The Role of the Marshall Islands Flag in the Shipping Industry

Republic of the Marshall Islands

The Republic of Marshall Islands (often referred to as the “Marshall Islands”) is a self-governed independent state with its own constitution, located just north of the Equator in the Pacific Ocean.  The Marshall Islands takes its name from John Marshall, captain of the three-masted barque, Scarborough.  The captain of the barque Charlotte, Capt. Thomas Gilbert, named the Islands (previously referred to as Lord Mulgrove’s range) after Captain Marshall as the Charlotte and the Scarborough, which passed through the area in late June 1788 (Capt. Marshall named the Gilbert Islands (now the Republic of Kiribati) after his fellow captain).

International Conventions

The Marshall Islands retains strong links to the US under a compact of free association.  Importantly, in a shipping finance context, the Marshall Islands is a contracting party to the 1961 Hague Convention Abolishing the Requirement of Legalisation for Foreign Documents and a contracting state to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).  As the Marshall Islands is a contracting state to the New York Convention, this means that (subject to certain provisions) foreign arbitral awards can (and will) be recognised in (and enforced by) the Marshall Islands courts.  The Marshall Islands is also a Member State of the United Nations.

Ship Register

The Marshall Islands ship registry (the “MI Ship Registry”) is positioned within the top three largest ship registries in the world by deadweight tonnage, representing a very significant number of the world’s commercial shipping fleet.  In addition, a growing number of business entities formed in the Marshall Islands are routinely used as corporate vehicles for shipping and other related activities.

Owners, operators and lessors often choose the Marshall Islands as the flag state for their vessels;Marshall Islands ship mortgages are widely accepted by financiers, which is crucial as the flag selected will determine the governing law of the mortgage over a vessel.

For the more common types of commercial ships such as bulkers, tankers and containerships, the MI Ship Registry will accept registration subject to due diligence and certain age and size restrictions.   Generally speaking however, the MI Ship Registry does not place restrictions on the types of vessels it will accept and it also has yachts on the register.

Qualification

The Marshall Islands will permit any Marshall Islands-incorporated company to fly its jurisdiction’s flag and any entity which is a registered foreign maritime entity (“FME”) under section119 of the Marshall Islands’ Business Corporations Act (the “BCA”).  The FME registration typically takes around one business day to file and process.

Underlying Law

The BCA is modelled on (and closely follows) Delaware law and other US states with substantially similar legislative provisions (there is express language in Section 13 of the BCA to this effect).

Age Limits / Vessels

There are age limit requirements for the use of the Marshall Islands flag (generally about 20 years although the average age of the fleet is 9.7 years) before which a pre-registration survey or waiver is required.  Generally, private yachts of less than 12 metres in length do not qualify although the minimum length restrictions noted above may be waived at the discretion of the Maritime Administrator and the vessel may be documented or re-documented where the vessel meets all other applicable requirements for registration and it has been satisfactorily demonstrated that there is an absolute and genuine need for such waiver (a waiver of the age requirement may be granted depending upon a satisfactory evaluation of the condition, seaworthiness and usage of the vessel).

Form of Mortgage

There is no prescribed form of mortgage for the Marshall Islands, and a ship mortgage can be recorded at any office of the Marshall Islands Maritime & Corporate Administrators, Inc.  The mortgage must be in English (although there are exceptions to that rule for certain supporting documents) and it will require notarisation by a notary public or acknowledgement by a special agent of the Commissioner of Maritime Affairs.  Mortgagees do not have to be resident in the relevant jurisdiction to take the benefit of a mortgage.

The Marshall Islands permit registration under construction even if the ship, upon delivery, will not be registered in the Marshall Islands.  The advantages of registration under construction are that, from the owner’s perspective, a title is ascribed to the owner as registered owner of the constructing ship.  It ensures that the constructing ship is distinguished from the other assets of the shipyard in protecting the rights of the owner in the event that the shipyard files for bankruptcy.  In addition, it may be useful for the owner in obtaining an export license.  From the lender’s perspective, it facilitates asset-based financing during the period of construction, security and / or lien can be created over the constructing ship in securing the owner’s payment obligations.

New building or transferring ship (from another flag state) that is first registered in the Marshall Islands will be granted with a provisional certificate of registry with a valid period of one year.  The permanent certificate of registration will be issued only when the MI Ship Registry receives the permanent application which includes additional documents (e.g. updated classification certificate and satisfactory completion of RMI safety inspection report) and fees payable for permanent registration from the owner during the valid period.  An unexpired provisional certificate of registry has the same validity and legal standing as a permanent certificate of registry, and is prima facie evidence that the ship to which it has been issued is duly registered.

Full registration is permitted in the Marshall Islands until the ship is deleted.

Parallel Registration

The Marshall Islands permits dual / parallel registration (subject to the rules of the other flag), provided a bareboat charter of the vessel is in full force, and effect and permission is granted by the Chief of the Vessel Registration Division of the MI Ship Registry.  The period of bareboat charter registration is two years, with the possibility to extend, subject to certain rules.

Cancellation

Closure of the ship’s register is straightforward, once all (existing) mortgages have been discharged.  Deletion upon sale (and transfer of flag) from the MI Ship Registry  is also uncomplicated, which makes the flag attractive for owners.  This requires the owner to submit a written request for a Certificate of Permission to Transfer to the Maritime Administrator.

Finance Lease Registration

Finance leases, ordinarily in the form of a bareboat charter with certain specific terms included, can be recorded at the registry.  Once the finance lease / charter has been recorded, this will confer a proprietary security interest, in favour of the owner, over the vessel.

Assuming that all mortgages of record are discharged, a certificate cancelling the ship’s register is available on delivery to the maritime administrator, including a copy of the bill of sale where change of ownership has occurred.

Tax Exemption, Exchange Control, Recent Changes in Law

The Marshall Islands statutorily exempts non-resident domestic corporations from tax.  Marshall Islands borrowers, i.e. special purpose companies (SPCs), are generally considered non-resident and are therefore exempt, and there are no withholding taxes levied on the repayment of loans (principal and / or interest) to non-resident lenders.

A foreign lender may extend credit to non-resident Marshall Island companies (as borrowers, where they are giving, as security mortgages over vessels registered under the Marshall Islands Maritime Act) without having to concern itself with domestic regulation or approvals.  The Marshall Islands has no exchange controls.

Corporate Issues

A Marshall Islands corporation is permitted to guarantee obligations not in furtherance of its corporate purposes under Section 16 of the BCA when authorised by majority shareholders and shareholder consents should always be sought for that purpose.  As the concept of third-party security is not addressed in Section 15 of the BCA, often a financier will require a Marshall Islands corporation to give a guarantee (for the obligations of the third party) and then secure its own obligations (under that guarantee) by means of mortgage security over its assets.

Economic Substance

Recently, the Marshall Islands has adopted amendments to its Associations Law (and elsewhere) to bring the Marshall Islands in line with the implementation of certain transparency requirements of the Organisation for Economic Co-operation and Development (OECD), particularly in relation to inter-jurisdictional exchange of ownership information, for tax compliance purposes.  The Marshall Islands government remains very alive, and continues to take proactive measures to satisfactorily address issues relating to economic substance and base erosion and profit sharing (BEPS).

Beneficial Ownership

Relatively recent amendments to the BCA require all Marshall Islands corporations (excluding publicly traded companies) to keep and maintain a record of their ultimate beneficial owners.  A ‘beneficial owner’ is defined as a natural person who exercises control over a company directly or indirectly and will generally be deemed to hold more than 25% of the interests of the company.  All Marshall Islands corporations issuing bearer shares must now maintain up-to-date records of all holders and beneficial owners of bearer shares as well as any subsequent transfers.