To charter or not to charter

James Lawson of Hill Dickinson discusses the legal implications of operating a yacht commercially or for charter.

One of the first questions we ask when advising on yacht ownership structuring and registration is whether the yacht is to charter, or operate privately. The issue is fundamental on a number of levels and some clients ask for advice on the pros and cons of operating their yachts commercially.

These can be loosely grouped under four headings:

Personal preferences

Yachts, especially the larger, custom-built yachts, are very much personal assets. In many cases, years of planning by the owner in terms of layout and design have been invested in the project or the owner has viewed a number of yachts on the market before committing to one. Owners value their privacy, and their yachts are often treated as an extension of their home so some do not want strangers sleeping in their beds, even where those strangers are paying many thousands of euros a week (or day) for the privilege. No matter how many advantages may arise from chartering the yacht, some are resolutely for private, personal use only.

Financial implications

The most obvious advantage of offering a yacht for charter is to derive income from its operation, either to offset running costs or as part of a business proposition. Having said this, it would be unwise to assume that chartering the yacht will be profitable. There are a number of successful charter yachts, but in the current market there are more that are nowhere near to breaking even.

The costs of running a charter yacht are typically higher than for a privately operated yacht: the costs of retaining a full crew, more demands on repair time, commission, discounts required for double or repeat weeks and the vagaries of the charter market are all factors to consider.

On the other hand, a yacht that is able to charter will often command a higher on-sale value, and could attract a wider pool of potential purchasers.

Fiscal

Putting it simply, if a yacht is to operate privately in the EU and the main user is EU resident, it will incur a VAT liability. Similarly, if it is to charter in the EU, it will incur a VAT liability. The difference is that if it charters, there are ways in which the VAT liability can be mitigated.

At the moment, the two main VAT mitigation arrangements for commercially operating yachts are (i) French Commercial Exemption; and (ii) a VAT registration of the owning entity. This is not an article on VAT mitigation and, as such, I won’t comment on these (or indeed the lease structures available in Malta and Cyprus). The relevance, though, is that if an owner is facing a VAT liability on his yacht, and he would rather not pay the VAT, chartering the yacht is likely to provide more preferable options to mitigate that liability. An owner must be aware, however, that the yacht has to be advertised for charter at realistic rates, that third-party chartering should take priority over his own use, that his use must be by way of a signed charter agreement with evidence of payment of an arm’s-length charter fee, and that the degree of his use of the yacht is likely to be limited.

Operational

A charter yacht gives rise to a number of operational issues: build standards; annual surveys; crew qualifications; and ISM/ISPS compliance, increased inspection and requirements of local jurisdictions.

With rare exceptions, a yacht that charters should be commercially registered and classed with an approved classification society. To obtain commercial registration a yacht needs to comply with the commercial code requirements of its flag state, meaning in practice that the yacht needs to have been built to particular safety standards.

Closely allied to this is the requirement to keep the yacht in compliance with those requirements by way of annual surveys. A charter yacht may need a higher qualified crew than a private yacht, again primarily for safety reasons.

Dependent on its size, a charter yacht will need to comply with International Safety Management and International Ship and Port Facility Security, which often requires the involvement of a professional yacht manager. This all adds to the safety of the yacht but increases costs and administrative burden.

Given the increased level of operational requirements, a charter yacht is more likely to undergo a closer inspection by Port State Authorities and Customs officials (especially those within the EU).

Finally, some jurisdictions (such as the Galapagos Islands, for example) place embargoes on commercially registered yachts, and some apply far higher security requirements (the US is one such jurisdiction). Others have specific rules that may apply, or may seek to impose local taxes.

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This is necessarily a brief and general overview of the implications of operating a yacht commercially and should not be relied upon as legal advice. Specific guidance should always be obtained on ownership structuring, registration and operation of a yacht.

To read the full article, see Issue 5 of The Superyacht Owner. To become a member, click here.

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