Over the last few decades, ship owners have been forming their entities and registering their vessels in the Marshall Islands and in Liberia. Both jurisdictions have adopted U.S. style associations law (based on Delaware and New York associations law) and have made it easy to create and maintain entities.
This briefing outlines some key points to consider for those who may wish to assess the suitability of using the Marshall Islands or Liberia to establish offshore entities.
Main types of entities
Like U.S. states, the Marshall Islands and Liberia offer, among others, three types of entities: corporations, limited liability companies and limited partnerships. Each has its own features, making it important to select the structure that best suits the ultimate needs of any given entity. Unlike other offshore jurisdictions, neither the Marshall Islands nor Liberian law require a person, office or headquarters to be located in the Marshall Islands or Liberia, which has the advantage of keeping start‑up costs and annual costs to maintain these entities relatively inexpensive.
One of the key benefits enjoyed by ship owners and others forming entities in the Marshall Islands or Liberia is their tax efficiency. Entities that are formed in the Marshall Islands or Liberia and that do not conduct business or operations in those countries are not subject to income tax there. Similarly, non‑resident equity holders of Marshall Islands or Liberian entities, including corporations, limited liability companies and limited partnerships, are not subject to Marshall Islands or Liberian taxation or withholding on distributions or dividends, including distributions treated as a return of capital.
In addition, non‑resident equity holders are not subject to Marshall Islands or Liberian stamp, capital gains or other taxes on the purchase, ownership or disposition of equity and are not required under Marshall Islands or Liberian law to file a tax return relating to ownership of equity. While this does not mitigate tax liability payable elsewhere by non‑ residents, the Marshall Islands and Liberia are seen to be attractive to those who may otherwise be tax‑exempt or in a low tax area (as some ship owners are) or those who wish to avoid incurring significant costs attached to maintaining a presence in other offshore tax‑friendly jurisdictions.
Accordingly, many ship owners with global operations choose to form entities in these jurisdictions, which also have a streamlined and user‑friendly process to register vessels and record ship mortgages. Registering vessels and recording ship mortgages becomes easier when only one jurisdiction is involved.
What is required?
In order to utilize a Marshall Islands or Liberian entity, those involved must, of course, adhere to the relevant laws, which differ according to which of the three types of entity is used. These include:
- Incorporation: Corporations are incorporated by filing articles of incorporation with the relevant corporate registry. While this is a public document, the bylaws of the corporation that are adopted following incorporation, are not public.
- Three levels of governance: Corporations are required to have shareholders, a board of directors (comprised of a minimum of one person) and one or more officers (including, at a minimum, a corporate secretary). The board of directors will make significant decisions for the corporation and is elected annually by the shareholders. Officers of the corporation will be appointed by the Board to act on behalf of the corporation on a day‑to‑day basis.
- Payment for Shares: Shares of a Marshall Islands corporation must be issued only after full payment for such shares has been paid. This is not the case for Liberian corporations, where shares can be issued before full payment is made.
- Articles of incorporation will prevail: To the extent that there is a conflict between provisions contained in both the articles of incorporation and the bylaws of a corporation or any shareholders’ agreement, the provisions contained in the articles of incorporation prevail.
- A secretary is required: Both the Marshall Islands and Liberia require corporations to have a secretary (or, in the case of Liberia, an officer that performs the tasks of a secretary). Neither jurisdiction requires any other officer. The secretary records the proceedings of the meetings of shareholders and directors and maintains the minute book of the corporation.
- Directors: Directors make, but do not implement, decisions. Directors do not have the apparent or ostensible authority to act on behalf of the corporation.
- Officers implement decisions: Officers of the corporation should be appointed to act on the corporation’s behalf on a day‑to‑day basis, as officers are recognized under Marshall Islands and Liberian law to have authority to bind a corporation in relation to third parties. An officer generally has authority to execute documents on behalf of the corporation, whereas directors in their capacity as such do not. A director cannot execute documents on behalf of a corporation (a director who is an officer may execute documents but only in his or her capacity as an officer). Due to the bifurcated structure, the use of the title “managing director” or “executive director,” as is often used in European countries, can lead to confusion.
Limited Liability Companies
- These are akin to partnerships: A certificate of formation (which is typically a two or three paragraph document) must be publicly filed, but the limited liability company agreement, or LLC Agreement, which governs how the LLC will be operated, is not public. Unlike a corporation that cannot contract out of statutorily applicable corporate law, the LLC agreement can elect to opt out of otherwise applicable statutory LLC law in many instances, which gives LLCs much greater flexibility. Unlike a partnership, an LLC may be owned by one person.
- Tax planning: Even though an LLC has been formed in the Marshall Islands or Liberia, it is possible that documents will need to be filed in other jurisdictions shortly after formation, specifically documents relating to tax treatment. This will depend on the group structure in which the newly formed company sits and how the group requires the LLC to be taxed.
- Complying with LLC Agreement: LLCs must be managed in accordance with the terms of the LLC Agreement, so it is important to ensure the terms are workable on a day‑to‑day basis. For example, it is quite common for the LLC Agreement to provide that a member (i.e., equityholder) will manage the company directly, but then the member, in contravention of the LLC Agreement, allows others to manage the company. To the extent these terms are not properly followed, the manager is subject to personal liability, and the action taken by such person may not be valid.
- Flexible governance: Similar to LLCs, a certificate of limited partnership (which is typically a short, one‑page document) must be publicly filed, but the Limited Partnership Agreement, which governs how the limited partnership will be operated, is not public. Unlike a corporation that cannot contract out of statutorily applicable corporate law, the Limited Partnership Agreement can elect to opt out of otherwise applicable statutory LP law in many instances (so, in this respect, is more akin to an LLC).
- Understood in foreign jurisdictions: Although a limited partnership is a slightly more complicated structure than an LLC (due to the requirement to have one or more general partners, who are liable for the limited partnership’s debts and obligations, and one or more limited partners, who are not liable for the limited partnership’s debts and obligations), certain foreign jurisdictions are more comfortable transacting business with a partnership rather than an LLC. Because some foreign jurisdictions do not have the equivalent of an LLC, it is sometimes more difficult for LLCs to navigate a third party’s internal processes, procedures and banking matters.
- Board structure: Although the traditional limited partnership is governed by a general partner, similar to Delaware, the Marshall Islands statute permits the general partner to delegate its rights and powers to manage and control the business and affairs of the limited partnership to other persons. Often, the Limited Partnership Agreement of a Marshall Islands limited partnership will provide that the general partner has delegated its responsibility to a board, which in turn may act in a manner similar to a corporation (so long as such is appropriately included in the Limited Partnership Agreement).
The relative ease of establishing an entity in the Marshall Islands and Liberia, combined with the low costs of maintaining them and the flexibility afforded in terms of the types of entity has led these jurisdictions to become one of the options considered by the maritime industry when looking to establish offshore entities. It may be that organizations in other sectors will look to these jurisdictions as potentially worthy of investigation as viable alternatives to other offshore locales.