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Ownership OptionsEver walk down the docks of a major resort marina and wonder why so many boat transoms list their home port as Wilmington Delaware, Cayman Islands, or Antigua? Especially the really big, expensive yachts? You’re right, it’s a tax dodge. It’s not always a tax evasion scheme either. In many cases it is an effective and legal tax avoidance system that may have other benefits for the owners. Corporate or Individual or PartnershipOnce you’ve found your dreamboat, the very next thing you should consider is how to own the vessel. When you buy a used $2000 Hobie Cat it probably doesn’t make any difference. Just buy it, put it in your name and state register it. But when you buy a bigger boat, say one that costs $50,000 or more as I recently did, then you should take a look at your options. Corporate ownership offers some very useful advantages over owning the boat outright in one person’s name especially if you plan to charter the boat. Even if chartering is not an option for you, a corporation has some features that may interest you. The principal feature of a corporation is that the owners of the corporation have limited liability. That is, the assets of the corporation are separate from the assets of the owners. The corporation can go bankrupt without damaging assets owned outside the corporation. Since your ownership of
the boat is really in shares of stock owned not in the boat proper, you can sell
shares of stock in the corporation without actually transferring the boat.
This feature is useful if you have multiple parties that wish to own a
boat together. Each can own shares
in proportion to their investment. If the owners do not wish to participate in
the future they can sell their shares and the boat need not change hands. Likewise if one of the owners dies, the shares are part of
the estate; the boat is not. You
may have to deal with the spoiled brat grandson of the deceased but you can
always buy his shares without transferring the boat.
This is the main reason many larger yachts are owned in corporations.
You can sell the boat by selling shares of the corporation and thus avoid
sales taxes that would be incurred if the boat changed hands directly. In addition, there is no rule that says officers of the corporation have to own stock. This means that the owners of the stock can be ‘hidden’. Since the company will be privately held there will be no requirement to disclose who the owners are. There will be a jurisdictional requirement to name officers but these can be employees of the company with no ownership interest. Often all of the officers can be a single individual. This feature can be helpful if you would prefer that your ex not know that you just bought a $1,000,000 pleasure palace. Partnerships are a possibility too, but keep in mind that if a partner wants out, a new partnership must be formed and the old one dissolved which means legal bills not to mention tax implications for the partners. Since one partnership ends and another begins when partners change, you, in effect, have a transfer of ownership that may subject the boat to taxes of one sort or another depending on the rules of the jurisdiction. On the negative side of the coin for corporations, you do incur legal fees to get one set up. Sometimes this is quite expensive but in most of the US and many foreign jurisdictions, it is relatively cheap. Corporations generally also have annual reporting or registration requirements that can be burdensome depending on where the corporation is based. On the plus side, you get to name your corporation anything you want so long as someone else hasn’t registered a corporation with the same name in that jurisdiction. The next question after you’ve decided on corporate ownership is where to set up the corporation and register the boat. The choices seem endless. The list that follows offers a few ideas on various jurisdictions but you really should consult your attorney and CPA before making your decision. Many companies specialize in setting up corporations for yacht ownership. These companies also provide services such as mail receipt, annual reports filing, and other administrative services usually for reasonable fees. Domestic Corporate OwnershipDelaware
Corporations
Delaware is very popular for yacht ownership. Delaware has no state income tax on corporations nor does it have any sales taxes, personal property taxes or intangible taxes. Non-residents pay no Delaware taxes on shares either. A Delaware corporation may also own the shares of other corporations. It may also own real or personal property with no limitations on the amount or location of any shares or property. Like most modern corporations, shareholder liability is limited to the shares of stock held. Incorporation costs are low and corporations are easily and quickly set-up. You pays your money, you gets your corporation. Delaware has small filing, registration, administrative and incorporation fees. Sounds good but what’s the catch. Well, there might be several depending on where you live and how long the boat owned by your Delaware Company, resides there. In Florida, for example, even though the boat is registered in Delaware, state ‘Use’ taxes still apply. If you think you can dodge this tax think again. A boat that has Delaware as its homeport (as in Wilmington, DE) is a red flag to the state revenuers. It’s almost a guarantee that the boat’s comings and goings will be watched. If the state can demonstrate that the boat, while registered in Delaware is really ‘domiciled’ in Florida then the state will levy sales (use) taxes. A recent case illustrates the point. A foreign registered vessel owned by a foreign corporation was moored in Florida waters. The owners claimed to be chartering the vessel and, therefore, only owed sales tax on the charter fee. Not so said the court, the charter fee is a sham to avoid sales taxes and forced the owners to pay up. Some states may be tougher than Florida, especially where the tax base is dependent on personal property or sales taxes. Other states may be more lenient. However, the good news is that if a corporation owns the yacht and pays it’s sales (use) tax obligation, then a subsequent buyer could buy the boat by purchasing the shares of the corporation. Since the corporation owns the boat and has already paid sales tax, it will not owe sales taxes on the transaction. This could be an important selling point especially where the sales price is high. Also, consider that because the stock is traded that capital gains treatment for any profit or loss may be possible. Delaware is attractive for yacht ownership mainly because it is cheap and easy to set up a corporation there. There are very low taxes and maintaining your company is not burdensome. Plus it’s a US entity, which means you can document your vessel with the USCG and enjoy the benefits of the US legal system. Setting up a Delaware corporation costs anywhere from $200 up depending on the services requested. Annual fees in Delaware are low but if you don’t live in Delaware then you’ll need a registered agent in Delaware. Having a law firm act as your registered agent can run anywhere from about $100 per year on up depending on the services requested. How difficult is it to set one up? It couldn’t be easier. A mere phone call, fax or filling out a form on the Internet will get your company established within a day or two. Of course you can always incorporate in your home state if you’re more comfortable with your own attorney. Fees vary but in Florida less than $500 will get the job done but then you have annual tax returns to file and annual registration fees and paperwork to file not to mention intangible tax on the shares. Offshore CorporationsOffshore corporations are not much different from US Corporations. They may have different suffixes such as Ltd. instead of Inc. but the basic entity retains similar advantages of liability protection and stock ownership. The differences are in the details concerning fees, annual reporting requirements, ownership rules, record keeping requirements, naming officers and the like. Consult your attorney for these. The advantages to some offshore companies is that it may be possible to shield the owners names from US tax authorities although recently the trend has been for foreign governments to open up the books in the name of the war on drugs. This is particularly true of the British affiliated corporations and registries. There is a fair degree of cooperation between US and British law enforcement in this regard. Some countries like Panama advertise that they have no information exchange treaties which implies confidentiality but this can change depending on politics. In the Caribbean, most companies are known as IBCs for International Business Corporation. This is generally a British convention or at least based on British law. The companies are usually exempt from local taxes (although some jurisdictions have annual filing or registration fees). In some jurisdictions, ‘bearer shares’ can be issued which hides ownership. An IBC can be set up for as little as $800 with annual fees in the range of $500-$1000. Having a local act as a director (with no signatory rights) adds another $400-$1500 in annual fees depending on services. The US has no treaty arrangements with these countries which again implies confidentiality. Most of these corporations will also qualify to the IRS as a Controlled Foreign Company, which is a box you do not want to check on your 1040. Like Delaware corporations there are any number of firms advertising on the Internet that will set you up very quickly. Just send them a check or your credit card number and fax them the info. The following list includes some of the more popular offshore registration possibilities. Just remember that these are foreign jurisdictions where US laws do not apply. If you register your company and boat in Lugash you’d better have a Lugashian attorney named something other than Clouseau. Offshore Registration If you buy a boat in a
foreign country, offshore registration may enable the owner to avoid
‘importing’ the boat into the US and therefore avoid customs duties.
Instead of importing a vessel that will be sailed in US waters, you can
get a cruising permit. US Customs will issue a Cruising Permit to a foreign flagged
vessel for about $25 per year. If you decide to buy a foreign flagged vessel be sure to first get and read the US Customs brochure on the subject of “Importing a Pleasure Vessel”. This brochure spells out the process and duties involved. They are available at any US Customs office. Customs duties amount to 1.5% of the value of a boat imported for personal use. Offshore
registration may also allow the owner to avoid US Federal taxes and in some
jurisdictions, state taxes. In
Florida, for example, sales or use taxes still apply if the vessel is
‘domiciled’ there regardless of ownership or registration nationality.
However, be aware that some foreign registries charge significant fees.
In the Bahamas, for example, fees range from a minimum of about $2000 up
based on the gross tonnage of the vessel. Antigua Limited filing requirements, bearer shares, officers and directors need not be owners, no exchange of information treaties. Vessels fly the Antiguan flag Bahamas Probably useful only for commercial shipping, cost effective, efficient bureaucracy, flag, but smaller yachts (under 1600 gross tons in volume or older than 12 years )cannot be registered here; vessels fly Bahamian flag British Virgin Islands Popular registry for many US owned yachts, yachts fly British Red Ensign, efficient bureaucracy, reasonable costs Cayman Islands Vessel must be owned by a British citizen or company (read IBC) but any British company will do; no information exchange treaties; low taxes; yachts fly British Red Ensign. Cyprus Very low tax environment but probably only suitable for commercial shipping. Vessels fly Greek Cypriot flag. Gibraltar Cost effective for smaller boats and yachts, Mediterranean registry, also efficient process, subject to EU rules and regulations, yachts fly British Red Ensign Isle of Man Prestigious, cost effective for yachts, may have VAT advantages if purchasing a European Union boat. Yachts fly British Red Ensign. Many Mediterranean charter companies use Manx registration. Jersey Low tax structure, no inheritance tax, no import tax, efficient bureaucracy, yachts fly British Red Ensign Liberia Mainly for commercial shipping, vessels fly Liberian flag Malta Probably only useful for commercial shipping. Vessels fly Maltese flag Panama Low incorporation cost, largest registry of commercial shipping, has ‘bearer share’ ownership meaning confidentiality, speedy registration process, vessels fly Panamanian flag State Registration State registration and
titling is the simplest way to own your boat since you will have to register
with the state even if your boat is USCG documented. In Florida for example, you must purchase a state registration renewal sticker every year (the stickers expire just before the July 4th holiday) even if your boat is a documented vessel. When you register with the state you get registration numbers that have to be displayed near the bows of the boat. You also get a title just like an automobile title that is used to register ownership. If the vessel is documented then that serves as a title and the states generally do not issue titles on documented vessels. If you are documented then you do not display the state numbers on the bow but you must display the vessel name and hailing port on the transom in accordance with USCG specifications. USCG Documentation USCG documentation is national boat registration and titling. It is proof of nationality when sailing international waters and it is internationally recognized proof of ownership. It will almost certainly be required when financing is involved in a yacht sale/purchase in the US. Vessels need not be documented. State registration and titling is sufficient for most purposes but if you are using the vessel in certain kinds of commercial enterprises such as trading in the Exclusive Economic Zone then documentation is required. Rather than displaying numbers, documented vessels are identified by their name and hailing port. Even though a vessel is
documented it is still subject to the laws of the state in which it is being
operated. Hence, even though a
vessel is documented it must still display its state registration sticker. While applying for
documentation is not difficult, if you find dealing with government forms
tedious, or if you have unusual circumstances, you may be better off paying a
documentation service to do the paperwork for you. If you want to do it yourself, start with the USCG National
Vessel Documentation Center web site. There
you will find all of the required forms and instructions for getting your vessel
documented. Otherwise you can call
or write to the USCG NVDC for the forms and instructions.
Documentation via a service costs about $200 plus the documentation fees,
which range from $166 up to $300
depending on endorsements. Several
services advertise on the Internet and provide very quick service. Conclusion After all this what did
I do? I played it straight
arrow all the way. I purchased my
boat in the islands so I had opportunities to exploit a foreign company.
But, in the end, I decided to own my new boat in my own name rather than
a corporation. I did document the
vessel because I think it will be easier to sell that way.
I did pay the Florida Sales taxes, and the US Customs duties when I
imported the boat. Why did I decide not to use a corporation? I decided that I didn’t really need the limited liability feature or the ability to transfer the boat via a stock transaction. What I did want was a documented vessel and since I couldn’t avoid the Florida Sales tax or the customs duties, the corporation idea lost its charm. Maybe next time.
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