Criteria for choosing a ship’s flag from a financier’s perspective

Choosing a ship’s flag is a complex exercise involving many operational and financial considerations. Depending on the planned operation, and in order to make an informed decision, it is necessary to understand the different criteria involved in this choice and their practical consequences.
 

1. Implications of choosing a flag

The choice of registry is the shipowner’s decision. However, since this decision has significant consequences for the bank financing the ship, the bank will only agree to support the operation if the chosen flag is acceptable — that is, if it provides sufficient guarantees to the lending institution.

To understand the stakes of this choice, it is important to identify its consequences. Registering the ship determines, on one hand, the law applicable to ownership and real rights (including the mortgage), and on the other hand, the economic profitability of the operation and, therefore, the repayment of the debt.
 

2. Conditions for registering a ship

The conditions for registering a ship under a state’s flag can vary from country to country. First, there must be a link between the ship and the flag state. This link is assessed with varying degrees of strictness, but traditionally, the criterion was the nationality of the owner or shipowner. However, since World War II, new criteria have emerged, and it is useful to list some of the most notable developments.

For example:

• Liberia requires the adoption of a “local” legal form, even if there is no real connection with the country.

• France requires that at least 50% of the ship’s ownership be held by entities from the European Economic Area, and that management is conducted from France.

• Switzerland is even stricter: the owning company must be 100% Swiss. Some authors have questioned the validity of a mortgage in favour of a foreign bank, as the bank could enforce the security and sell the ship abroad, risking purchase by a non-Swiss company that would not be eligible to own a Swiss ship.
   

3. Registry formalities

Some states have a single centralized system, with or without international offices (e.g., Marshall Islands or Malta) or a consular network (Panama), with varying degrees of efficiency. Others have multiple “registers” or “regimes,” such as France, which has a “first” register in its main ports, an international register (RIF) in Marseille, and other smaller registers in its overseas territories (e.g., New Caledonia or Wallis and Futuna).

For mortgages, it is important to verify that a register exists, who maintains it, what formalities apply (such as registration fees), and the conditions for maintaining it.

Administrative formalities can be more or less flexible depending on the state. For example, some allow registration based on PDF copies of documents, while others require heavy procedures (translations, notarizations, etc.). These procedures have direct consequences in terms of costs, fees, and financing timelines.

The choice of flag also has tax implications, mainly concerning ship operation, capital gains from ship sales, social charges, or the possibility of paying taxes based on a flat-rate system (tonnage tax).

Registration and mortgage costs also vary by flag.
 

4. Operational constraints

Operational constraints in the chosen registry must also be considered.

Flag law may impose crew restrictions. In the past, only nationals of the flag state could be employed as crew. However, under pressure from “offshore” registers that allow employment of seafarers from low-wage countries, traditional registers (like the Italian international register) have opened up, under certain conditions, to employing foreign seafarers to attract tonnage and support national employment.

The ship’s flag may also grant access to cabotage services, which are often restricted by national or federal laws (e.g., EU Regulation 3577/92 or the US Jones Act).

There are also constraints regarding approved classification societies and working conditions for crew training and pay.

International conventions ratified by the flag state must also be considered. Among the most important in maritime law are:

• The United Nations Convention on the Law of the Sea (Montego Bay, 1982)

• The Convention on Limitation of Liability for Maritime Claims (London, 1976)

• The International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-going Ships (Brussels, 1952)

• The International Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages (Brussels, 1926)

• MARPOL (London, 1973)

• SOLAS (1974)

• The US Oil Pollution Act (1990, amended 2000)

In judicial matters, relevant instruments include:

• EU Regulation 44/2001 (jurisdiction, recognition, and enforcement of civil and commercial judgments)

• The Hague Convention of 15 November 1965 (service of judicial and extrajudicial documents abroad)

It is important to note that certain memoranda of understanding aim to improve maritime safety through data exchange, ship inspections, and risk profiling of flags and companies. For banks, this information is crucial, as if the ship is detained, the charterer may suspend rent payments, affecting debt repayment.

It is therefore necessary to check that the flag state has signed relevant conventions, such as:

• The Paris Memorandum of Understanding (MOU) on Port State Control (1982)

• The Tokyo MOU

• The International Safety Management (ISM) Code (1994)

• The International Ship and Port Facility Security (ISPS) Code

• The Maritime Safety Code

Finally, it is useful to check if the register allows bareboat charter in and out. For banks, this can allow temporary freezing of the initial flag (where securities are taken) and temporary adoption of another flag under a bareboat charter, to obtain operational advantages. This allows a bank to benefit from the legal system of the “first register” while operational advantages go to the shipowner.
 

5. Political stability

Political reasons also influence the choice of flag, as they determine, among other things, the ship’s right to request military protection, exposure to international boycotts, or risk of requisition by an enemy country.