Shipowners' choice of vessel flag
The shipowner’s decision as to which flag they should fly on their vessel must be made when an owner is:
- registering a new build;
- changing flag in connection with a sale and purchase transaction; or
- concluding a bareboat contract.
This article looks into some of the factors that may influence the choice of flag and consequently the terms of the relevant contract – ie Salesform, Shipbuilding or Bareboat.
Most registries do not require the owning company to be incorporated under the laws of its state; however, this is still mandatory with some registries. For the majority of registries, it suffices that the shipowning company appoint an agent residing in the country in order to meet the minimum UN «genuine link» requirement.
When it comes to ship eligibility, some registries impose restrictions/limitation on classification societies, the type, size and/or the age of the ship. Requirements regarding size and age are usually not absolute and may be waived under certain conditions as discretionary set out by the relevant flag state from time to time.
Cabotage and embargoes
The transportation of cargo or passengers between domestic ports (cabotage) is restricted in most countries and within certain group of countries. Furthermore, the flag state’s embargo legislation will have an impact on the vessel’s potential trading areas.
Blacklisting and Paris Memorandum of Understanding
The Paris Memorandum of Understanding on Port State Control is an organization responsible for harmonizing port state-control inspections undertaken by its 27 European member countries. A flag’s rating according to the body (or similar organizations, e.g. the the Port State Control in the Asia-Pacific Region (the Tokyo MOU)) is an important consideration when choosing registry. A black or grey-listed flag may increase the frequency of port state controls, which may result in expensive delays. The flag’s listing may also cause concern among other parties, which have an interest in the vessel (e.g. banks and charterers).
Nationality of crew and managers
Most registries do not impose restrictions on the nationality of crew, terms of employment or management, provided that international standards are met. However, there are several exceptions to be carefully considered prior to the choice of flag/registration.
Taxes and fees
Tax considerations often play an important role when decisions are made about which flag to choose. Most open registries have an initial registration fee plus an annual tonnage tax. Income tax is generally not imposed, if the shipowning company is not a tax resident in relevant the flag state.
A temporary bareboat registration under another flag may be mandatory to trade in certain markets. If the shipowner requires its vessel to fly the flag of a second state for a limited period of time (i.e. due to cabotage restrictions), it must register the ship under a flag that accepts bareboat charter-out registrations.
All registries typically require extensive documentation to be submitted before registration is granted. The documentation and formalities are for the main part similar in most flag states, but it is important to identify and plan for particularities in the respective flag states in order to avoid costly delays and obstacles.
Mortgage and mortgagees’ rights
Mortgage requirements vary greatly under different flags. Therefore, it its important (especially for banks) to check the relevant local rules and requirements, particularly whether:
- the original mortgage deed is required for deletions or amendments to the mortgage;
- foreign individuals and entities may act as mortgagees;
- transfer of a mortgage is permitted; and
- the mortgage must be enforced in the flag state’s jurisdiction only.
All registries charge a fee for mortgage registrations, but only some charge for the deletion of mortgages. These fees can be considerable and should be checked in advance.
The matters to be considered when choosing a flag and preparing for a transaction as discussed above are by no means exhaustive and other factors may be equally important. When registering a new build or purchasing a second-hand vessel, it is important to have a clear picture of the chosen registry’s requirements in advance in order to avoid a situation where a closing has to be postponed – or worse still, fails – because requirements have been overlooked or were communicated too late to the owner.