Sales Of Foreign Flagged Vessels

We have experienced in our transactional practice an increase in the sales of both foreign flagged vessels and foreign owned vessels in the Northeast in the last five years. The majority of these foreign built and registered vessels have not been imported into the commerce of the United States, nor paid U.S. duty for legitimate and valid purposes. These vessels are operated pursuant to a validly issued Cruising Permit, renewable annually with U.S. Customs. There are limitations attached to operating a yacht under a cruising permit, specifically the probation of any commercial activity for the yacht while in U.S. waters. The offering for sale of such a non duty paid foreign yacht is a commercial activity and can pose real risk and attendant liability to the uninformed constituent to the sale of such a vessel. The penalties associated with such an offense are monetary and/or forfeiture of the vessel itself, and therefore brokers and dealers must proceed in this area with caution..

A foreign flag vessel may not be offered for sale on a general basis while in the U.S. unless first entered through Customs and any applicable duty paid. A U.S. built vessel may be entered duty free as “US goods returned,” except as to the value of any foreign improvements, e.g., arising from a refit performed at a foreign yard. The duty rate on a yacht is 1.5% of its value (but 50% as to the value of foreign improvements if it’s in commercial use). Any duty is required to be paid before the vessel is offered for sale, and cannot be remitted at the closing of the sale.

A foreign flag vessel may be offered for sale while in the U.S. if any offering is restricted to non-U.S. residents. This is the reason why one will often see yachting magazines with a restriction in an advertisement such as “vessel is not offered for sale or charter to U.S. residents.” The vessel owner and the broker should be careful as to how and to whom the vessel is advertised/shown because, as stated above, the maximum sanction for violation of the Customs laws is forfeiture of the vessel. Thus, notwithstanding the restriction, if the vessel is shown to, or the owner entertains an offer from, a U.S. resident while the vessel is located in the U.S., Customs could seize it.

A foreign flag vessel also may be entered duty free into the U.S. under a bond so long as it is a used vessel of over 79 feet and is brought in to participate in and be offered for sale at boat show. The exemption is good for six months, at which time the boat must be exported or duty must be paid. Customs takes the position, though, that the boat may be shown and sold subsequent to the boat show only to prospective buyers who inspected the vessel at the boat show.

In light of the serious sanctions associated with a violation of U.S. Customs regulations and the law, we strongly recommend that brokers proceed with caution when becoming involved in the purchase or sale of a foreign flagged or foreign built yacht in the United States.