In this month's blog, Jonathan Silver and Georgina Axon, Norton Rose Fulbright, provide an overview of the rules and regulations governing Hong Kong, Panama and Marshall Islands flag.
Currently in Asia, we often see owners, operators and lessors choosing Hong Kong, Panama or Marshall Islands as the flag state for their vessels. The reasoning behind choice of flag is the topic of an article in itself and will not be addressed here. Suffice to note that all three flags are widely accepted by financiers (noting also the flag will determine the governing law of the mortgage over a vessel) and we have rarely seen a financier refuse to finance on account of a counterparty’s choice of one of these three flag states.
Ownership is critical to choice of flag. For Hong Kong flag, the special purpose company that will be registered as owner of record on the Hong Kong Shipping Registry (HKSR) must either be incorporated in Hong Kong or registered as a non-Hong Kong Company under Part 16 of the Companies Ordinance (Cap 622 of the Laws of Hong Kong). Incorporation of a Hong Kong company is now very quick although a company incorporated overseas may take significantly longer to register as a non-Hong Kong Company in Hong Kong. For the Marshall Islands, under the Maritime Act (1990 as amended), entities incorporated under the Associations Law (including the Business Corporation Act (BCA) and the Limited Liability Company Act) and any foreign maritime entity qualified under Division 13 of the BCA may register a vessel in the Marshall islands. Nationality of ownership for Panama flag is not regulated.
Type and age of vessel
Hong Kong and Panama flag put specific restrictions on certain types of vessel (fishing vessels etc.) although the HKSR is more proscriptive of the types of vessels it will not accept e.g. mobile drilling rigs, etc. There is a maximum age limit of 20 years for Marshall Islands flag. Hong Kong flag (which has a stringent survey system prior to acceptance) and Panama do not stipulate age restrictions. The Panama Maritime Authority (PMA) may refuse entry onto the register if the vessel has a bad history.
Hong Kong mortgages are “statutory” in a form prescribed by the Hong Kong Marine Department and are bi-lingual, in English and Chinese. The mortgage need not be notarised or legalised before it is presented to the HKSR for registration although if the signatory of the mortgagor signs under a power of attorney given outside Hong Kong, that power of attorney must be notarised. The rules in Panama are slightly more complex although a ship mortgage given abroad may be preliminarily recorded through a Panamanian consulate with maritime functions or an Economic Commercial Office with maritime functions. Such mortgages must be notarised and apostilled and (finally) recorded at the Public Registry of the Panama Maritime Authority in Panama. There is no prescribed form of mortgage for Panama. There is also no prescribed form of Marshall Islands mortgage (save for certain terms that should be included in the mortgage for it to be regarded as a preferred mortgage), and a Marshall Islands mortgage will require notarisation and acknowledgment by a special agent for the Marshall Islands. A Marshall Islands preferred mortgage is maintained in the main office of the Marshall Islands Maritime Administrator in the United States, although it may be recorded by the Commissioner of Maritime Affairs and any deputy commissioners at any of its world-wide offices.
All three flags have a provisional and a permanent registration procedure and a demise charter registration procedure. In Hong Kong and the Marshall Islands, provisional registration is not a pre-
requisite to permanent registration but it is in Panama. In Hong Kong and the Marshall Islands, full registration is permitted until the vessel is deleted however in Panama, a permanent registration license is valid for up to five years, although it can be renewed every five years thereafter. The Marshall Islands and Panama permit dual registration (subject to the rules of the other flag) but Hong Kong does not permit dual registration.
Income derived from the international operation of Hong Kong registered ships is exempt from profits tax in Hong Kong. For the Marshall Islands, income derived by non-resident entities (domestic or foreign) from any source (including operation of any vessel registered under the Maritime Act (1990 as amended), is statutorily exempt from tax in Marshall Islands. Likewise, all revenues from Panamanian flagged ships (including any capital gains from the sale or transfer of a Panamanian flagged ship) are exempt from tax.
Hong Kong has perhaps the most stringent requirements although, as with the Marshall Islands, once full registration has been completed, it is valid indefinitely. The Panamanian registration system is more flexible but permanent registration is only valid for five years subject to renewals. Marshall Islands, with its balanced rules and regulations, is becoming increasingly popular. All three flags are generally acceptable to an owner’s financiers and they will ordinarily readily accept a Hong Kong, Marshall Islands or Panamanian mortgage as collateral for a loan.
For more detail, the company has comprehensive guidance notes available separately on request.