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Know the Ropes When Flagging Your Vessel: a Comparison of Three of the World’S Du Jour Vessel Registries

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Know the Ropes When Flagging Your Vessel: a Comparison of Three of the World’S Du Jour Vessel Registries Know the Ropes When Flagging Your Vessel: A COMPARISON OF THREE OF THE WORLD’S DU JOUR VESSEL REGISTRIES Heather C. Devine and Stephanie S. Penninger* by not requiring the vessel owners, operators, and crew to have the same nationality as the country where the ship is registered or the disclosure of ownership information.1 Today, “flag of convenience” refers to vessel registration in a country with I. Introduction: Choosing a an “open registry” for predominantly vessel registry in the world, reaching economic reasons, including: little to no Flag – More Than a Matter 100 million gross tons in February local taxes on vessel income, acceptance 3 of Convenience 2014. Headquartered in Reston, Va., of foreign owners and crew, increases the International Registries, Inc. and Advising a client of the appropriate in vessel market value, easy currency its affiliates (“IRI”), is the world’s flag state for his or her vessel is a conversion, allowing vessel repairs oldest and one of the most experienced challenging retainer, requiring abroad, lower operating costs due to privately administered Maritime and consideration of almost every lower wages (due to the ability of hiring Corporate Registry provider; it operates commercial issue from vessel ownership, non-union employees), and more lenient 26 full-service offices in major shipping labor and manning issues, and even the labor and safety standards, obtaining and financial centers around the world, reputation of the flag state. The only vessel tonnage more easily, and avoiding 2 and provides worldwide, around-the- certainty is that a vessel must sail under Coast Guard regulations. clock duty officer system and real time a flag: United Nations Convention on With the increased popularity in support to vessels flying its flag.4 the Law of the Sea (UNCLOGS) Article open registries for vessel registry, it is 91 provides: important to understand the advantages 1. International Treatment Ships have the nationality of and disadvantages of the different The RMI maintains a permanent the State whose flag they are available registries and the factors to representative and active delegation entitled to fly. … [Moreover] consider when selecting a particular at the IMO.5 It is included on the ships shall sail under the flag registry. Choosing where a vessel should White Lists of both the Paris and of one State only and … shall be “flagged” is a complex process that Tokyo Memorandums of Understanding be subject to its exclusive requires consideration of a multitude (“MoUs”), and has also maintained jurisdiction on the high seas. of factors. This article considers some Qualship 21 status with the U.S. When considering which flag of the key factors in the context of the Coast Guard for an unprecedented state to choose, one encounters three of the most popular flag states: 10 consecutive years.6 Qualship 21 is several different registration regimes: the Republic of Marshall Islands (RMI), an initiative that was implemented traditional, open, and a hybrid of Mongolia and Panama. by the Coast Guard to identify high- the two. While traditional registries quality ships, and provide incentives usually require the vessel’s owner or A. Taking the Right Tack – Flying to encourage quality operations.7 Only operator and a certain percentage of the the Marshall Islands Flag approximately 10 percent of the foreign- crew to be citizens of the registration The RMI Registry, governed by flagged vessels that call in the U.S. qualify state, open registries typically impose the RMI Maritime Act of 1990 (“RMI for this initiative and certification, more lenient registration requirements Maritime Act”), is the third largest which focuses predominantly on the * Gowling Lafleur Henderson LLP (Hamilton, Ontario, Canada) and Benesch, Friedlander, vessel’s Port State Control (“PSC”) Coplan & Aronoff LLP (Indianapolis, Indiana). We gratefully acknowledge Summer Associates, records and history8 ensuring the vessel Sarah Wouters and Brittany Shaw, for their contributions to the drafting of this article. TTL February 2015, Vol. 16, No. 4 44 is manned and operated in compliance available for certain registrations, e.g., a Island laws will govern the mortgage with applicable international law.9 fleet or newly constructed vessels.20 instrument.29 In addition to the RMI legal system, international legal and 2. Qualifications for Registry 4. Mortgaging Vessels & financial professionals recognize the Business entity formation within Maritime Liens RMI mortgage recordation procedures the RMI is straightforward and efficient, The RMI Maritime Act incorporates and administrative controls.30 and there are tax incentives associated provisions for recordation of security- with vessel registration with the RMI related instruments and documents 5. Manning & Safety Registry. The RMI does not restrict the of title.21 Recordation provides notice Requirements nationality of seafarers serving on RMI to creditors, purchasers, suppliers There are no nationality restrictions flagged vessels, and offers competitive and other parties with interest, and for vessel crewmembers.31 However, registration fees and tonnage taxes.10 furnishes an internationally enforceable RMI officers are required to hold a Additionally, RMI’s legislation permits structure for the protection of legal CoC/Certificate of Endorsement (CoE) vessels to register with the RMI Registry rights recorded.22 The RMI does not issued by the Administrator, and all although the vessel is still subject to a require a particular form of vessel persons serving aboard RMI flagged recorded mortgage in its present country mortgage. However, for a mortgage to commercial vessels are required to 11 of registry. The foreign mortgage lien be recorded with the Administrator, hold an RMI Seafarer’s Identity and accompanies the vessel into the RMI the mortgage must be duly executed and Record Book, which serves as a record 12 Registry. acknowledged as required by the RMI of sea service and contains the Special Seagoing vessels of any tonnage Maritime Regulations (MI-108) Section Qualification Certificates (SQCs), engaged in foreign trade and those 3.30, or with proof of due execution as specifying the rating in which the holder under construction are eligible for required in RMI Maritime Regulation is qualified to serve and any special registration in the RMI.13 At the time of 1.04.2a.23 qualification(s) held by the seafarer.32 registration, vessels should not be more All documents recorded under than 20 years of age, however, vessels that the Maritime Act (MI-107) must be in 6. Taxation are older than 20 years may be granted the English language, except notices Pursuant to RMI Business a waiver for registration depending on of foreign language ship mortgages Corporations Act Section 12, RMI their condition and classification.14 An or financing charters recorded under business entities and foreign maritime owner may check availability of vessel the bareboat registry provisions of the entities (“FME” or “FMEs”) are exempt names and reserve that name for six Maritime Act, Section 264, which only from annual filings and corporate tax, months for an existing vessel and two have to have their cover and execution net income tax, withholding tax on years for a newly constructed vessel.15 pages translated into English.24 entity revenues, asset tax, tax reporting Ownership of vessels registered Preferred status gives priority to a requirement on entity revenues, stamp with the RMI must be through an RMI lender’s mortgage lien over those with duty, exchange controls or other fees or corporation, limited liability company, certain other claimants.25 An RMI ship taxes, provided that they do not engage limited or general partnership, and mortgage must contain the: (1) vessel in business within the RMI.33 associations of individuals or a qualified name; (2) hull number for a vessel under FME.16 The RMI has mandatory construction; (3) names and identifies of 7. Labor and Operating Costs classification and statutory survey and the parties to the mortgage; (3) interest On September 25, 2007, the RMI certification requirements. The country in the vessel affected; and (4) amount(s) ratified the Maritime Labour Convention provides a list of approved societies for of the direct or contingent obligations of 2006 (“MLC 2006”), which provides: an owner’s convenience.17 that are or may become secured under the minimum requirements for seafarers its terms.26 to work on board ships, conditions of 3. Registration Fees A preferred mortgage may secure employment, including pay, rest hours, Registration fees as well as first year’s sale and lease transactions, contingent leaves of absence, training and manning RMI tonnage taxes and annual fees and future obligations, advances and of ships, accommodation, health are payable upon registration.18 There repayments, and guarantees. Owners protection and care and compliance are two fee option schedules available. also have an option to “tack on” a and enforcement mechanisms and Schedule A where the standard fees are previously recorded mortgage.27 Owners measures. The government also adheres payable for the registration in the RMI may submit the recorded foreign to certain minimum standards of social or Schedule B providing a sliding scale mortgage and a simple signed mortgage security, under the Social Security for various tonnage categories and a instrument that is recorded when a vessel (Minimum Standards) Convention of fleet discount structure.19 Discounts are is registered with the RMI.28 Marshall 1952 (“SSC 1952”), concerning: medical TTL February 2015, Vol. 16, No. 4 45 care, sickness benefits, unemployment 4. Mortgaging Vessels & 7. Labor and Operating Costs benefits, employment injury benefits Maritime Liens At present, Mongolia has not and survivors’ benefits.34 The Regulations for Registration of ratified the MLC 2006, although a draft B. Full Steam Ahead: Flying the Ships in the Ship Registry of Mongolia bill was submitted to Parliament last year Mongolian Flag allows for a Mongolian vessel to be used in support of Mongolia’s ratification of as security for “a loan or other valuable the MLC 2006.50 Ratifying the MLC 1.
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