Shipping Registries 101

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Ship registration is the process by which a ship is documented and given the nationality of the country to which the ship has been documented. The nationality allows a ship to travel internationally as it is proof of ownership of the vessel. The organization which actually registers the ship is known as its registry.

The principal purpose of the Ship Registration is to provide worldwide proof of ownership. This enables yacht and ship owners, to take advantage of all the Maritime laws and treaties that govern the rules of the open seas and coastal waters in all foreign countries.

Registration costs and annual fees are not cheap, and fall under the International Maritime Laws and Treaties. It is for the sole purpose of Identity and proof of ownership in International waters. It has nothing to do with taxes, or what cargo the ship can carry, or where the ship can go, etc. It only has to do with proof of ownership.

Which Ships need to be Registered?

That country has jurisdiction over the vessel and is responsible for inspecting that it is safe to sail and to check on the crew’s working conditions.

Any ship over 100 GT irrespective of whether it is a cargo vessel, fishing vessel and passenger vessel has to be registered. This registration grants the ship physical and legal protection of that flag/flag state which may be applied to vital areas such as safety of cargo and life of those on board the ship.

But ships need not necessarily be registered under a country’s own flag, for example a British ship need not be registered mandatorily under the British Flag or UK Ships register. It may be registered with registries other than the British Registry.

Upon registration, the ship will be assigned an Official Number by the register that the ship is registered with. The Official Number is different from the IMO number above in that, if the ship changes its port of registration, then there will be a different Official Number where as the IMO number stays the same.

Freedom is the guiding principle of the law of the sea and as per these principles:

  1. a ship of any nation can navigate the oceans freely;
  2. the ship’s national state has exclusive dominion over the ship; and
  3. no other nation can exercise dominion over that ship.

Types of Ship Registries

TRADITIONAL CLOSED REGISTRY

A registry that is open only to ships of its own nation is known as a traditional or national registry. In other words they allow only vessels that are owned by companies or persons that are residents of that country.

Traditionally, closed registries have a two-fold requirement, firstly, incorporation in country of registration and secondly, principal place of business in country of registration. In a closed registry, the tax is charged on the earnings as compared to open, wherein the taxes are on the basis of tonnage.

THE INTERNATIONAL REGISTRY or OPEN REGISTRY

International Registry has virtually no restrictions. However, this has led to allegations of sub-standard ships. International registry incorporates second registry, hybrid system and bareboat charter registration. Open registers denote flags of convenience for ships. More than half of the world’s shipping countries follow open registry, such as Panama, Liberia and Bahamas.

A ship registered in a country is required to fly the flag of that country and is entitled to the privileges and protection of the country. Registration provides title to a ship which is important for the ship to enter into trade relations.

SECONDARY REGISTRY

Secondary Registry is also known as Offshore Registry. It permits as an economic incentive, the hiring of foreign crews at wages lower than those payable to domestic crews.

It was viewed as an alternative to open registry, to counter its effects on shipping. Prior to the advent of secondary registry, traditional maritime countries were offering various forms of financial incentives to ship owners, thus the main objective of secondary Registry was the phasing out of subsidy and incentive schemes.

HYBRID REGISTRY

Hybrid registers offer attractive combinations of national and open registry features designed to lure shipowners. Just as open registers developed in response to national registries, so hybrid registers have developed in response to open registries.

They are easier to access and have fewer entry requirements than most national registries. They tend to maintain a nationality link between beneficial owner or management of the vessel and the flag State. In general, hybrid registries tend to offer financial incentives and advantages similar to open registers.

Many hybrid registers are maintained for use only by national shipowners as an alternative to flagging out and as a way to compete with the open registry system.

However, some hybrids allow foreign shipowners access to the registry once certain technical standards are met. The Norwegian and Danish International Ship Registers, the Isle of Man, and Madeira permit foreign owned or controlled vessels in certain circumstances while the German and the French International Ship Registers do not have nationality requirements.

Why so many shipowners find Panama’s flag convenient?

Panama, a small nation of just three million, has the largest shipping fleet in the world, greater than those of the US and China combined. Thanks to its location and slender shape, Panama enjoys a position as the guardian of one of the world’s most important marine trade routes, which connects the Pacific and Atlantic oceans.

For a hundred years the Panama Canal has provided a short cut for ships wishing to avoid the more hazardous route via Cape Horn. Dubbed one of the seven wonders of the modern world, the 77km (48-mile) canal is a feat of engineering that handles 14,000 ships every year along its intricate lock system.

Many of these vessels fly the Panamanian flag yet the country itself has a limited history of trade. Panama only has one small shipping line as well as a number of companies providing supplementary maritime services around the ports and canal.

Cheaper foreign labour

Most merchant ships flying Panama’s flag belong to foreign owners wishing to avoid the stricter marine regulations imposed by their own countries. Panama operates what is known as an open registry. Its flag offers the advantages of easier registration (often online) and the ability to employ cheaper foreign labour. Furthermore the foreign owners pay no income taxes. About 8,600 ships fly the Panamanian flag. By comparison, the US has around 3,400 registered vessels and China just over 3,700.

With 330m dwt on its books, Panama remains the most popular register with a lead of 126m dwt over second placed Liberia at 204m dwt. The gap between Liberia and top three register Marshall Islands, which clocks in at 196m dwt, is a mere 8m dwt with the latter enjoying a more comfortable 38m dwt lead over fourth placed Hong Kong.

Benefits of Ship Registration

Without being registered with any of the above mentioned registers, a ship cannot trade commercially. Apart from this commercial benefit or requirement, different ship owners register their ships with different registers for preferential treatments on tax (tonnage tax), certification and security.

Tonnage Tax

Tonnage tax is a special tax regime for shipping companies under which a notional profit is calculated based on the number and size of ships operated and on which a standard corporate income tax rate is applied.

Under a tonnage tax regime, the tonnage rate used for the notional profit calculation is set in such a way that the profit and consequently the actual corporate tax paid is minimal..

Only ships sailing under a national flag may be registered for tonnage tax and the ship operator needs to be a resident corporate body liable to tax regimes and the corporate body should necessarily be present in the country of registration thereby creating the much needed “genuine link” between the flag state and the ship.

(References: Shipping and Freight Resource, BBC, Mondaq, Basic2Tech)

Sea News Feature, September 21

Baibhav Mishra
Author: Baibhav Mishra

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