Tax Planning and Ship Registration in Kenya. What it Means to a Prospective Maritime Investor

This article examines two key thematic issues. First is the concept of Tax Planning in light of the rapidly developing maritime industry not just in Kenya but globally. It highlights salient tax and economic considerations that any maritime investor and business owner ought to tick. Secondly, it examines the procedure, process and requirements for registering a ship in view of the Kenya’s legal framework. This article argues that timely tax arrangements including the decision as to which flag to fly is a key ingredient to a successful maritime investment. It will aid the reader, current and prospective maritime investors in appreciating the value of tax and economic planning; provide information on the procedure, process and the requirements for registration of a ship in Kenya.

World Fleet ownership and the Kenyan Maritime status
As of January 2020, (UNCTAD Handbook of Statistics 2020) the top five ship-owning economies combined make up for 52 per cent of world fleet tonnage. Greece held a market share of 18% of the merchant ownership, followed by Japan and china at 11%, Singapore 7% and Hong Kong SAR 5%. It is notable that half of the world’s merchant tonnage is owned by Asian investors and companies. In Kenya the tonnage ownership in terms of registration and flagging does not even make 0.1% of the world fleet ownership. Kenyan maritime investors have revamped the Ethiopian maritime market among other lucrative international markets.

Shipping companies and interested stakeholders have been forced to take a critical look into their existing business models. In order to embrace the current trends around the shipping industry, maritime operators now adopt flexible economic and business plans more specifically in the taxation management of the shipping business.

For Kenya, just like many other countries in the maritime sector, the shipping industry is of significant importance to the economy. Tax incentives are primarily employed in stimulating investments. Ship owners across the globe prefer registering their ships and consequent shipping companies in jurisdictions that are tax and economic-friendly.

Tax Planning
Why would one choose to register their ship in one country and not the other? The decision of a ship owner or that of a shipping company to register the ship in one jurisdiction ultimately affects their tax obligations. That is to say that the choice of a flag that a ship would fly often comes with tax and economic implications. For the said reasons, maritime operators have often chosen to register their ship and shipping companies in other countries and not their country of origin. The three major tax regimes applicable to the maritime industry across the globe are as follows;

a) Tonnage tax regimes
b) Shipping incentive regimes
c) Favourable tax regimes

Tonnage Tax Regimes
Tonnage Tax is a method of taxation where qualifying Shipping companies calculate their profits based on the tonnage of the ships and from such profits, Corporation Tax is paid. The major principle of tonnage taxation is that the liability of a shipping company as to tax is based on the tonnage of the vessel in question and not the actual profits accrued from the exploitation of the ship.

Countries that have adopted the tonnage tax regime and in which the shipping business has been lucrative over time include: Malta, Greece, Singapore, the United Kingdom, India, Netherlands and South Africa.

The main advantage of the tonnage tax regime to shipping businesses is that under a given set of circumstances a very low effective tax rate is attainable even less than 1%

Shipping incentive regimes
Various countries offer corporate tax incentives to the shipping businesses aside from tonnage tax. Tax incentives reduce the tax burden on the shipping companies and the maritime operators on one end and also enhances the ease of doing shipping business in those states. The incentives narrow the tax base applicable to the shipping business thereby lowering the rates or complete tax exemptions to the businesses.

A few countries with tax incentives specifically designed for the shipping industry are Canary Islands, Hong Kong and Singapore.

Favorable Tax Regimes
Certain jurisdictions are often attractive for your shipping business due to the general tax benefits they offer. Some countries do not accord any special tax incentives towards their shipping industry. As such uniform tax laws apply to every category of business. However, establishing your shipping business in such countries even without the incentives specifically designed for the shipping industry might be of great benefit to your business since their tax regimes are very favorable as compared to other countries.

Countries with favorable tax regimes and in which shipping business would be a considerable investment include: Antigua and Barbuda, Barbados and Bermuda.

Registration of Ships in Kenya
A ship just like any other property may be registered. This is the process of documenting a ship giving it nationality and legal status. The registration of ship is proof of ownership of the vessel by the registered proprietor and provides clarity and assurance on the nationality, right to fly the flag of a given country as well as the applicable jurisdiction. Further, it accords legal and political protection to the ship in question under international law.

The registration ships in Kenya is governed by the Merchant Shipping Act No. 4 of 2009 together with its subsidiary legislation and rules. The Kenya Maritime Authority is the body responsible for the registration and documentation of ships. The same Act further provides that the Director-General of Kenya Maritime Authority shall be the Registrar of Kenyan Ships.

The requirements for registration are as follows:
a) Name of Ship; and
b) Ownership where the Act limits the ownership of a ship to a maximum of sixty-four individuals.

In addition to the ownership and name requirement, the following conditions must also be met before a ship is eligible for registration:
a) The ship in question should be at least 24 meters or more in length
b) The ship should be owned by persons qualified to own a Kenyan ship; and
c) The ship in question should not be one that exempted from registration by any written law.

The following persons are qualified to own ships or seagoing vessels in Kenya:
a) The government of Kenya
b) Citizens of Kenya
c) Corporations and companies registered in Kenya
d) Corporations that are in genuine joint venture shipping business relationship with Kenyan nationals as may be prescribed by the minister from time to time.

The Process of Registration
Any person or corporation intending to register a ship shall lodge an application in form 29A to the Registrar for registration.
The person shall then sign a declaration of eligibility, in reference to the ship upon survey and as described in the certificate of the surveyor, and containing the following;
a) A statement regarding his qualifications to own a Kenyan ship in Kenya;
b) If the person is a body corporate, the statement shall include circumstances of its constitution and business as may be required to prove its qualification to own a Kenyan ship.
c) Where the ship is foreign, the statement shall provide details of her foreign name; and
d) The statement should also provide the number of shares the person holds on the ship.

Upon fulfilling the requirements for registration, the Registrar of Ships shall register the ship by entering into the register the particulars of the ship. The survey certificate shall be retained by the Registrar, builders certificate together with all declarations of ownership and thereafter issue a certificate of registry containing the particulars of the ship.
The certificate of registry shall be valid for a period of 12 months from the date of its issue and shall be renewed annually upon payment of the prescribed fee.

Conclusion
In the wake of the rapid growth of the blue economy, tax and economic planning in the shipping industry are inevitable. Countries across the globe are taking steps towards ensuring ease of doing shipping business in their jurisdictions. It is therefore upon the prospective and existing shipping companies to plan their operations around jurisdictions and regimes that are tax, economic and administrative friendly.

It is imperative for every shipping company or every individual intending to invest in the maritime business to ask themselves the simple but crucial questions; How long do I intend to be in the business? Where should I register my ship? Which flag should the ship fly? Which jurisdiction is good for my business both for tax and administrative reasons? What are the tax and economic implications of the intended registration?

Answering these questions and making an informed decision might just be the best business decision you ever made. Getting to know which jurisdictions and the existing tax regimes around the globe enables a business owner make sound decisions that would see the growth of their maritime business. Finally, appreciating and understanding the procedures and processes around ship ownership and registration in Kenya is the inception point of a successful maritime business.