in the United States.
3.) Inconvenience of Cruising License Renewal: A cruising license is needed for a foreign yacht to be able to move about freely within the U.S., and to avoid various federal tonnage taxes, fees, formal entry and clearance requirements, etc. (19 C.F.R. §4.94). Cruising licenses are issued for a maximum period of one year and are not supposed to be issued successively. The yacht must first leave the country and traveling to a foreign port before returning at least 15 days after the prior cruising license has expired. From many U.S. locations, having to travel to a foreign port and back in order to renew a cruising license would be very inconvenient, time consuming, and expensive.
4.) Maritime Safety Codes / Port State Control: The relatively recent proliferation of yacht safety codes (such as the MCA Large Yacht and Small Yacht Codes) and other regulations adopted in some of the more popular foreign yacht registries is making the registration and operation of certain yachts, especially charter yachts, more complicated and more highly regulated than ever.
- In some cases, the regulations are considerably more extensive than those applicable to U.S. documented yachts. Sometimes the costs to comply with such foreign safety codes or other regulations could substantially diminish any potential savings on sales or use tax and/or import duty that an owner might have sought to achieve through foreign registration.
- In a very recent development, the U.S. Coast Guard has indicated its intention to increase Port State Control examinations of foreign flagged yachts, particularly those of 300 or more gross tons, and those engaged in trade. (See, Guidance on Port State Control Examinations for Foreign Flagged Yachts, 16700, CG-CVC Policy Letter 15-04, November 18, 2015)
5.) Maritime Labor Convention 2006: The Maritime Labor Convention 2006 (the Convention) entered into force in the signatory countries on August 20, 2013. It imposes numerous extensive, and in some cases potentially expensive, requirements and obligations for the benefit of crewmembers of vessels that are ordinarily engaged in commercial activities (such as commercial charter yachts) while operating within signatory countries. The United States has not ratified the Convention, and is unlikely to do so any time soon. Neither does it issue the certificates required by the Convention. This could favor U.S. documentation of a yacht, but could be disadvantageous for owners of U.S. documented yachts that want to engage in charters in countries that are signatories to the Convention. One of the more unsavory provisions of the Convention, from a U.S. yacht owner’s perspective, is the so-called No More Favorable Treatment principle, buried in Article V, Section 7, which reads:
- “Each Member shall implement its responsibilities under this Convention in such a way as to ensure that the ships that fly the flag of any State that has not ratified this Convention do not receive more favourable treatment than the ships that fly the flag of any State that has ratified it.”
- This provision not only authorizes, but indeed obligates, states that have ratified the Convention to impose the requirements of the Convention on vessels of states that have not ratified the Convention, whenever a vessel of a type to which the Convention applies enters into the jurisdiction of a ratifying state. So, at least in the case of commercial charter yachts that want to charter within a signatory country, this factor could favor foreign registration over U.S. documentation.
6.) Mandatory Reporting of Foreign Entities or Accounts to IRS / Treasury. There are often owner citizenship requirements for foreign registration of a yacht, which may require the formation and maintenance of a foreign legal entity as the registered owner. When such an entity is owned or controlled by a U.S. taxpayer, the taxpayer will be required annually to report its interest in the entity to the IRS on Form 5471, which must be submitted along with the owner’s income tax return (See, Internal Revenue Code Sections 6038 and 6046).
- Certain specified foreign financial assets also must be reported to the IRS on Form 8938 pursuant to Section 6038D of the Internal Revenue Code.
- In addition, any foreign bank accounts or other “financial accounts” relating to the yacht or the foreign entity must be reported on the taxpayer’s U.S. income tax returns, and must also be separately reported to the Treasury Department on FinCEN Form 114. Noncompliance with any of these reporting requirements could potentially result in draconian penalties.
7.) Higher Costs Related to Foreign Registration: Initial transaction costs and recurring corporate and vessel registration costs for foreign registration are considerably higher than costs relating to U.S. documentation. Some of the typically higher costs include, (i) Initial vessel registration fees and costs, (ii) annual vessel registration and tonnage fees, (iii) company formation costs, (iv) company annual government fees, (v) company maintenance fees by foreign company administrators or law firms, (vi) stamp duty payable on ship mortgages, (vii) recording fees for Bills of Sale, Mortgages, and other instruments, (viii) fees for various certificates, licenses, etc. and (ix) vessel inspection fees and surveyor costs.
8.) Higher Attorneys’ Fees: The attorneys’ fees, both for the U.S. attorneys and the foreign attorneys, involved in a foreign yacht registration typically are considerably higher than with U.S. documentation because the transactions are typically more complicated and the documentation is usually much more extensive. The attorneys’ fees will be much higher yet if a foreign registered yacht will be financed.
9.) Potential Adverse Financing or Insurance Implications: There may be disadvantages both as to the availability and the costs of financing and/or insurance for a foreign registered yacht. Space limitations prevent discussing the reasons in greater detail.
A multitude of factors may bear on an owner’s decision whether, in a particular case, it may be more advantageous for a yacht to be foreign registered or U.S. documented. Different factors may be of different importance to different owners. And, there could be other factors relevant to some owners that have not been addressed in these articles.
In any case, the formerly dominant factor of avoidance of state sales or use tax has become less important as a result of the sales and use tax caps that have been enacted in Florida and in several other key East Coast states. The non-tax factors now take on much greater relative weights. As a result, a higher proportion of cases may now favor U.S. documentation over foreign registration.
Mark Buhler specializes in yacht transactions. He is Board Certified in Admiralty & Maritime Law by The Florida Bar.
Contact Details: Mark J. Buhler; Buhler Law Firm P.A.,
475 W. Lake Brantley Rd., Altamonte Springs, FL 32714
Office – 407-681-7000, Mobile – 407-497-0110
E-mail – firstname.lastname@example.org
© Mark J. Buhler 2016
Article Author: Mark Buhler, Buhler Law Firm P.A.