Duties, Tariffs and State Taxes. One of the strongest advantages to foreign flagging for a yacht owner is exemption from import duties, tariffs, and state vessel taxes. If a yacht is flagged in one of the roughly thirty countries which are eligible for a U.S. cruising permit, and if the yacht obtains and maintains a U.S. cruising permit, the yacht may be entitled to exemption of these duties, tariffs, and taxes. This is a fact-specific exemption so it is very important for a buyer to consult maritime counsel to determine if they will be able to take advantage of it.
Cruising Permit Requirements. Cruising permits for foreign flagged yachts are typically issued for a 1-year duration, and then must be renewed. The largest practical consideration for renewing the cruising permit is that the yacht must leave the United States for at least seven days and clear in to a foreign port. Upon arrival back on the United States, another 1-year cruising permit is issued. For this reason, foreign flagging is only a viable option for yacht owners who intend to cruise to a foreign country at least once a year. Canada and the Bahamas are typically the most convenient foreign destinations for this purpose.
Insurance and Mortgages. Most yacht insurance carriers and yacht lenders have no issue with insuring or lending for a vessel with a foreign flag, provided it is a reputable flag – for example the Marshall Islands, Cayman Islands, or any of the British “Red Ensign” group of countries. Foreign flagging can offer a broader range of options for insurance or financing, as it allows an owner to take advantage of alternatives outside the U.S. market. In any case, an owner interested in foreign flagging their yacht should speak with their insurance broker or lender to confirm the options available to them if they proceed.
Restrictions. An important restriction on foreign flagged yachts cruising the U.S. under a cruising permit, is that the yacht may not carry passengers for hire within the U.S. For this reason, foreign flagging is typically not suitable for an owner who intends to charter their yacht in U.S. waters. Foreign flagged yachts also face certain restrictions on selling the yacht to U.S. citizens while the yacht is in the U.S. In order to accomplish such a sale, the yacht must typically go at least 12 miles offshore for closing, unless the buyer wishes to pay the import duty and tariff upon sale. For these reasons, working with a yacht broker and a maritime lawyer experienced in offshore closings is highly recommended when selling a foreign flagged yacht in the U.S.
In short, foreign flagging can be an attractive option for yacht owners facing high import duties and tariffs, and who do not intend to permanently import their yacht into the United States. Whether this is a good option is a highly fact-specific determination, and so we would strongly recommend any potential buyer interested in foreign flagging to consult with a maritime attorney.
