I once had a client, who wore his Anglophilia as a badge of honour, who would not fly anything other than a UK Red Ensign. He was desperate to fly the White Ensign, and was crestfallen to learn that its flying was limited to the Royal Navy, the Royal Yacht Squadron and certain ships accompanying the reigning British monarch; it was never going to happen.
Most advisors in the European superyacht space never really gave a second thought to the possibility that a non-EU flag might be persona non grata within Europe, but recent guidance from the European Commission and a European Court of Justice case, may just change that view. The bedrock upon which that position was based was and is EU Council Regulation (EEC) No. 357792, which applies the principle of freedom of movement to EU shipowners, allowing them to engage in trade anywhere in EU waters – what we call cabotage.
Cabotage, for the uninitiated, refers to the reservation of inland and coastal trade to the national flag – port to port, harbour to harbour. Coals from Newcastle to London used to be reserved for British flagged vessels. Enter Antibes in pre-EEC days and you would only see local French ships for local French business, reserving local business for local ships and keeping out foreign flagged vessels.
However, given the open commercial borders principle of the EU, stopping British ships plying French waters, and vice versa, meant that strict cabotage needed revisiting. Depending on the source, the length of the coastline for the 28 EU Member States is anywhere between 66,000km and more than 136,000km. The European coastal regions account for more than 40 per cent of the total EU area. Whatever the right figure, the sea is an important part of EU life. Let me be clear: this does not mean EU is one big cabotage zone. Each maritime member state has its own separate cabotage zone.
It is contrary to the principles of the establishment EEC/EC/EU to deny the free movement of member state vessels within the EU.
In 1993, the superyacht industry as we know it today was in its infancy and at that time superyachts were barely recognised. Indeed, yachts do not feature at all in the EU Council Regulation (EEC) No. 357792. Therefore, the accepted view was that yachts were not covered by the cabotage rules. They were exempt, if you will.
Nevertheless, in the face of specific questions on the subject the Commission in their 2003 Interpretation of EU Council Regulation (EEC) no. 357792 took the very clear view that private non-commercial pleasure yacht activity was outside the scope of the regulations. But what about commercial activity? In April 2014, the Commission published its latest interpretation of EU Council Regulation (EEC) no. 357792, which is intended to help explain the regulation. In its 22 April press release the Commission said, “The new guidance is presented in the interest of transparency and legal certainty to help explain the EU rules to all actors that wish to make use of it.” This interpretation appears in Communication from the Commission on the Interpretation of Council Regulation (EEC) No.3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) (COM (2014) 232).
At paragraph 3.2 it clearly says that in relation to “pleasure craft”, which I take to mean vessels designed for recreational use, that is yachts, the regulations only apply to maritime services “normally provided for remuneratio” and to that end the Commission says “… most pleasure craft activities fall outside its scope”. However, if you fill in the blanks, the Commission is actually saying that if most pleasure craft activities fall outside the scope, the obvious conclusion must be that some pleasure craft activities will fall inside the scope of the regulation. Those activities must be those where a service is provided for money. In other words, commercial pleasure craft activity, aka charter yachts. In my opinion, both commercial and private yachts are pleasure craft. One operates for money and the other does not.
This interpretation reinforces the justification for the initial Spanish demand that from a customs perspective only EU flagged vessels can charter in Spain, and similar official demands are being made in Greece with a creeping bias against non-EU flagged vessels in France and Italy. It should be noted that the recent Spanish edict that non-EU flagged vessels can benefit from the local charter regime does not override the EU Council Regulation and only succeeds in setting up an interesting conflict of laws problem for owners. What that means in practice is that commercial yacht activity in the EU is reserved for member state flags: UK, Malta, France, Germany, Italy, etc. This is in line with the official Greek and Spanish positions. Private yacht activity is not included.
With this in mind it is useful to look at the original text of Article 1 EU Council Regulation (EEC) No. 357792, which provided:
“1. As from 1 January 1993, freedom to provide maritime transport services within a member state (maritime cabotage) shall apply to community ship owners who have their ships registered in, and flying the flag of a member state, provided that these ships comply with all conditions for carrying out cabotage in that member state …”
Article 2 of the Regulation goes on to say:
“For the purposes of this Regulation:
1. ‘maritime transport services within a member state (maritime cabotage)’ shall mean services normally provided for remuneration and shall in particular include:
(a) mainland cabotage: the carriage of passengers or goods by sea between ports situated on the mainland or the main territory of one and the same member state without calls at islands;
(b) off-shore supply services: the carriage of passengers or goods by sea between any port in a member state and installations or structures situated on the continental shelf of that member state … “
The phrase “community ship owner” means:
“(a) nationals of a member state established in a member state in accordance with the legislation of that member state and pursuing shipping activities;
(b) shipping companies established in accordance with the legislation of a member state and whose principal place of business is situated, and effective control exercised, in a member state;
or
(c) nationals of a member state established outside the community or shipping companies established outside the community and controlled by nationals of a member state, if their ships are registered in and fly the flag of a member state in accordance with its legislation.”
Where does this leave the Cayman Islands flag, St Vincents and the Grenadines and the Marshall Islands? If the yacht is not commercial and does not provide charter services those flags can still fly high.
The Cayman Islands flag in particular has been a stalwart of the commercial superyacht world. It is, de facto, the default flag of choice for many large new builds. It was they who drove forward both the Large Yacht Code and the Passenger Ship Code. So are we really barred from Cayman Island flagged commercial superyachts in the EU? On the face of it, that is a big yes; indeed, the Commission cannot be clearer when they say in paragraph 2.2.2 of their interpretation of the regulations:
” …the “off-shore” registers of Member States are not beneficiaries of the regulation (for example the Dutch Antilles Register, the Isle of Man Register, the Bermuda and Cayman Islands Registers) as EU law does not apply to these territories.”
This is not to say that all offshore commercial flag are totally banned. There are limited exemptions for superyachts registered in the Spanish Special Register of Ships, plus also those registered in the Madeira register and Gibraltar.
It is worth noting that on the website of the Red Ensign Group, Gibraltar makes a big play of the fact that “The Gibraltar Ship Register is fully recognised as an EC Member States’ Register”. That is a claim missing from the erstwhile commercial superyacht flags of choice, namely the Isle of Man and the Cayman Islands. Gibraltar was actually only recognised in 2004 following the intervention of the UK government as reported by the House of Commons Select Committee on European Scrutiny:
“6.4 The cabotage market was liberalised in the UK before the introduction of the regulation. Since the regulation, the government has made representations to the commission in response to a member state’s refusal to recognise Gibraltar’s EU cabotage rights. But the communication has a paragraph that introduces an element of uncertainty regarding the rights of Gibraltar registered vessels to benefit from the Regulation, appearing to suggest that there is a question over Gibraltar-registered ships’ entitlement to exercise cabotage rights.” In 2004, the UK lobbied and won Gibraltar’s EU cabotage rights.
As an aside, in 2009 and 2012 the Commission consulted the Conference of Peripheral Maritime Regions (CPMR), the European Community Shipowners’ Association (ECSA), the European Sea Ports Organisation (ESPO) and the European Transport Workers’ Federation (ETF), which are the member state maritime administrations on cabotage issues. I presume that the superyacht community was absent from this consultation process. During the next round, should we be lobbying to exclude all superyacht activity from the cabotage rules?
Are non-EU member state flagged commercial superyachts barred from EU waters? Yes and no. Yes, in my opinion, as they cannot start or terminate charters in the EU, and that probably includes picking up or dropping off passengers at EU ports, but they can transit – which is how the Commission treats cruise ship services.
A case in point is the recent European Court of Justice (ECJ) judgement in Alpina River Cruises GmbH and Nicko Tours GmbH v. Ministero delle infrastructure e dei trasporti – Capiteneria di Porto di Chioggia (C-17/13) that concerned a Swiss flagged ship, which provided a river cruise that started and ended in Venice. Although not concerning a superyacht, it is clear, in my opinion, the way that the court sought to apply the regulation to the Swiss flag in their judgment, the same could be applied to superyacht charters. Their judgement has now supplemented the case law, which previously provided transport between two ports of a single maritime member state is covered by cabotage, by now adding that a maritime transport service which starts and ends in the same port of a maritime member state is also caught by the regulation.
This makes the position absolutely clear that non-EU flagged vessels must start and end charters outside the EU. However, what if the superyacht is non-EU flagged but its owning company is established in the EU and has registered charter business and is registered for VAT, which is owned by a community ship owner? The regulation only contemplates cabotage services being provided by a community ship owner using a member state flag. Unfortunately, the current thinking is that the two are diametrically opposed. An owner can register his non-EU flagged charter superyacht for VAT, but he cannot charter the same yacht in the EU without breaching cabotage rules.
In my opinion, the industry should lobby the commission to exempt not just private yachts but also commercial yachts from the cabotage regime. The principle of cabotage is to protect local ship owners from international cheap interlopers. Provided any non-EU flagged vessel complies with all its tax obligations and is governed by flag state regime, which does not give it a lower regulatory standard than a comparable EU flagged superyacht, there is an even keel. Failure to do this might cause the industry to lose the expertise built up by the key non-EU superyacht flags.
This article originally appeared in The Superyacht Report.