The question of the State in whose registry a vessel is to be entered is not merely an administrative preference; it directly determines the tax burden, the supervisory regime to which the vessel will be subject and the law that will apply in the event of a dispute. The legal definition of the vessel is made in Art. 931 of the Turkish Commercial Code No. 6102:
Turkish Commercial Code Art. 931
"Every craft which, by reason of the purpose to which it is allocated, must move on water, which possesses the property of floating and which is not very small, shall be deemed a "vessel" for the purposes of this Code, even if it has no capacity to move by itself"
Through an extensive interpretation of this definition it is generally accepted that yachts too bear the character of a vessel. In Türkiye yachts are of such a nature as to be capable of being entered in the National Ship Registry, in the Turkish International Ship Registry and in the Marina Register.
For yacht and vessel owners, the question of which registry is to be chosen is decisive in terms of cost as much as of ease of procedure. Some owners relegate the security offered by the registry to second place and turn towards the lightness of the conditions sought for registration and towards economic advantages, preferring the registries of countries known as "flag of convenience" States, which grant various advantages to shipowners. Although the registration of vessels and yachts in foreign countries offers their owners considerable conveniences, it also brings with it serious problems of reliability.
Indeed, while flag of convenience States provide economic advantages to the vessels entered in their registries, they disregard the element of safety, which is one of the most fundamental principles of shipping. The ship registries of States operating in this way are therefore assessed as registries exposed to risk on account of their weaknesses of supervision. In this briefing note we address the picture of registries in the international sphere, the reasons for preferring foreign registries and the risks they carry, and thereafter the third-country flags regarded as safe.
Ship Registries in the International Sphere
A significant part of world trade is conducted by sea, yet almost three-quarters of the world merchant fleet is not registered under the flag of its own country. On account of the conveniences afforded, shipowners avoid having their vessels and yachts entered in the registry of their own country and prefer foreign ship registries.
The principal reason for this is the tax advantages that flag of convenience States accord to shipowners. These flags, which appear attractive from the tax standpoint, nevertheless also have problems as regards legal certainty. The United Nations Conference on Trade and Development, known as UNCTAD, brought safety problems onto the public agenda with the report it published in 1981, indicating as the source of those problems the ship registries of less developed countries such as Panama and the Bahamas. Thereafter, with a view to securing the safety of vessels in international waters and to giving effect to port State control, the Paris Memorandum, an agreement of an administrative character, was signed in January 1982.
Today a total of 27 maritime administrations from North America and Europe are members of the Paris Organisation, and Türkiye is not among those members. One of the most important tasks of the Organisation is that it places all flags under examination by keeping annual reports. As a result of the reports, national flags are classified as white, grey and black. As is apparent from the naming, the most reliable flags are gathered in the white category, while the flags of countries exposed to various risks fall within the black flag category.
Like other countries that attach importance to maritime safety, Türkiye too is taking its measures against flag of convenience States. Pursuant to instruction no. 2014/260 of the Ministry of Transport, Maritime Affairs and Communications of the Republic of Türkiye, it was decided that, in order to secure the safety of carriage to be performed within the country’s borders, trade should be conducted with vessels complying with international standards, and that sanctions should be applied in respect of vessels not complying with the legislation and with international conventions as regards working conditions and living standards. In the same vein, with a view to encouraging the registration of Turkish vessels in the national ship registries and keeping them away from flag of convenience States, the Turkish International Ship Registry (TUGS), which grants tax privileges, was established. The details relating to the Turkish ship registry organisation are examined in Independent Legal’s study entitled "The Ship Registry and Registration in the Registry".
Reasons for Preferring Foreign Registries and the Attendant Risks
The United Nations Convention on the Law of the Sea of 1982 refers to the need for a genuine link to exist between the State and the vessel. For this reason, until the recent past vessels and yachts predominantly sailed under the flags of their own countries. However, as steps were taken towards globalisation at the beginning of the 21st century in maritime trade as in every other field, shipowners wished to take advantage of registering their vessels in third countries. While some owners decided on the basis of safety and chose the countries characterised as "white flag" States, others acted purely out of economic concern and turned to flag of convenience States such as Panama.
Open registries give yacht owners the opportunity to choose the registry that is most advantageous economically. Yet this opportunity also brings with it practices that lack infrastructure and are remote from supervision. A vessel registered in a flag of convenience State pursues its sailing life under constant risk. Registration in these States is an extremely simple transaction; some coastal countries undertake that a change of flag will be completed within forty-eight hours, the transaction most often being concluded merely by the completion of a simple form.
In the report it published, the United Nations Conference on Trade and Development (UNCTAD) dealt in detail with the safety gaps in open registries. According to the report, the true owners of vessels entered in these registries cannot be identified; and since there is no requirement for the crew serving on vessels registered in a flag of convenience State to be nationals of the flag country, they are easily able to evade the legal proceedings conducted against them. The report further stated that hijacked vessels, abandoned vessels known as ghost ships, false certification, smuggling and terrorism are most frequently encountered on vessels registered in flag of convenience States. Safety problems therefore head the list of difficulties that may be encountered in the registration of vessels and yachts in foreign countries.
The country in which the practice of open registries was first put into effect, and the one most preferred among flag of convenience States, is Panama. The transfer of the registry to an electronic medium has made registration far simpler, and Panama has thereby risen to the position of the coastal country with the largest merchant fleet. The State of Panama, which currently meets a significant part of its economy from the fee, service and tax revenues arising from the registry, is followed by small countries such as the Marshall Islands, Honduras and Liberia.
Safe Third-Country Flags
Notwithstanding the economic crisis experienced on a global scale, the momentum in the world vessel and yacht market continues to rise rapidly. While large cargo vessels are used and generate income solely in maritime trade, yachts generally fall within the field of luxury use. Beyond personal use, yachts may also be chosen for investment and financing purposes, and they constitute an important economic resource for the countries active in the field of yacht production and registration.
Since on the legal plane yachts too are characterised as vessels, they must likewise be entered in the ship registry of a particular country. Yacht and vessel owners may be natural or legal persons. Owners are free to determine the nationality of the vessel they have purchased and to choose the law to which they will be subject. As we noted above, this freedom has given rise to competition among coastal countries. Flag of convenience States are the most preferred, on account of tax privileges that cannot be denied, but by the same token they harbour the riskiest registries.
Nevertheless, one should not place all foreign ship registries in the same category as flag of convenience States. There are also national flags that keep supervision extremely strict and leave no room for risk. The State of Delaware in the United States of America may be given as an example of these. Delaware has a developed system not only in maritime trade but also in trade on land. It is distinguished from other coastal jurisdictions particularly in respect of maritime trade by the tax advantages it applies, its arrangements favouring shipowners and its low registration and application fees. For all these reasons it has become a registry in which a great many vessel and yacht owners register with confidence.
Since vessels and yachts are made the subject of legal transactions such as leasing and chartering, they often sail miles away from their owner; during those voyages a collision or an attack lies within the bounds of possibility. The fundamental reason for preferring Delaware is that the vessel may be registered in the name of a limited liability legal entity to be established in that State. Since the legal owner will thereby be not the true owner of the vessel but the limited liability legal entity established, this structure will serve as a shield between the yacht owner’s personal assets and the debts of the vessel.
Alongside limited liability, since shipping activities hold a large share in the economy of Delaware, there are numerous alternative agencies available as regards the operation and supervision of the vessel and intermediary transactions. Moreover, the legal protection of a vessel registered in the ship registry of that State rests on far sounder foundations than in flag of convenience States. Case law has developed before the courts of Delaware in relation to many disputes; indeed, the legal order of the USA, which has adopted the Anglo-Saxon legal system, rests on case law.
Delaware is only one example of States possessing a safe flag; there are other ship registries that keep supervision strict. For registration in the registries of States of this character, the stages to be followed once the national flag to be flown has been determined may be listed as follows:
- Establishment of the limited liability legal entity that is to own the vessel,
- Obtaining of the certificates and documents evidencing the seaworthiness of the vessel or yacht,
- Completion of the inspection and survey procedures,
- Conclusion of the contract of sale,
- Deletion of the vessel from the registry of the seller’s country and its registration in the registry of the flag to be flown,
- Conclusion of the insurance procedures relating to the vessel,
- Payment of the price within the framework of the conditions agreed by the parties.
Since a sale is involved and technical inspection is required while these procedures are carried out, it is advantageous for the process to be conducted with the assistance of a specialist agency together with lawyers and advisers. Because all the transactions carried out are international in character and the value of the vessel forming the subject of the transaction is high, financial and administrative losses are likely to arise. In order that such losses may be prevented, support must be obtained from lawyers and agencies who are specialists in the field.
Relevant Legislation
- Turkish Commercial Code No. 6102
- Turkish International Ship Registry Act
- Financial Leasing, Factoring, Financing and Savings Financing Companies Act No. 6361
- Ship Registry Regulation
Independent Legal Assessment
In practice the choice of flag is most often reduced to a calculation made solely by reference to tax and the cost of registration. Yet this decision affects a wide field, ranging from the port State inspections to which the vessel will be subjected and the determination of the insurance premium, to the security demanded by lenders and the liability regime that will apply in the event of a casualty. A vessel sailing under a flag on the black list is subjected to more frequent and more detailed inspection in foreign ports; the risk of detention may directly disrupt operating plans.
Where a decision is taken to register in a foreign registry, the contractual and the administrative limbs of the process must be structured together. Where the timing of the contract of sale, of the deletion and registration procedures and of the payment of the price is wrongly planned, grave consequences may follow, such as the vessel being entered in no registry at all for a period. In a given file the following headings should be brought to the fore:
- Examining in advance the position of the intended flag within the classification of the Paris Organisation
- Structuring the form of the legal entity that is to be the owner together with its limited liability and tax consequences
- Scheduling the deletion and the new registration so that they follow one another without interruption
- Completing the seaworthiness certificates, survey reports and insurance policies before the transfer
- Making the payment subject to a condition tied to the completion of the registry procedures, or to an escrow mechanism
- Expressly agreeing in the contract the law to be applied and the competent forum in the event of a dispute
Independent Legal provides advisory services and conducts litigation in processes relating to the purchase and sale of vessels and yachts, changes of flag, registration in foreign registries and the financing of vessels.