Selling a vessel: why planning matters

For shipowners planning to sell a vessel, deciding where to complete the transaction is an important consideration that should be addressed well before a sale agreement is signed. The choice of location can have significant implications for VAT, taxation, customs formalities, legal documentation and the overall cost of the transaction. Bad planning can result in unnecessary costs.

A vessel's physical location at the time of sale may create tax obligations in a jurisdiction that the seller had not originally considered. A recent example is a vessel sale in a Norwegian port, where the seller discovered that Norwegian VAT registration requirements needed to be considered.

VAT: the first consideration

One of the most important questions is whether the sale will be subject to local VAT. This depends on the applicable country's legislation, the vessel's location, its intended use and whether a specific exemption or zero-rating provision is available.

Some jurisdictions provide favourable VAT treatment for qualifying commercial vessels, particularly those engaged in international trade. However, the conditions can differ considerably. Vessel size, classification, commercial purpose and the buyer's intended use may all be relevant.

Shipowners should not assume that a sale to an overseas buyer, or the fact that the vessel operates internationally, automatically makes the transaction VAT-free.

Location, delivery and transfer of ownership

The contractual place of signing is not necessarily the place of supply for VAT purposes. The vessel's physical location, the commencement of any transportation, the transfer of possession and the contractual arrangements for transferring ownership and risk must all be examined.

Completing a transaction in international waters or arranging delivery in another jurisdiction may have different consequences, but these arrangements must reflect the actual transaction. Simply changing the location stated in the sale agreement will not necessarily change its tax treatment.

Other important considerations

Before selecting a sale location, shipowners should also assess:

• Customs: the vessel's existing customs status, export declarations and evidence of export.

• Corporate taxation: potential capital gains tax, withholding taxes and local registration requirements.

• Legal matters: governing law, jurisdiction, enforceability of the Memorandum of Agreement (MOA) and escrow arrangements.

• Flag and registration: deletion from the existing register and registration under the buyer's flag.

• Financial considerations: local professional fees, port charges, banking arrangements and transaction costs.

• Practical delivery: availability of surveyors, technical inspections, crew, agents and port facilities.

Plan before signing

The most effective approach is to undertake a preliminary tax and legal assessment of potential sale locations before agreeing the MOA. This should compare the expected VAT treatment, registration obligations, transaction costs and practical delivery arrangements in each relevant jurisdiction.

At Mainstay Partners, we believe that careful preparation can help shipowners avoid unexpected tax liabilities, unnecessary administrative burdens and delays at completion.

Choosing where to sell a vessel should be a strategic commercial decision, not simply a consequence of where the vessel happens to be berthed when a buyer is found.