Factors Influencing the Choice of a Ship Registration System

Factors Influencing the Choice of a Ship Registration System

Selecting a ship registration system is often regarded as one of the most important concerns for shipowners. Because states that provide registration services can derive substantial revenue from such systems, intense competition has emerged over the scope and variety of services offered.

A shipowner must make an initial and fundamental determination as to which system most effectively serves the owner’s interests. This article addresses which factors should be considered when choosing between an open registry and a national registry, and, where an owner concludes that an open registry better serves those interests, which criteria should be applied when selecting among the numerous open registry regimes.

Legal Considerations When Selecting the Flag State

Choosing Between an Open Registry and a National Registry

When a shipowner decides to select a flag, the first step is to choose between two principal approaches. The vessel may be registered in a state with which it has a genuine link, whether through nationality, economic ties, or another real and substantive connection. Alternatively, the vessel may be registered in an open registry that accepts ships regardless of the nationality of the beneficial owners or the state that effectively controls the vessel.

In some cases, an owner may seek to benefit from certain advantages of an open registry while maintaining ties with an established maritime state through a secondary registration system or through mechanisms such as bareboat charter registration. The factors that influence the choice of flag for merchant vessels are primarily economic or political, as explained below.

Economic Factors

One of the most significant drivers in choosing between a national registry and an open registry is economic advantage. Shipowners and operators, whether public or private, generally pursue maximum economic benefit, and this consideration frequently has the greatest impact on the ultimate choice.

Several parameters may increase the attractiveness of a particular registry, including:

Low Tax Burden

Registering a vessel under the flag of long-established maritime states such as the United Kingdom, Japan, Norway, Spain, or Sweden generally entails that the vessel’s operations will be subject to that state’s applicable tax system.

In advanced market economies, shipping income is commonly taxed in the same manner as other commercial income.

By contrast, states operating open registry systems often impose no tax on profits earned from the operation of ships flying their flag. Instead, they typically require payment of initial registration fees and annual charges calculated by reference to the vessel’s tonnage. Nevertheless, registration in an open registry does not, by itself, exempt the shipowner from other taxes in the jurisdiction where the owner is tax resident.

High Operating Costs in Traditional Maritime States

The ability to avoid high labor costs traditionally associated with established maritime states is among the strongest incentives for registering a ship in an open registry. Crew employment is often the largest component of direct operating costs for vessels registered in economically developed states.

Registration under such flags may require the shipowner to employ a specified number of crew members who are nationals of the flag state. It may also require engagement with local trade unions regarding wages, manning levels, working conditions, and benefits.

In contrast to national or closed registry regimes that often impose nationality requirements on crew, open registries commonly grant shipowners broad discretion over crew nationality and wage arrangements.

Political Factors

Political reasons for utilizing open registries have varied over time and depend on changing international and geopolitical conditions. Political considerations that may be taken into account when choosing between a national flag and an international or open registry include:

• The ability to conduct global trade without restrictions imposed by the flag state concerning the carriage of cargo to particular destinations that are subject to sanctions or economic pressure.
• Avoiding discriminatory treatment directed at ships trading under certain flags.
• Reducing exposure to requisition or seizure during periods of conflict.
• The potential loss or limitation of naval or state protection traditionally associated with established maritime powers during war or armed conflict.

Other Relevant Factors

In addition to economic and political motivations, a range of further considerations may influence the choice of flag, including:

• The ability to repair vessels anywhere in the world without being confined to domestic shipyards.
• Freedom to build vessels in accordance with international standards rather than being required to follow special domestic rules that may be protectionist in nature.
• Access to the flag state’s technical expertise regarding the design and construction of newbuild vessels.

Frequently Asked Questions About Factors Influencing the Choice of a Ship Registration System