S I X T H E D I T I O N
CONTENTS
Design & build Design
Insurance What are the possible risks? What insurances are required? Are there any insurance clauses that I need to pay particular attention to?
7 9
66 68
Intellectual property
Build contract
14 20
Warranty
70
Sale & purchase Top tips
Finance Documentation
23 26 27 28
76 77 79 79
Points for sellers to consider Points for buyers to consider
Security
Points to consider Post-drawdown
Basics of superyacht sale and purchase
thesuperyachtlawfirm.com
Tax Q&As
Additional considerations MYBA charter agreement
31
81
Operational Superyacht management
Bribery and know your client rules Bribery
37 40 44 46 48 50 52
85 86 92 93
Crewing matters
Know Your Client
Art on board
Litigation
Flag
Multi-jurisdictions
Arms on board
Key contacts About Clyde & Co Our global reach
Migrants
Helicopters
101 102
Toys Jet skis
57 58 60 62
Flyboards
Drones
Submarines
On Brexit, we have updated the pages to include the impact of Brexit on superyachts in relation to matters of employment, tax and the enforceability of English law judgements and English arbitration awards in the European Union. On insurance matters, in a market that has come under a great deal of pressure because of a spike in claims we look at how the market has responded. In May 2019 the sailing superyacht My Song was lost overboard on a transit from Palma to Genoa and therefore we examine the issue of superyachts as cargo when being transported. Finally, The Guide to Superyacht Law has been refreshed and expanded to reflect the latest developments in case law and best practice, as always, the latter gleaned from our continued position front and centre of the superyacht industry. We will continue to bring to you updates not only with this publication but also on our micro website thesuperyachtlawfirm.com and our Clydecast Superyacht Podcasts .
If a week is considered to be a long time in politics, the almost three years since the publication of the fifth edition of The Guide to Superyacht Law must be considered to be an eternity in the legal world. When we were first contemplating this sixth edition of The Guide we had in mind a publication that would be focused on the consequences of Brexit. The global pandemic caused by COVID-19 has changed how we do business and possibly increased the appetite of ultra-high net worth individuals to own or charter superyachts. Our fourth and fifth editions of The Guide were written in the maelstrom caused by the publication of both the Panama Papers and the Paradise Papers. Both these events have substantially changed people’s appetite for the acceptability of hidden wealth and tax avoidance and perhaps framed the moves by the European Commission to end aggressive tax benefits afforded to superyacht owners. There have been some very high-profile seizures of yachts in the last three years, most famously and, as a consequence of the 1MBD scandal, the seizure and eventual sale at auction of the yacht Equanimity . Consequently, we have updated the pages on tax and added new language relating to transparency, and in particular Know Your Client rules.
Clyde & Co the superyacht law firm
3
5
DESIGN & BUILD
DESIGN
Every person involved in the design process needs to understand what rights in the design of any superyacht they have. An owner needs to be surrounded by an experienced team to assist with the build process. Any owner needs to explore the following:
• What is the owner expecting from the designer? Will the choice of the design have an impact on the superyacht’s performance or compliance with regulatory obligations? Hire the designer or designers early. The exterior styling and the interior design may come from different design houses. Who has responsibility for the naval architecture? • What are the designer’s obligations? Are they only delivering the design, or should the designer also be responsible for ensuring the builder fulfils the design intent? • Does the design contract tie into the build contract? The designer should deliver the design in accordance with the design deliverables schedule of the build contract. Does the design contract clearly specify the designer’s responsibility towards the owner or towards the builder for defects attributable to the original design? Is there a clear and workable approval process for design drawings moving back and forth between designer, owner and builder?
• Is the designer protected from wrongful implementation of the design by the builder and from delays to the build not attributable to the designer’s fault? Does the design contract allow the designer to recover design fees for variations to the design requested by the owner above the initial scope of work and/or in respect of extra activity requested to the designer to assist the builder in the implementation of the design?
• Is the owner/builder protected from negligent design (including latent (or
‘hidden’) defects, of which particular care should be taken, especially by builders who can potentially be held liable for their failure to identify and correct technically flawed designs) or breaches of intellectual property? Does the designer have professional negligence insurance cover in place? It is expensive but designers should have it.
DESIGNING AND BUILDING A SUPERYACHT IS A COMPLEX PROCESS
7
INTELLECTUAL PROPERTY
• Does the design contract protect the designer’s intellectual property? Does the contract provide that any licence of the intellectual property rights granted by the designer are subject to payment of the design fees, and that if the designer is not paid the licence will be immediately withdrawn?
Design rights protect the outward appearance of an article resulting from its features, in particular, the shape, lines, contours, texture, colour, materials used and its ornamentation — for example, the shape of a superyacht hull or deck design may qualify for protection.
Intellectual property (IP) is concerned with creations, such as inventions, literary and artistic works, designs, and names and symbols used in a commercial context. IP can be legally protected, for example by way of copyright, designs, patents and trade marks. These rights can help to ensure that inventors and designers are recognised for and profit from their work, and are protected against the misuse and/or misappropriation of their works by others.
IP includes such rights as: confidential information and trade secrets, copyright, database rights, design rights, domain names, know-how, patents and trade marks. Our intellectual property lawyers have a wealth of experience advising on the full range of intellectual property rights in a superyacht context, including the management, protection, exploitation and enforcement of IP, as well as reputation management and privacy issues. Whether you are creating the exterior design of a superyacht or the design of an internal feature of a superyacht, you should consider:
• Whether to license the right to use your IP or to assign the rights in your IP to another party. • How you want to restrict the use of your IP — you must be specific or you risk misuse and infringement. • Who will own the IP — for example if you are only contributing to one aspect of a design, be clear who will own the design and avoid the pitfalls of joint ownership. • What consideration do you want for the use of your IP — is a one-off payment sufficient or do you require payment on an ongoing basis via royalty payments.
• How to protect your IP.
• How you want to use your IP going forward and the extent to which you want to allow third parties to use it.
9
• Trade Marks: Trade marks protect symbols, names and slogans that are used to identify and distinguish goods and services of one undertaking from those of another undertaking. Examples of trade marks include the names ‘Aston Martin’, ‘Microsoft’ and ‘Rolex’. They can also protect sounds (the Nokia ringtone), smells (Chanel No. 5) and shapes (the classic Coca-Cola bottle). Consider the logo used on a superyacht or the logos which may be found on individual parts of a superyacht — they serve to distinguish the goods and/or services of one organisation from another. Not all trade marks are registrable and there are various legal requirements they must satisfy. Once registered, trade marks can be protected indefinitely provided that various requirements are met, including the payment of renewal fees every 10 years. Unregistered trade marks arising through use also provide a certain amount of protection. IP laws have historically been harmonised to a large extent across the EU. However, following Brexit, there is the possibility of the UK’s laws diverging from those of Europe. Whilst this is unlikely to happen to a very significant extent given widespread appreciation of the benefits of harmonisation, it is nonetheless important to consider where further applications may need to be made in order to protect IP rights in both the UK and EU.
Note that a number of changes to UK IP law came into being on 1 January 2021 following the end of the Brexit transition period. These changes have been designed to ensure continuity as far as possible as the UK departs from EU IP systems. However, not all continuity mechanisms are automatic and therefore there are some instances where right’s holders will need to take action in order to continue to adequately protect their IP. IP lawyers are able to advise on all aspects of the legislative changes to make sure that your IP continues to be protected in both the UK and EU. A designer should never surrender their design palette or assign or license their intellectual property rights without specialist advice. Owners go to a designer for their style, which is their signature.
The following IP rights may apply to various elements you have designed or invented in relation to a superyacht: • Copyright: Copyright is the right to prevent others from copying your work, and is especially important when creating and negotiating superyacht designs. Copyright protects, amongst other things, artistic and literary works (which includes sketches, design drawings, photographs, images, books, paintings and sculptures), as well as computer programs, databases, sound recordings, films and broadcasts. Copyright will exist in a work if certain conditions are met, including: the work is original, the work has been recorded, and the work qualifies for copyright protection (which depends on the national status of the author, or the country of first publication of the work). Copyright arises automatically in the UK and there is no requirement for registration. • Design Rights: Design rights protect the outward appearance of an article resulting from its features, in particular, the shape, lines, contours, texture, colour, materials used and its ornamentation — for example, the shape of a superyacht hull or deck design may qualify for protection. To qualify as a new design, the overall impression of the design must be different from any earlier design. Design rights provide a monopoly right and prevent a third
party copying your design for a period of time. Design rights may be registered or unregistered and you can register your design provided it meets the eligibility criteria. • Patents: Patents protect inventions and give inventors the exclusive right to use and/or commercially exploit their inventions, generally for up to 20 years. Patents cover both manufactured products and processes, and they are available for most industrially applicable processes and devices. For a patent to be granted in respect of an invention, the invention must be new, involve an inventive step, be capable of industrial application and not fall within any of the applicable exclusions, for example scientific methods or software.
The benefit of a registered design is that the design
may enjoy a larger period of protection.
11
In terms of the protection of IP in the US, as a World Trade Organization member the US is committed to certain minimum IP protection standards. There are many similarities between the respective IP law frameworks in the US and UK, though it is always recommended to seek legal advice from US lawyers in order to ensure adequate protection of IP there. • Be aware of the difficulties in protecting IP rights (particularly in an international context, which the superyacht industry almost invariably is) — certain types of claims (such as copyright infringement) can be extremely difficult to prove, and it is much better for a designer to protect their IP pre-emptively (such as by registering design rights) than to address the issue for the first time only once infringement occurs. • There are also other kinds of claims that touch on IP rights, such as the tort of passing off.
If things do go wrong, take prompt action to protect your rights. There are different forms of dispute resolution common to IP disputes and our IP lawyers can advise you on the best strategy to adopt should your intellectual property rights be misused or infringed, from negotiating
commercial resolutions to the commencement of legal proceedings.
13
BUILD CONTRACT
• Regulations: Will the yacht be built to comply with commercial regulations
throughout the construction process and remains responsible for any partial or total loss occurring prior to delivery. Should buyer’s supplies be insured under the builder’s policy? Builders should check with their insurers what is insurable and whether object d’art or valuables should instead be insured by the buyer. Does the contract provide for an assignment of the builder’s insurance proceeds to the buyer or should the buyer be named as co-assured in respect of the value of buyer’s supplies? It is important to consider the credit rating of the insurers and also what risks are excluded under the policy. • Protecting the buyer’s pre-delivery instalments: Progressive title transfer (getting ownership in the superyacht as she is built), bank refund guarantees - or a combination of both. Where title is being transferred, check with the relevant jurisdiction what requirements may impact title registration to ensure that it is validly transferred to the buyer and that such title registration can be opposed to third party creditors. Similarly, if the buyer receives bank refund guarantees consider the terms and conditions for enforcement and events allowing the buyer to make a payment demand to the issuing bank. How best to protect your pre-delivery instalments and how effective is that bank refund guarantee?
applying to yachts carrying out chartering or for private use? Is there a difference in the construction cost to achieve commercial notation? How many passengers and crew members will the yacht accommodate? What are the applicable Classification Rules and what Flag will survey the construction? Construction Flag and Flag for final registration on delivery do not necessarily need to be the same, but both parties should check before the construction commences that if the Flag for final registration is different such Flag State will accept registration. Will the yacht be built to comply with the REG Code which came into force on 1 January 2019 and consolidated the Large Yacht Code (LYC) (as published by the United Kingdom Maritime and Coastguard Agency “MCA” and the Passenger Yacht Code (PYC) SOLAS) or to comply with regulations issued by United States Coast Guard? What are the new regulations on low emissions and does the yacht have to comply with the International Maritime Organisation (IMO) Tier III of the IMO Nox or are there any exemption applying to certain yachts based on their size and year of construction?
There is no industry-wide standard form superyacht construction contract. Each builder will have their own standard contract which reflects how they work. It is however common for builders to use provisions or even amended versions of commercial ship building contracts, such as the Shipbuilders Association of Japan (SAJ) form.
basis; be monthly stage payments or on a percentage of completion of the superyacht. Careful consideration should be given to timings and events triggering payments and the value of the superyacht as constructed. • Specification: A marine surveyor, or an experienced yacht construction project manager can help to negotiate this. The specification will include details of what is going to be built and the materials, as far as they can be defined on contract signing day. The specification will detail in every respect how the superyacht will perform, how the quality of the superyacht will be measured and will set out the regulatory requirements issued by the Classification Society and Flag State and the Class notation to which the yacht must comply.
A good contract will appear fairly balanced, while a poor contract, a contract heavily balanced in favour of one party, is likely to generate disputes during the construction process and undermine the parties’ commercial relationship at a later stage. A superyacht construction contract will usually consist of the main contract, the technical specification, the general arrangement plan, and any other elements such as a construction schedule, and the form of delivery documents.
Never sign a contract without seeking legal advice.
There are some basics you should expect to see in a build contract:
• Payment terms: Stage payments to fund the build of a superyacht are defined by the economics of the builder. They can be linked to construction milestones; be on a cost plus
• Insurance: The builder is responsible for placing the builder’s all risk insurance
15
• Performance warranties: Depending on the size of the yacht, the buyer should at a minimum expect to see speed, range, noise and vibration warranties, taking into account the specific type of superyacht and its use. An explorer will focus more on range than a fast day boat that will focus on speed. Paint quality criteria and warranties should also be considered. The amount of liquidated damages and acceptable deficiencies will depend on what features are important to your superyacht and its intended use. Our comments above regarding things a builder should consider when agreeing levels of liquidated damages apply equally to buyers. • Jurisdiction, forum and technical disputes: You need to know the law that will govern disputes and whether (and where) you will go to court or arbitration. If you intend for technical disputes to be settled by a technical expert, be sure that the contract says so, and that there is no scope to appeal the technical expert’s decision. An exercise in good customer service “where the customer is always right” could have unexpected contractual repercussions which might circumvent protections for a builder. Our Litigation and Brexit sections dive more deeply into these aspects.
• Subcontractors: The builder will sub- contract certain elements of the build and will be responsible for the subcontractors’ performance both as to quality and time. The chain of command for subcontractor management should be clear (typically, management of subcontractors and liability for their work is solely the right and responsibility of the builder). Builders must prevent owners circumventing that relationship. • Delivery and VAT: Where will delivery take place and what VAT structure should be set up? Taxes and VAT obligations apply to both parties and each party is responsible for taxes arising in its own jurisdiction, but if a buyer claims that VAT is exempt on the yacht purchase but then fails to meet such exemption criteria, will the builder be liable to pay VAT? As you will see within our section on tax, this should not be overlooked or viewed lightly.
instalment, request performance bonds from the buyer guaranteeing the payment obligation of (at least) the next pre-delivery instalment. This gives some comfort to the builder in securing a minimum cash flow to continue the build if the buyer steps out of the contract during construction when the builder has already invested its funds. Alternatively, where the contract is entered into by a single purpose vehicle company (the norm in the industry) it is not unheard of for the builder to request a personal guarantee from the beneficial owner or a corporate guarantee from a parent company securing the buyer’s payment obligations. • Project management: Depending on the complexities of the project, during the build you may have an on-site project manager to supervise the build process. The build contract should allow access and office space for the project manager and their team. A complex and bespoke project requires all parties (owner, builder and designers) to work closely together from as early a stage as possible and a clear demarcation of each party’s obligations — particularly when it comes to deadlines for producing and approving work.
If there is a valid reason to demand payment under the bank refund guarantee, ensure that the form of the demand conforms to the terms of such guarantee. Further, buyers should not consent to any amendments to the contract, without first ensuring that the right to call under the refund guarantee will be unaffected by any such variations. • Protecting the builder’s interests: Does the contract provide any mechanism to guarantee the buyer’s payment obligations during the build process? What if the buyer fails to pay the pre-delivery instalments when they fall due or if the buyer unlawfully terminates the contract or illegitimately refuses to take delivery? Will the builder be able to recover any of its losses from the buyer, or claim liquidated damages if the buyer causes the project to overrun, increasing the costs to the business? Note that liquidated damages clauses no longer need to be a genuine pre-estimate of a party’s losses — although an extravagant provision could still be seen by the courts as a penalty (and therefore unenforceable). As a general point, you should be able to articulate legitimate commercial justifications for the level of liquidated damages. In addition, or as an alternative to retaining title and ownership of the superyacht, some builders, upon payment of each pre-delivery
17
• Post-delivery warranties: What is the warranty period? What will it cover? Does the warranty extend if an item is fixed during its original warranty period? Is major equipment (e.g. engines and gensets) actually covered by original manufacturer warranties or the builder? If so, how long are those warranties? What happens if the buyer carries out repairs without consulting the builder, despite there being warranty provisions in place? Consideration should also be given as to whether the buyer should have limited rights when it comes to latent defects. • Termination: If it all goes wrong and the contract is terminated, what happens? If the builder terminates due to a buyer’s default, is the builder suitably protected so as to recover its losses and damages? To what extent can the builder recover its losses? If the buyer terminates due to the builder’s default is the buyer protected to receive all his money back or to remove the yacht in her current state of construction and complete it elsewhere? Consider that if the buyer choses to take delivery of the unfinished yacht will he receive all the documentation and the design work and all the class and flag approved drawings to complete the build elsewhere.
• Commission: While not generally mentioned in the build contract, if the buyer is introduced to the builder by an intermediary, a commission may well be payable by the builder. Transparency on the amount of the commission, even though not always available, should nevertheless be accessible to a buyer. • Payments: must come from an account in the name of the buyer entity, not from an account controlled by another company or by the ultimate beneficial owner. If accusations of money laundering surface, the builder will be put to proof that they are certain where the money comes from and may be required to offer up payment details to customs or other governmental authorities — without referring back to the buyer first.
19
WARRANTY
However, with fairly small changes to the wording of a warranty, or a carelessly drafted clause, this complete code can be disrupted, such that the warranty becomes less effective, and potentially opens up the builder to liability for all of the losses suffered by a buyer in connection with a defect. The extent of the warranty is not the only issue to be aware of in this context: warranty works can also raise jurisdictional issues, and there have been instances of builders attempting to seize jurisdiction (undermining that of the build contract) by trying to characterise warranty works as local refit work. Ensure you maintain a consistent line in communications and in any new contractual documentation to avoid any ambiguity. This is an especially high risk where non-warranty works are co-mingled with warranty works. Management of warranties under a build contract have also proven challenging for both sides: there are procedures for validating warranty claims, procedures the buyer has to follow to avoid losing their rights under the contract. Further, the builder should be very careful when dealing with warranties under the contract ensuring they are taken care of in a timely manner. During the various lockdowns effected around the world due to COVID -19 restrictions, the owners were not able to exercise their rights under the
warranty provisions because of yard closures or unavailability of materials. In many cases a commercial fix was found, however, parties now are urged to address this issue properly.
The financial and market problems over recent years have seen a run of unprecedented claims in the English courts and London arbitration that were absent pre-2008 addressing the nature and extent of the obligations of a builder in terms of after sales service to its buyer. Further, the exclusion of implied terms in a business to business contract enables the builder to limit or exclude liability for breach of some conditions that are implied in a contract for a sale of goods that the goods correspond with their description, are of satisfactory quality, and are fit for purpose.
While much of the attention in concluding a contract will focus on the specification and pricing, we recommend that equal attention is given to what could come after delivery.
established legal concepts, emphasizing the importance of the parties’ intentions when entering into the contract. With appropriate wording, the warranty clause replaces any liability on the part of the builder for breach of both express and implied terms of the contract with an obligation solely to repair or replace defective workmanship, and permits the exclusion of liability for broader losses ranging from towage fees to lost charter income. Essentially the clause becomes an indemnity under which all other damage or financial losses suffered by the buyer would be excluded and it is for the buyer to establish that it ‘qualifies’ for the assistance of the yard.
There have been a rising number of contracts in which buyers have raised numerous and extensive claims that frequently go well beyond what the builder is obliged to perform under their post-delivery warranties. There is then a tension between the legal obligations under the contract and the commercial desire of the builder to assist and satisfy its customer. The English courts have indicated, following a particularly interesting case in 2000 (reinforced in 2016 in the commercial shipbuilding case known as Star Polaris ), that a properly worded warranty clause can represent a complete code that governs what is or is not covered by the builder after delivery. The English courts therefore seem to support a more flexible interpretation of
21
SALE & PURCHASE
The reality is that you must never underestimate the importance of having a thorough understanding of the legal processes, statutory certificates, transaction documents, tax position and various different forms required for the sale or purchase of a superyacht.
TOP TIPS
• Surround yourself with people who know what they are doing and have a good track record including: surveyor, lawyer, superyacht manager, broker and VAT adviser qualified in the jurisdiction where the yacht is to be imported and used.
• You should consider carefully before signing any personal guarantee which underwrites the obligations of the selling or buying company. This may compromise the ownership structure you have carefully put in place, and it could cause not just tax problems on the sale but wider personal tax complications. • Are there any mortgages, charges or other encumbrances registered against the superyacht? Ensure that these are discharged before delivery and that title is clean and unencumbered. This is a question any prudent buyer should ask and if you are selling, you must ensure that you can present a Transcript of Registry (or equivalent) showing that your superyacht is unencumbered.
• Make sure your form of agreement, special terms and document list are all in writing.
• The most common form of agreement for sale and purchase of second-hand superyachts is the Mediterranean Yacht Brokers Association (MYBA) sale and purchase form, known as the MYBA Memorandum of Agreement (MYBA MOA). Any additional terms or amendments to the standard terms should be recorded (e.g. transfer of any charters currently booked for the season, items excluded from the sale and repair works to be completed by the seller prior to completion of the sale). It is important that any agreements made verbally are recorded in writing.
THE SALE AND PURCHASE OF A SUPERYACHT CAN BE A HIGHLY
EMOTIONAL EXPERIENCE
23
• What is the process? Agreement signed, conditional upon sea trial and survey. Deposit paid (the standard deposit is 10% of the purchase price but a different sum could be negotiated). Always have the sea trial first and, if you’re happy, move on to the condition survey conducted by a marine surveyor. It is never advisable to do the condition survey before the sea trial, but if you cannot avoid it you must ensure that the MYBA MOA is amended to adequately deal with this. Typically, the MYBA MOA will have an addendum which will deal with all documents that will be delivered by the seller to the buyer and vice versa. • Who should the deposit be paid to? It is customary for the seller’s broker or lawyer to hold it. However, you can commercially agree for it to be held by the buyer’s broker, lawyer or a professional escrow agent (who will receive a fee for doing so). Any party holding a deposit should be an established company and they are likely to need up-to- date customer information on both parties. If you cannot agree on who holds the deposit, you could get a bank to act as the stakeholder.
The sale and purchase of a yacht is like buying or selling an apartment — it’s floating real estate and should be treated with the same respect.
25
POINTS FOR SELLERS TO CONSIDER
POINTS FOR BUYERS TO CONSIDER
• With regards to VAT on the purchase price, should delivery be in international waters or within the EU?
• What happens with the crew members? Do I need to terminate their employment contracts? Will they be employed by the buyer?
• Is the superyacht VAT paid? Or is VAT accounted for? Has VAT been reclaimed?
• Are there any special conditions, or items I want left on the superyacht (i.e. transfer of upcoming charters or specific items fixed prior to closing)?
• What will be my owning structure, and do I need a VAT structure set up?
• Are all of the superyacht’s statutory documents in order?
• Do I want to retain the use of the name of the yacht by transferring it to a new yacht?
• Do I want to keep the current crew?
• Will this superyacht be operated privately, or do I want to charter the superyacht?
• Is the superyacht financed? If so, consent from the bank to sell is usually required.
• Do I want a personal guarantee from the ultimate beneficial owner or a parent guarantee of the selling company?
• Is there a list of items to be excluded from the sale, such as my personal belongings or valuables?
• Do I want to keep the same flag? Will the current flag affect the use of the superyacht? What is involved in changing flags? Will the new flag accept this superyacht onto its register as a private or commercial superyacht?
• Who is my broker? Should I enter into a central agency agreement?
• Have all the vested interests in the deal been declared?
• What do I need to do if I am selling with charters in place post-closing?
• Is the buyer known? Who is the ultimate beneficial owner? Do I want a personal/ parent company guarantee, if a single purpose company is the buyer?
• Is the title of the yacht currently clean or is it subject to a mortgage or other encumbrance?
• What are the closing mechanics and how are funds released? What certainty do I have that I will receive payment simultaneously with ownership of the yacht being transferred?
• Where do I feel comfortable with the deposit being held?
• What do I need to do if the buyer is changing flags?
27
BASICS OF SUPERYACHT SALE AND PURCHASE
Accept following rectification or price reduction for the yacht
Agree MOA
Pay deposit
Condition survey
Pay price
Title transfer
Sea trial
Complete
Agree rectification or price reduction or reject yacht
MOA terminated
Deposit repaid
Exchange documents
Reject
Defects
29
TAX
Q&AS
If you are building a superyacht in the EU, be cautious to avoid becoming involved in a tax-avoidant artificial exporting structure.
Do I have to pay VAT on the acquisition of my superyacht?
• More generally, the industry’s tax practices are under increasing scrutiny (from governments and journalists alike) worldwide, and we are aware of yachts caught up in tax cases in several countries. Owners would be advised to approach any tax minimization scheme with caution, and not to put short-term savings above long- term legal, financial, and reputational risks. By way of one example, the UK government has recently introduced ‘Unexplained Wealth Orders’ — a means of using civil powers (and their lower standard of proof) to investigate and confiscate the perceived proceeds of crime, including tax evasion.
• If you are an EU resident, you may be able to recover any VAT you are charged if you are legitimately operating the superyacht commercially in the EU, or you may consider participating in a leasing structure. • Cyprus and Malta ran broadly similar leasing schemes until their legality was questioned by the European Commission. The individual EU member states have laws on the VAT on charters that operate in part outside EU territorial waters. Provided you tick all the regulatory and commercial operation boxes (and your yacht has a length of more than 15m), generally if you operate 70% outside EU territorial waters you will qualify for charging 50% less charter VAT, with an evaluation of the time spent outside EU waters using AIS data. Generally, no AIS data no reduction in tax, but there are exceptions for superyachts without AIS who need to provide the navigational paper alternative to AIS using for example, logbooks.
IF YOU ARE AN EU RESIDENT OR YOU CHOOSE TO OPERATE YOUR SUPERYACHT COMMERCIALLY IN THE EU, OR ANY COMBINATION OF THE TWO, YOU HAVE TO ACCOUNT FOR VAT
Is the VAT status of a superyacht preserved for life?
All sorts of events can compromise the VAT status of a superyacht even if it is VAT paid. For example, if you own a superyacht which has been declared to be for commercial use and has been accounted for VAT, if at some point in the future it becomes clear that you are not pursuing legitimate commercial business or you are only chartering the
31
Can I charter my superyacht if I am in the EU under the Temporary Importation Regime (TIR)? • No. The TIR is a relief, that lasts for 18 months and is renewable, from import VAT based on you neither chartering or offering to charter, selling or offering to sell your superyacht within the EU. TIR is only available to a non-EU flagged superyacht, owned by non-EU residents. Post Brexit British residents with non-EU flagged superyachts can avail themselves of TIR. • You should not allow EU residents to use the superyacht if you are not on board. If you breach any of these conditions, the relief is removed and VAT on the importation of the superyacht is immediately chargeable, together with possible penalties and interest calculated from the date of the original importation. TIR for helicopters on board a superyacht is only six months.
respect the sanctity of the corporate veil. They look at who directly or indirectly owns the company and draw their own conclusions. Even a tax paid superyacht if sold in the middle of a charter or as a chartering business can compromise the VAT paid status.
superyacht infrequently, you may be asked to de-register as a commercial yacht. At this point you would become liable for VAT on the hull unless you permanently export the superyacht or become eligible for VAT relief as a non-resident. Also, an EU tax paid superyacht sold outside the EU will lose its VAT paid status if brought back into the EU by a new owner. The only certainty in tax and superyachts is that there is no certainty. Those who have a VAT accounted for or VAT paid superyacht where the superyacht has previously been to the UK, the British tax authorities say that if you are looking to return to the UK and claim Return Goods Relief (RGR) you must do so before 31st December 2021 or you will have to pay VAT again on your return to the UK. However, if the superyacht has never been to the UK and paid or accounted for VAT whilst outside the UK, RGR will not be available, even if it comes back to the UK before the end of 2021. In those circumstances you will have to avoid the UK, and possibly Gibraltar, and stay in the EU where your VAT status will be preserved. If you paid VAT in the UK and sell the yacht in the UK, you will lose EU VAT paid status.
The industry’s tax practices are under increasing scrutiny (from governments and journalists alike) worldwide.
Does the flag have anything to do with tax?
• The flag only has an impact on tax if you are applying for TIR (Temporary Importation Relief) where you have to have a non-EU flag. Usually, tax is determined by how the superyacht is used as opposed to the superyacht’s flag. However, anecdotal evidence suggests that non-EU flags are having a tough time operating legally in some parts of Spain and Greece. Non-EU flagged vessels would, like EU-flagged vessels, need to establish a branch in Greece, thus potentially onshoring the activities of an offshore entity. To operate out of Greece requires a Greek charter licence, which means setting up a branch in Greece, appointing a Greek tax representative, and facing the risk of a luxury tax being imposed if less than 75 days’ chartering is undertaken during a three year period.
Can I charter the superyacht to myself?
Occasionally this is possible, but only if you pay an arm’s length commercial charter rate. However, if you are the only or principal charterer, the superyacht is not commercial. As an aside, chartering through a series of dummy companies does not count as arm’s length chartering or pursuing commercial business. The tax authorities do not always
33
35
OPERATIONAL
SUPERYACHT MANAGEMENT
Providing services ranging from purely commercial and marketing services to full commercial, administrative and technical services such as: crewing, arranging superyacht and crew insurance, general administration, accounts, technical and ISM/ISPS services, superyacht managers can be an asset to the operation of the superyacht.
Do I need, or should I have a superyacht manager?
• What is market standard? Ensure you know what the manager is providing for their fee.
• Yes, an ISM-certified manager is required for commercially registered/operated superyachts over 500 GRT. • A manager is not strictly needed for privately registered/operated yachts. On a smaller day boat, a captain will normally suffice. However, on the bigger tonnage, engaging a manager is recommended, for example, if the superyacht has a large crew employed or is to undergo works.
• If you are borrowing funds to finance the acquisition of a yacht, check that the manager is prepared to provide a manager’s undertaking on standard market terms to your bankers.
THERE ARE MANY AREAS TO DEAL WITH WHEN OPERATING A SUPERYACHT, SOME WITH INCREASED MEDIA ATTENTION
What should I expect from the management agreement?
• An adapted version of the standard BIMCO Shipman 2009 is a good place to start.
How do I choose one?
• Do they have professional indemnity insurance in place? It is advisable to have it and for superyacht owners to request it. • Limitation of liability — get the relevant, clauses or disclaimers carefully reviewed to ensure the manager’s liability is not limited beyond what is standard or reasonable.
• Are they reputable? Is he or she appropriate for the services needed and superyacht size, intended use and area of operation? Seek references from industry experts and your friends.
37
• Terms of the contract and termination provisions — ensure you are not locked into a contract for longer than you want to be. • Governing law and dispute resolution are also important, and advice from a local lawyer is advisable.
A superyacht’s corporate and operational structure has to be respected every day, it cannot be forgotten about or treated as mere formality. If you forget about it, so will the courts.
39
CREWING MATTERS
Who will be covered by the MLC?
has approved the MLC. Even purported flag exemptions from MLC may not protect an owner from crew action or port state control.
• The MLC applies to all superyachts ordinarily engaged in commercial activities, but only superyachts over 500 GRT can get certified. This makes it difficult for sub- 500 GRT superyachts to prove complete compliance. It covers all crew who are employed or engaged or work in any capacity on board. It is important to note that on employment matters, the MLC will apply to existing superyachts and that owners will need to ensure compliance. • The Marshall Islands and Cayman Islands offer the Yacht Engaged In Trade (YET) dual-certification regime (which allows yachts on these flags to switch from private to commercial registration), one of whose effects is to exempt yachts from the need to comply with the MLC whilst being used privately (although they must comply when being used commercially). In our opinion, best practice however is to comply fully with the MLC at all times, even while operating privately.
The crew is part of a global workforce increasingly deployed and managed through a network that links owners, managers and labour-supply agencies. It is important to ensure compliance, as the crew is central to the successful operation of the superyacht.
What paperwork is required?
• Following an inspection, a certificate will be issued by the flag state certifying that the working and living conditions of crew satisfy the mandatory requirements. • A declaration, as approved by the flag state, which states the national requirements for the working and living conditions for crew and sets out the measures adopted to ensure compliance.
What protection is there for the crew?
2021) firmly placed jurisdiction in England when the Captain received instructions and responded to the ultimate beneficial owner of the superyacht based in the UK which cut through the formal employment and management structure set up to employ the crew.
• The employment contract will set out the crew members’ contractual rights. Further mandatory employment rights, for example protection against dismissal, may also be afforded to them. • There is no model contract, however, certain flags require contracts to be approved by their relevant authorities. For example, UK flagged superyachts require contracts to be approved by the Maritime and Coastguard Agency.
What is the Maritime Labour Convention (MLC)?
Is the MLC really important?
The MLC provides a globally applicable standard for:
• Yes, penalties and corrective measures for breaches or obstructions will be imposed.
• Minimum requirements to work on a ship.
• The superyacht could be detained in port until breaches are rectified.
What jurisdiction will govern a dispute?
• Conditions of employment.
• The express election of jurisdiction and choice of law in the contract is one factor. However, either party may be able to challenge this on a number of grounds, such as where the crew member carried out his or her duties, and where the owner is based, or the place from which the instructions to crew come from. A recent case (Crew Employment Services Camelot .v. Mr.W.Gould
• Non-compliance of some parts of the MLC can lead to criminal sanctions on the captain and owner (for example breaches of hours of work and rest obligations).
Can the owner avoid liability by registering a superyacht with a flag state that has not approved the MLC?
• Accommodation, recreational facilities, food and catering.
• Health protection, medical care, welfare and social security protection.
• No, all superyachts will be subject to inspection in the ports of any country that
• Compliance and enforcement.
41
The aim of the MLC is to set a standard for seafarers’ working conditions regardless of which flag they sail under. The MLC came into force on 20 August 2013.
social security payments there. This applies to crews whose vessels are within French territorial waters, and (unless these are states with which France has reciprocal agreements and social security contributions are being paid there already) regardless of the yacht’s flag state or the crewmember’s nationality. There are some exceptions: if social security is already being paid in an EU state, or a non-EU state with which France has a reciprocal social security treaty (these include some of the popular superyacht flag states such as the Isle of Man) then this is an acceptable alternative, although proof may be required. Alternatively, private insurance is available from a (so far) small number of providers as an alternative to the French public system. You must carry on board the following: Maritime Labour Certificate, Declaration of Maritime Compliance, two copies of the most recent inspection, medical certificates for crew, employment contracts, records of hours of work and rest, complaints procedure.
Is there anything new with the MLC?
• As the MLC is known as a ‘living’ document, we can expect developments and amendments as issues arise and levels of compliance evolve. • Since its implementation, the MLC has been amended to add a mandatory requirement that shipowners have financial security to cover abandonment of crew, as well as death or long-term disability of crew due to occupational injury and hazard, which took effect in early 2018, while other recent amendments give a greater emphasis on inspections to the health and safety risks of bullying and harassment of crew.
Are there any other crewing matters I should be aware of?
Depending on where your yacht operates and your crew’s nationalities and/or countries of residence, there may be other costs and compliance issues to be aware of. For instance, the French government recently enacted a decree requiring the employers of non-French seafarers (including yacht crews) resident in France for more than three months to make
43
ART ON BOARD
Jaime Botin, in which he was convicted of smuggling a Picasso painting. Ensure that you obtain proper advice from experienced specialists, and are able to prove your compliance with the relevant regulatory regimes. • Conservation: Less of a legal point and more of a practical one: have you considered the potential risks of displaying your artwork on your superyacht? Humidity levels and vibration (not to mention human error) on board could cause irreversible damage to a priceless piece if not properly managed and controlled for. If you have a significant collection, consider enlisting the assistance of an art specialist. If your art is covered by your standard insurance policy it is worth checking what limitations apply to its cover. For example, geographical limitations may apply.
For some owners, housing their art collection on board is a necessity. It represents the style and tone that they wish to impart upon the superyacht. In doing so, there are a number of factors to consider to ensure art on board the superyacht is properly owned and maintained.
• Ownership: It is necessary to consider who owns the art work on board the superyacht to ensure they are aware of any tax, customs or insurance implications. Will the ultimate beneficial owner of the superyacht own the artwork? Or will it be the superyacht owning company or a different company altogether? • Security: A robust security system on board the superyacht to prevent theft is essential. The captain should also keep an inventory of all artwork on board with appropriate documentation. It is also worth educating the crew about correct methods of care for different art pieces to ensure they are not inadvertently damaged. • Insurance: You may need to have separate specialist cover for high-value items. This will require you to declare to your insurer the art on board the superyacht and its estimated value. Don’t assume that the yacht’s hull and machinery cover will protect your art.
• Tax: If the art is not physically part of the superyacht, it may have its own separate tax treatment , which may not be consistent with that of the yacht — as with helicopters, the yacht’s Temporary Importation Regime is unlikely to extend to art on board — and you may well need separate import and export papers for each piece of art. It may have a shorter right to stay in the EU than the superyacht. • Regulatory: Antiquities, artworks of particular cultural importance, and objects incorporating materials derived from rare plants or animals are subject to additional (and stringent) regulation. For example, Spain has some of the strictest heritage laws in Europe, including those that say that any work of art more than 100 years old that is considered culturally important can be deemed a national treasure. The relevant legislation forces owners to obtain a permit before taking any such works out of the country — as was illustrated in a high- profile case involving Spanish billionaire
45
Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42-43 Page 44-45 Page 46-47 Page 48-49 Page 50-51 Page 52-53 Page 54-55 Page 56-57 Page 58-59 Page 60-61 Page 62-63 Page 64-65 Page 66-67 Page 68-69 Page 70-71 Page 72-73 Page 74-75 Page 76-77 Page 78-79 Page 80-81 Page 82-83 Page 84-85 Page 86-87 Page 88-89 Page 90-91 Page 92-93 Page 94-95 Page 96-97 Page 98-99 Page 100-101 Page 102-103 Page 104-105 Page 106-107 Page 108Made with FlippingBook - professional solution for displaying marketing and sales documents online