Posted: January 24th, 2024

A Study on the Legal Issues of Ship Finance Lease in China

A Study on the Legal Issues of Ship Finance Lease in China

Ship finance lease is a form of financing that allows a shipowner to lease a vessel from a leasing company for a fixed period of time, with an option to purchase the vessel at the end of the lease term. Ship finance lease has become an increasingly popular alternative to traditional bank loans for shipowners, especially in China, where the government has encouraged the development of the maritime industry and the Belt and Road Initiative.

However, ship finance lease also involves complex legal issues that need to be addressed by both parties, such as the ownership and registration of the vessel, the tax implications, the risk allocation, the dispute resolution mechanism, and the cross-border enforcement of rights and obligations. This paper aims to provide an overview of these legal issues and suggest some solutions based on the current laws and practices in China.

Ownership and Registration

One of the main advantages of ship finance lease is that it allows the shipowner to use the vessel without paying the full purchase price upfront. However, this also means that the ownership of the vessel remains with the leasing company until the shipowner exercises the purchase option. Therefore, it is important to clearly define and document the ownership rights and obligations of both parties in the lease contract.

In China, there are two types of ship finance lease: domestic lease and cross-border lease. Domestic lease refers to a lease where both the leasing company and the shipowner are registered in China, while cross-border lease refers to a lease where either one or both parties are registered outside China. The ownership and registration of the vessel may differ depending on the type of lease.

For domestic lease, the leasing company usually registers the vessel under its own name in China and grants a bareboat charter to the shipowner. The shipowner then operates the vessel under its own flag and crew. The leasing company retains the legal title to the vessel and has a lien over it as security for the lease payments. The shipowner has an option to purchase the vessel at a predetermined price at the end of the lease term.

For cross-border lease, there are two common models: Chinese lessor model and foreign lessor model. In the Chinese lessor model, the leasing company registers a special purpose vehicle (SPV) in a foreign jurisdiction, such as Hong Kong or Singapore, and transfers the ownership of the vessel to the SPV. The SPV then leases the vessel to the shipowner under a bareboat charter and registers it under a foreign flag. The leasing company retains control over the SPV and has a lien over
the vessel as security for the lease payments. The shipowner has an option to purchase
the vessel from the SPV at a predetermined price at the end of
the lease term.

In
the foreign lessor model,
the leasing company is registered in a foreign jurisdiction
and leases
the vessel directly to
the shipowner under
a bareboat charter
and registers it under
a foreign flag.
The leasing company retains
the legal title
to
the vessel
and has
a lien over it as security for
the lease payments.
The shipowner has an option to purchase
the vessel from
the leasing company at
a predetermined price at
the end of
the lease term.

The choice of
the type and model of
ship finance lease may depend on
various factors, such as
the availability of
funding sources,
the tax implications,
the regulatory requirements,
and
the preferences of
both parties.
However,
regardless of
the type and model of
ship finance lease,
it is essential to
register
the ownership and lien rights of
the leasing company
in
the relevant ship registry
and
to notify
any third parties who may have an interest in
the vessel,
such as
mortgagees,
charterers,
or insurers.
This can help to
protect
the leasing company’s interests
and
to prevent
any disputes or conflicts arising from
the transfer or disposal of
the vessel by
the shipowner or other parties.

Tax Implications

Another important aspect of ship finance lease is its tax implications for both parties. Ship finance lease may involve different types of taxes, such as value-added tax (VAT), corporate income tax (CIT), withholding tax (WHT), stamp duty, and tonnage tax. The tax treatment may vary depending on the type and model of ship finance lease, as well as the jurisdictions involved.

In general, for domestic lease, both parties are subject to VAT on their respective incomes from

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