Security, privacy and tax: navigating the risks of superyacht ownership

In May, visitors to the 60th Venice Biennale — arguably the world’s most prestigious art exhibition — were treated to another show on the water by the Giardini, the verdant park that is the entrance to the event: a display of some of the world’s most expensive yachts. Sleek and shining, and staffed by vast uniformed crews, some even had red carpets coming off their gangplanks.

But while the yachts drew interest from passers-by, their owners are usually keener on privacy than attention. In common with many in the restless global elite, yacht owners will go to enormous efforts to remain anonymous as they sail the world — often fearing media intrusion, regulators and tax agents, and, increasingly, criminal gangs.

“Anyone who owns a [larger] yacht will be aware that they could be a target for anything from burglary when moored, through to hijacking and piracy,” warns Mike LaCorte, chief executive of London-based investigations and disputes specialists Conflict International. “Recent geopolitical developments have meant that certain waters are now largely off-limits to westerners. But, even in safer waters, there are pockets of danger.”

He says that, for example, the waters around Morocco are a “pretty notorious” drug smuggling route, although hotspots can move quickly — so waters that are reasonably safe one day can be unsafe the next. “Hijackers and pirates are usually after container ships and other commercial vessels but, on occasion, have been known to go after private yachts,” LaCorte notes.

If a yacht needs to sail through hostile waters, planning can help reduce the risks. When a vessel is on its own, with no security, then the captain should map the route out properly, understand where the nearest coast guards are, and establish at the outset who should be contacted in an emergency. Owners are advised to have means of communication always available — not just GPS — and to tell a third party their route, so that the authorities can be notified if someone suspects the boat has hit difficulties.

On occasion, a yacht owner may choose to switch off a boat’s Automatic Identification System (AIS), to avoid detection. However, experts warn against this ruse. “Most of the time, it’s done by wealthy or high profile individuals trying to avoid press intrusion, but it is also a tactic used when sailing either through or near potentially dangerous waters,” says LaCorte. “Leaving aside the legal questions, switching off an AIS presents a potential security problem. With no tracker, you’re not just invisible to possible hostiles, but to everyone — including potential help.”

Happily, there are other ways to minimise the risk of intrusion. They include switching off location services on mobile phone apps and devices, and not posting images on social media of your yacht moored in a location.

William MacLachlan, partner at international law firm HFW and specialist yachting lawyer, also advises against switching off AIS systems. He says they are a key element of protecting life at sea, and that all vessels of 300 gross tonnage or more, engaged in international voyages, must have an AIS system enabled.

There are some nuances when it comes to the application of these rules to yachts but most large yachts carry AIS transponders and receivers and use them, whether mandatory or not. And, if a yacht to which these regulations do apply turns up with AIS turned off, then the local authorities will raise questions and the owner may be fined.

On occasion, hijackers and pirates have been known to go after private yachts

Other safety factors, say experts, include the identity of the crew: who are they, and whether they are bona fide. Yachts can be targeted by criminals as an opportunity for data gathering — they are easy “entry points” for them, because individuals can go undercover to steal intelligence for business rivals or to defraud a yacht’s owner.

“Every single member of the crew — including those who worked for the yacht’s previous owner — must be thoroughly screened,” advises LaCorte. “Even just a social media sweep is enough to throw up red flags.”

A further problem is the necessity of having to screen the sellers when buying a pre-owned yacht. Buyers have to ensure they are not dealing with someone on sanctions lists. In addition, the UK’s Foreign Influence Registration Scheme is set to take effect soon, which will require a UK citizen to tell the government if they suspect that the seller of a yacht is working for a foreign power.

“Yachts are used a lot to facilitate money laundering,” points out LaCorte. “If you don’t know who you’re buying a yacht from, there is a risk — however small — that you could get caught up in a money laundering ring.”

Most yachts are bought through brokers who are able to screen sellers and conduct due diligence. But anyone looking to buy a yacht independently needs to conduct the relevant due diligence themselves. This includes acquiring the right ownership documentation and conducting background checks on the seller and the yacht’s docking history.

Then, there are privacy issues to consider if the yacht is being operated commercially, by chartering it out to guests. Steven Farmer, partner at law firm Pillsbury Winthrop Shaw Pittman, says the owner, depending on how the commercial arrangement is structured, and the charterer have obligations as a data controller to protect the personal information of guests. This requires correct processes and policies for all staff, to ensure that any personal data they are privy to remains private and protected.

He says, for example, that information about guests’ dietary requirements, allergies, or medical conditions, that the staff need to be aware of, could be damaging if they were made public knowledge. There should be contractual agreements with staff that they will not share this information with the press or on social media, or even anecdotally among friends.

“Staff will also have information about the yacht’s destination, which should also be protected,” says Farmer. “Failing to do so could lead to high profile or celebrity guests being met by paparazzi at the yacht’s destination or, at worst, pose a real security threat if malicious players obtain information about the vessel’s whereabouts.”

These risks can be mitigated by using agreements with staff and guests that are jurisdiction agnostic but adhere to the highest global standards for data protection. “Chartered yachts typically attract high profile customers, so the issue of maintaining personal privacy is often of high concern,” says Farmer.

Privacy and safety issues aside, even the logistics of buying and keeping a yacht can be complex, and individuals can make mistakes. “Buyers of superyachts, which typically travel between jurisdictions but may remain in them for long periods, can be caught out if they are not well-advised”, says Nic Arnold, UK head of JTC Private Office. “It’s about asking the right questions. I’ve seen people who are so keen to buy a yacht that they do everything too quickly and are left with a complicated ownership structure that causes them problems going forward.”

She says there are four main considerations when buying. First, buyers need to make sure they are on top of the tax laws in the jurisdictions they intend to be sailing in. Second, they need to understand the legal liabilities they will have and, where possible, protect themselves appropriately. Third, they need to abide by the registry laws for their chosen flag state. Finally, they have to consider the practical aspects of pulling all this together. “Trying to balance all those things is difficult, but it’s key,” says Arnold. “It’s easy to make your new yacht the most painful thing in the world if it’s not structured properly.”

MacLachlan at HFW says buyers of new yachts need to engage a team of experts to help them navigate both the purchase process and the operation of the yacht. He points out that the EU VAT status of a yacht and other assets can easily be misunderstood and will depend, largely, on how the asset has previously been transacted and operated.

For example, a yacht may be described as VAT-paid — which is attractive to buyers who might otherwise have to account for VAT on the purchase price of a yacht valued at millions of euros. But due diligence should still be done to ensure that the yacht retains a valid VAT-paid status and is therefore entitled to free circulation in the EU. If it does not, the buyer may find there is VAT to pay, after all.

I’ve seen people who are so keen to buy a yacht that they do everything too quickly

“People worry about how to structure the purchase of their yacht, a lot,” says MacLachlan. “Often, they don’t want to expose themselves to the risk of criticism from shareholders, employees and other stakeholders, and nor do they want to restrict their use of the yacht. Some clients therefore take the view that it is easier to simply pay any VAT that might be due and enjoy the peace of mind of a VAT-paid yacht.” For others, there remain legitimate means of accounting for the VAT due on their yacht without necessarily paying it.

Yacht owners resident outside of the EU and not interested in commercially operating their yachts may be eligible, with care, to operate their yachts in the EU for up to 18 months at a time, by taking advantage of the temporary admission relief available, without having to pay the VAT otherwise due. Other owners wishing to operate their yacht commercially may be able to account for the VAT due on it through a commercial operation without having to pay the tax. Again, though, careful attention to the rules has to be paid, and the ownership structure, operation and use of the yacht shaped accordingly.

“There are lots of things to consider when buying a yacht, [but] those things shouldn’t stand in the way of people following their dream,” says MacLachlan. “If you’re lucky enough to be able to do this, there are ways of structuring things such that you can lawfully mitigate any VAT liability, limit your personal exposure to claims, and maintain a degree of anonymity . . . you should be able to enjoy owning a yacht — largely in peace.” 

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment