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24 April 2013
Cabotage and embargoes
Blacklisting and Paris Memorandum of Understanding
Nationality of crew and managers
Taxes and fees
Mortgage and mortgagees' rights
Shipowners often face a decision as to which flag they should fly on their vessel. This decision must be made when an owner is:
Several factors may influence the choice of flag.
Shipowners have considerable freedom when choosing where to register their vessels. The main consideration is usually to minimise costs and maximise revenue. If a shipowner wishes to use an open registry, there are many to choose from, and many offer similar terms for registration. However, there are some important differences worth noting. This update examines some of those differences and the factors that a shipowner should take into account when making a decision as to what best meets its requirements.
Most registries do not require the owning company to be incorporated under the laws of its state; however, this is mandatory with some registries. For the majority of registries, it suffices that the shipowning company appoint an agent residing in the country. Registries in the Bahamas and Panama require neither a local shipowning company nor a local agent to be appointed.
When it comes to ship eligibility, some registries impose restrictions on the type, size and/or the age of the ship. Requirements regarding size and age are usually not absolute and may be waived by arranging additional inspections and the payment of fees.
The transportation of cargo or passengers between domestic ports (cabotage) is restricted in most countries. Shipowners must also be aware that vessels flying certain flags may be restricted from entering some countries' ports. For example, Cypriot-flagged ships are not permitted to enter ports in Turkey due to a Turkish embargo.
The Paris Memorandum of Understanding on Port State Control is an organisation responsible for harmonising port state-control inspections undertaken by its 27 member countries. A flag's rating according to the body (or similar organisations, eg, the Tokyo Memorandum of Understanding or the US Coastguard) 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 (eg, banks and charterers).
Most registries do not impose restrictions on the nationality of crew or management, provided that international standards are met. However, there are exceptions. For example, for Danish-flagged ships, the master must be a Danish citizen or a citizen of an European Economic Area country or an EU member state.
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 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, it must register the ship under a flag that accepts bareboat charter-out registrations.
When registration of bareboat charter-out is permitted, the ship is commonly suspended from the primary registry during the bareboat charter period. Registration of bareboat charter – both in and out – is permitted in many registries, but not, for example, in the Norwegian International Ship Register. In Singapore bareboat charter-in registration is permitted only on a case-by-case basis.
All registries typically require extensive documentation to be submitted before registration is granted. The main difference between registries is the extent to which they require original documents and, in addition, the extent to which the documents must be notarised and apostilled, which can be a time-consuming exercise. If pressed for time, a shipowner may consider moving to a registry that is flexible in accepting electronic copies for provisional registration.
Mortgage requirements vary greatly under different flags. Therefore, it is important (especially for banks) to check the rules on priority between mortgagees, particularly whether:
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 for a vessel 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 considered too late.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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