From Wikipedia:

A courtesy flag (or courtesy ensign) is flown by a ship in foreign waters as a token of respect by a vessel that is visiting. It is often a small (i.e., smaller than the ship's own national ensign) national maritime flag of the host country, although there are countries where the national (i.e., land), rather than the maritime flag is correct. The flag is customarily worn at the foremasthead of multi-masted vessels, the starboard yardarm or crosstree of the mast of single-masted vessels, and from the bow staff of vessels without masts.