In this article we will provide a broad overview of the rules and regulations governing Hong Kong, Panama and Marshall Islands flag including a brief analysis of the merits of each flag. We do not offer any opinion as to preference. As always, the devil is in the detail and we have comprehensive guidance notes for registration of title and mortgage available separately on request.

Currently in Asia (particularly Hong Kong and China) we very often see owners, operators and lessors choosing (and financiers accepting) 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 the flag will determine the governing law of the mortgage over a vessel) and we have rarely (if ever) seen a financier refuse to finance on account of a counterparty’s choice of one of these three flag states.

Ownership

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). This will require an analysis of the tax position in Hong Kong but the incorporation of a Hong Kong company is now very quick (around 2 business days). However, companies incorporated overseas (whom intend to fly Hong Kong flag) may take significantly longer to register as a non-Hong Kong Company. In practice, this has caused issues, particularly for sale and purchase. To explain in brief, if a memorandum of agreement has been signed and notice set at 21 days, it is unlikely that an overseas buyer under the MOA will have sufficient time to register as a non-Hong Kong Company, if they wish to transfer to HK flag on the delivery date. Panama does not have this issue (as nationality of ownership for Panama flag is not regulated). The Republic of the Marshall Islands will permit any Marshall Islands incorporated company to fly Marshall Islands flag and any entity which is a registered foreign maritime entity under s.119 of the Marshall Islands Business Corporation Act, which typically takes around a day to file and process.

Type of vessel

For the more common types of commercial ships (bulkers, tankers, containerships), all three flag states will accept registration subject to the usual due diligence.  Hong Kong and Panama flag put specific restrictions on certain types of vessel (fishing vessels etc.) although the Hong Kong Shipping Registry is more proscriptive of the types of vessels it will not accept (i.e. nuclear vessels, fish processing plants, mobile offshore drilling rigs). Marshall Islands does not have restrictions on the type of vessels it will accept (and has a number of fishing vessels on its registry). There are age limits for Marshall Islands flag (around 20 years generally) before which a pre-registration survey or waiver is required however Hong Kong flag (which has a stringent survey system in place prior to acceptance) does not stipulate age restrictions. Panama no longer has any age limit for vessels to be registered nor does it have a mandatory inspection for vessels over 20 years old now. However, the Panama Maritime Authority (PMA) may refuse entry onto the register if the vessel has a bad history.

Mortgages

Hong Kong mortgages are “statutory” in a form prescribed by the Hong Kong Marine Department and are bi-lingual, in English and Chinese. The sections of the mortgage that require user completion do not provide very much space. This can be problematic for large cross-collateralised ship financings although the form must be printed on A3 paper and the blank reverse side of the mortgage can be used if needed. Conveniently, the mortgage need not be notarised or legalised before it is presented to the HKSR for registration although if the signatory of the mortgagee signs under a power of attorney given outside Hong Kong that power of attorney must be notarised and the original presented to the HKSR. The rules in Panama are slightly more complex although a ship mortgage given abroad may be 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 in Panama.  There is no prescribed form of mortgage for the Republic of the Marshall Islands and a ship mortgage can be recorded at any office of the Marshall Islands Maritime & Corporate Administrators, Inc. Usually the mortgage should be in English (although there are a couple of exceptions to that rule) and it will require notarisation or acknowledgement by a special agent of the Commissioner of Maritime Affairs. For all three flag states, mortgagees do not have to be resident in the relevant jurisdiction to take the benefit of a mortgage.

Registration

All three flags have a provisional and a permanent registration procedure. In Hong Kong and the Marshall Islands, provisional registration is not a pre-requisite to permanent registration but it is required in Panama, before the owner can obtain a permanent navigation license. 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. The Marshall Islands and Panama permit dual/parallel registration (subject to the rules of the other flag) but Hong Kong has an absolute ban on dual registration – the vessel is either on the HKSR or off and there is no provision for suspended registration at all. Closure of the register is straightforward in Hong Kong, once all (existing) mortgages have been discharged. Consular officials must obtain authorisation for cancellation from the PMA where a request for cancellation of registration from the Panama Registry is received from abroad. Deletion from the Marshall Islands Registry requires the owner to submit a written request for a Certificate of Permission to Transfer.

Demise/bareboat charter registration

Demise charter registration procedures exist for all three flags, noting that for Hong Kong, the demise charterer must meet the same ownership requirements as an owner (i.e. either incorporated in Hong Kong or registered as a non-Hong Kong Company under part 16 of the Companies Ordinance). Bareboat charter registration in the Marshall Islands is limited to 2 years and may be renewed every two years until the expiration of the bareboat charter. Dual registration in Panama may now be obtained for the duration of the bareboat charter and the previous limit of two years is no longer applicable.

Tax

Income derived from the international operation of Hong Kong registered ships is exempt from profits tax in Hong Kong. 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. The Marshall Islands statutorily exempts non-resident domestic corporations from tax.

Summary

Hong Kong has perhaps the most stringent requirements of all three flag jurisdictions, although once full registration has been completed, it is valid indefinitely. The Panamanian registration system is more flexible (for example, the ownership restrictions are relaxed) but the permanent navigation license is only valid for a maximum of 5 years. Marshall Islands, with its balanced rules and regulations, is fast becoming popular among owners and financiers. All three flags are generally acceptable to an owner’s financiers and they will ordinarily readily accept a Hong Kong, Panamanian or Marshall Islands mortgage as collateral for a loan.