The Marshall Islands has long been a leading jurisdiction for yacht registration and structuring. In recent years, it has introduced an economic substance regime to align with international tax standards and to address concerns about so-called letterbox companies. For yacht owners, brokers, managers and legal advisors, it is important to understand how these rules apply to entities commonly used in yacht ownership and maritime operations.
Purpose and Scope of the Regime
The Economic Substance Regulations apply to non-resident domestic entities and foreign maritime entities registered in the Marshall Islands. The rules were introduced to meet OECD and EU requirements and to ensure that companies benefiting from the Marshall Islands corporate framework have some degree of real presence.
The regime applies only to entities that carry on a relevant activity and earn income from that activity. Relevant activities include shipping business, finance and leasing, fund management, headquarters business, distribution and service centre business, intellectual property business and pure holding company business. Banking and insurance are also listed but are not permitted for Marshall Islands non-resident entities.
If an entity is tax resident in another jurisdiction and can provide objective proof, such as a tax residence certificate, it can be treated as out ofscope for Marshall Islands substance rules.
The Economic Substance Test
An entity that conducts a relevant activity and earns income from it must meet the economic substance test for that period. The test has three parts.
First, the relevant activity must be directed and managed in the Marshall Islands. This normally requires holding board meetings in the jurisdiction at an adequate frequency, keeping minutes and records there and having directors who understand the business.
Second, the entity must have an adequate number of employees, appropriate operating expenditure and suitable physical premises in the Marshall Islands. Adequacy depends on the scale of the activity. For many companies this may be achieved through local service providers, while more active businesses may require dedicated staff or increased presence.
Third, the entity must carry out its core income generating activities in the Marshall Islands. For shipping business, core activities include crew management, technical management, voyage operations and similar functions. The authorities recognise that shipping and yachting activities are mobile and take place internationally, and operational records can help demonstrate substance.
Pure equity holding companies benefit from a reduced substance requirement. They are considered compliant if they meet all statutory filing obligations and hold adequate premises and resources for the passive holding of shares.
Annual Filing Requirements
All in scope entities must file an annual economic substance declaration within twelve months of the anniversary of incorporation or registration. This applies even if the entity carried out no relevant activity or earned no relevant income. The filing confirms the entity’s status and, if applicable, provides information on income, expenses, assets, employees and activities in the Marshall Islands.
Failure to file or failure to meet the substance test can result in significant penalties, including fines that escalate for repeated non-compliance and the potential for the entity to be struck off the register.
Implications for Yacht Ownership and Maritime Services
Most Marshall Islands yacht ownership structures can be divided into two categories.
Private yacht holding companies. A company that owns a yacht used solely for private purposes is not treated as carrying on a shipping business for substance purposes. The guidelines confirm that private yachts, including those that may carry guests or undertake occasional cost sharing charters, are outside the definition of commercial shipping. These companies still need to file an annual substance declaration but do not need to meet the substance test.
Commercial chartering or maritime service companies. A company that earns charter income or provides services such as crew management, technical management or vessel leasing is likely to be carrying on a relevant shipping business. Such companies must assess how they will meet the substance requirements. In practice, the normal commercial operation of a yacht, combined with appropriate records and some local oversight, can often satisfy the test. Entities may also choose to demonstrate tax residence in another jurisdiction instead of building substance in the Marshall Islands. Yachts operating under the YET program need to consider whether or not they are classified as private yachts.
Key Takeaways
The Marshall Islands economic substance regime requires yacht owners and their advisors to include annual reporting and, for commercial structures, meaningful substance planning. Private yacht holding companies benefit from a clear exemption from the substance test. Entities engaged in chartering or maritime services need to take practical steps to show adequate direction, management and activity. Yachts operating under the YES program should consult with Rosemont on their status. With proper planning, the Marshall Islands remains a highly attractive jurisdiction for yacht ownership and maritime structuring.
At Rosemont Yacht Services, we assist clients with the structuring and administration of Marshall Islands yacht ownership entities and can guide you through the steps required to keep them compliant. We can also provide wider advice on the choice of jurisdiction for your yacht owning company, and on the choice of flag, as well as provide assistance with the formation of the appropriate company, and the ongoing administration.
For more information, please contact rys@rosemont-yacht.com
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