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Liberia – “Flag of Convenience” Tax Haven 

Liberia has been a popular tax haven for registering ships for over 40 years. Found on the western coast of Africa, Liberia boasts a merchant shipping fleet more than three times the size of the United States. Liberia was founded in 1847 by freed American slaves with much help from the USA. Monrovia, its capital, was names in honor of President James Monroe, the 5th President of the United States. Liberia’s Constitution and government are patterned after that of the United States, but Liberia has only one political party. Recent civil war has made Liberia a poor choice to domicile a shipping company, and one would do best to wait until the current political conflict is over. 

Political Stability 

Liberia’s population consists of 16 indigenous ethnic groups, each with its own language, as well as the English-speaking Americo-Liberians. The largest groups are the Kpelle (19% of the population), the Bassa (14% of the population), and the Gio, Kru, Grebo, Mano, and Loma. The Americo-Liberians, who constitute only 5% of the population, are descendants of blacks who migrated to Liberia from the New World, mostly from the United States, between 1820 and 1865. The Americo-Liberians dominated Liberian society until the military coup of 1980 and 1965. The Americo-Liberians dominated Liberian society until the military coup of 1980. An earlier (1944) program of integration designed to reduce the imbalance had proved largely ineffective. After the coup, the government was dominated by the Krahn, allied with the Mandingo. After civil war began in late 1989, the army slaughtered many Gio and Mano, inflaming ethnic tensions in a nation long relatively free of tribal conflict. Liberia is officially Christian, but a majority practice traditional religions, and there is a significant Muslim minority. 

Of the country’s urban population, almost half live in the area of Monrovia, the capital and largest city, which was badly damaged during the civil war. Earlier, Monrovia and the mining centers in the interior experienced rapid growth due to internal migration from rural areas. 

Education was formerly provided by Christian missions, but most schools are now government operated. Although education is free and compulsory between the ages of 6 and 16, less than half of all school-age children attend, partly because of a teacher shortage. The University of Liberia (1862) is in Monrovia. 

Liberia is often called a flag of convenience” haven for the registration of ships. Ship owners from around the globe register their ships here because Liberia does not tax foreign source shipping income of non-resident Liberian registered corporations. Exemption of shipping income is authorized in the Liberian Business Corporation Act of 1977. 

Like Panama, Costa Rica, Hong Kong, and Gibraltar, Liberia’s tax system is said to be territorial. Only domestic source incomes earned within the country is taxable. While there are no guarantees in the Liberian Code against the future imposition of income taxes (as in the Cayman Islands), the exemption for foreigners of non-resident Liberian companies will likely remain indefinitely. 

Reciprocal Tax Exemption Agreements 

IRC §883(a) exempts from taxation U.S. source earnings of a foreign ship or aircraft when the earnings are derived from the operation of a ship documented or aircraft registered under the laws of a foreign country, and if the foreign country grants an equivalent exemption to U.S. citizens and U.S. domestic corporations. The exemption only applies to international shipping operations that begin or end in the United States. Profits arising from a route that begins in, say New York and ends in Miami are not entitled to the exemption. Today, Reciprocal Tax Exemption Agreements exist with Panama, Liberia, Cyprus, and the Bahamas. In addition, the IRS has recently ruled that the corporate laws of the Cayman Islands meet their criterion for the Reciprocal Tax Exemption. 

About 35% of the world’s merchant fleet is registered with flag of convenience nations, up from about 26% ten years ago. Flag of convenience registries have competitive licensing and registration fees and offer additional incentives through tax exemptions and amiable employment and corporate regulations. Vessels so registered are subject primarily to the rules and regulations of the maritime authority under which they are registered. Most countries restrict foreign vessels from domestic shipping, and restrict international business through cargo sharing agreements. 

Ship Registration 

Liberia has operated a flag registration since 1948. Registering a ship in Liberia is easy and straightforward. You don’t have to fly to Liberia to form a corporation or register a ship. A Liberian Trust Company with correspondents in New York and Zurich can handle all the formalities. Because Liberia’s corporate law is modeled after Delaware Law, they are easily understood by most Americans. 

The procedure generally followed goes like this. The instructions for incorporation are given by the client to a New York service company, which relays the information by cable to Liberia. Model articles of association (by-laws) are generally supplied at a modest price, and a company can be formed in as little time as 48 hours. A cable from Liberia notifies the client that the company has been registered on such and such a date, and you are officially in business. 

Some people believe Liberia’s ship registration service is now the largest in the world in terms of gross tonnage, and its lead will likely increase over its archrival Panama. There are no restrictions on crew nationality or routes, or on charter, mortgage, or transfer of vessels. 

The Liberian maritime regulations require Liberian ownership of Liberian registered vessels. This is complied with by forming a Liberian corporation, which then becomes the registered owner of the vessel. There are no restrictions on the nationality of shareholders, directors, or officers, and complete anonymity is available. There are no statutory annual corporate filing requirements. Income from the operation of vessels is exempt from local Liberian income taxes, unless the vessel engages exclusively in domestic Liberian traffic. There are no exchange controls on shipping income. 


It costs about $700 to register a company in Liberia, with an annual license fee of $250 (up from $100) payable to the government after that. It is required that you maintain a registered business agent in Liberia, and the Liberian Trust Company (in NYC or Zurich) that handled your incorporation can provide you with an agent for a nominal sum. 

There is no requirement that you or any company director be physically present in Liberia at any time. If you need a nominee director (the company ordinarily has three), the Liberian Trust Company will provide them at no extra charge. 

There are no minimum capital investment requirements to start a Liberian company, but to maintain non-resident domestic corporation status at least 75% (previously 50%) of the company shares must be owned and controlled by non-residents. 

Liberia uses the U.S. dollar for its currency, with Liberian coins. There are two income tax treaties with Sweden and West Germany in force. 

No Bank Secrecy Laws 

Liberia has no special bank secrecy laws like other tax havens, but this is not a deterrent as few Liberian offshore corporations actually handle their banking transactions within Liberia’s territory borders. Moreover, there is no requirement that they must bank in Liberia. 

Corporate records are available for public inspection but there is no requirement that the real beneficial owners of the company be publicly disclosed. 

Liberia has a vested interest in keeping its status as a haven for shippers upright. Liberia derives substantial revenues from annual fees. The annual fee required of every ship registered in Liberia to help finance Liberia’s marine safety program was $725 in 1980, plus an additional one-cent per net registered ton. 

Great American Shippers 

Daniel K. Ludwig (a.k.a. the “tanker Man”). Thirty years ago, Daniel K. Ludwig was thought to be the wealthiest American with an estimated net-worth of over $2,000,000,000. Little is known about this titan of industry, as Ludwig always kept a low profile, never granted press interviews, and avoiding photographers like the plague – going about his business much like the reclusive Howard Hughes had done. 

Daniel Ludwig’s company, National Bulk Carriers, was once thought to run the largest independent tanker fleet in the world, bigger than even Aristotle Onassis. Ludwig began his career buying repossessed tankers that bankers had put up for auction, and tankers that were ready for the scrap yard but still had a lot of life left in them. In time, his shipping empire grew to mammoth proportions. 

Keeping his offices up on Avenue of the Americas in Manhattan for years, D.K. Ludwig has just recently passed away. He was over 90 years of age at the time of death. His death, as was his life, may forever be masked in mystery. It is believed a son or daughter has taken over the business. 

Ted Arison is the principal owner of Carnival Cruise Lines, with headquarters in Panama and Biscayne Boulevard in Miami, Florida. Carnival Cruise Lines, Inc. was incorporated under the laws of Panama in November 1974, and today is the world’s largest cruise line based on number of passengers. Carnival operates seven ships servicing the Caribbean, Mexican Riviera, and the Crystal Palace Hotel & Casino in Nassau, Bahamas. Carnival recently acquired a luxurious Cable Beach Hotel in Nassau and HAL Antillen in the Netherlands Antilles. 

Ted Arison owns about 75% of Carnival’s Class “A” stock. His son Micky Arison is Chief Executive Officer. Carnival’s revenues reached $1,375,000,000 in 1990. Three new Super liners are currently under construction and should begin twice weekly service in 1990 and 1991. 

A Controlled Foreign Corporation (CFC) is entitled to the benefits of a Reciprocal Tax Exemption Agreement under new IRC §883(c)(2), but this is not a useable loophole U.S. shippers exploit because The tax Reform Act of 1986 repealed Code §954(b)(2), and now foreign base shipping income earned by a CFC is classified as FPHCI (Subpart F), and taxable under new IRC §954(b)(2) & (g). U.S. shareholders in a CFC must input the offshore shipping profits and include them on their tax returns. 

United States Exchange-of-Note-Agreements 

Aside from the 36 or so bilateral income tax treaties with other nations, which provide tax exemptions for shipping an aircraft operations to residents of both countries, the United States has entered 20+ Exchange-of-Note-Agreements with various other foreign countries. These E-O-N Agreements do not require Senate ratification to become operative because Section §872(b) and §883(a) of the Internal Revenue Code provides for the exemptions simply on the basis that the foreign country provide areciprocal exemption to U.S. corporations and citizens. 

The framework for the exclusion of shipping income from U.S. taxes has its roots in the Revenue Act of 1921 some 68 years ago. The exclusion has stood unscathed since the Revenue Act of ’21. According to the Senate Finance Committee of the 67th Congress, in an effort to avoid mass confusion which would result if all countries were to levy their own tax rates on port-of-call shippers, and in view of the fact there was no accurate way to compute accurately a foreign shipper’s U.S. source profits, Congress thought it best to exempt shipping profits entirely. 

IRC §883(a) 

Under IRC §883(a) U.S. source earnings of a foreign ship or aircraft are exempt from federal taxation when the earnings are derived from the operation of a ship documented or aircraft registered under the laws of a foreign country, and the foreign country grants an equivalent exemption to the U.S. citizens and U.S. domestic corporations. Today, exchange of note agreements exist with at least three tax havens, i.e., Panama, Liberia and the Bahamas. 

Tax Reform Act of 1986 Adds “New” Section §883(c) 

The Tax Reform Act of ’86 added new Section §883(c) to the Code. IRC §883(c) states that the exemption will not apply to any foreign corporation if 50% or ore of the value of the stock of such company is owned by individuals who are not residents of such foreign country or another foreign country meeting the E-O-N requirements. Also excluded from the E-O-N benefits are Controlled Foreign Corporations as defined under IRC §957(a). One-way to explain how these provisions operate with an example: 

Example #1: Fifty-one percent of Bahamian cruise line company X shares are owned by Bahamian resident Y. Shipping Company X has an office in N.Y.C. and Miami. Its cruise liners regularly enter U.S. ports to pick-up customers for round trip voyages to foreign ports. The income from U.S. customer receipts are excluded from Bahamian company X’s gross income for purposes of federal income taxes under IRC §8838(a) because the Bahamas have a reciprocal E-O-N agreement with the U.S. It makes no difference that the Bahamian company has an office in N.Y., or is “carrying on a trade or business in the United States”. Its shipping profits will not be subject to federal income tax. Neither will it be subject to the new “4% gross basis tax” explained in example #3 below. 

Conversely, a U.S. shipper flying the U.S. flag (i.e., a U.S. registered ship) would owe U.S. taxes on its shipping income, the same as any U.S. corporation doing business within the United States. IRC §883 and IRC §872(b) (for individuals) exempts foreign corporations and non-resident aliens from U.S taxes. IRC §883 does not ascribe to exempt U.S. corporations from federal income taxes. 

Residency is a prerequisite to get the exemption under IRC §883. The new Technical & Miscellaneous Revenue Act of 1988 states that only resident individuals who own 50% or more of the Bahamian ship company will be permitted the exemption. Moreover, a citizen of a foreign country that is resident in the country with a E-O-N agreement will qualify for the exemption, even if his home country does not have an E-O-N agreement with the U.S. 

The new tax law, denies the Reciprocal Tax Exemption if 50% or more of the value of stock in the corporation is owned by individuals who are not residents of such foreign country or another foreign country having a Reciprocal Tax Exemption Agreement. This residency requirement, leaves little room for Americans to qualify for the same tax benefits offered the foreigner. Is it possible for American shippers to obtain the same tax relief offered foreigners operating in a tax haven? 

The only logical solution appears to be to form a non-controlled foreign company with no U.S. shareholders (i.e., no 10% voting stockholders) and avoid CFC status, and either take the company public to qualify for the Reciprocal Tax Exemption, or satisfy the foreign owner residency requirement under IRC §883(c)(1). 

According to Tax Management, the foreign residents must be “individual owners” for the reciprocal exemption to apply. But, IRC §883(c)(B) says any stock owned in another corporation, which is owned directly, or indirectly by a corporation meeting the requirements of subparagraph “A” (i.e., the publicly traded company) shall be treated as owned by individuals who are resident of a foreign country in which the corporation meeting the requirements of subparagraph “A” is organized. Using two holding companies organized in the same tax haven should be considered, but one of the offshore companies must be brought public. 

Exception for Publicly Traded Stock (Boom or Bust?) 

Prentice-Hall (November, 1988) writes: The new (’88) law modifies the publicly traded exception to the residence-based requirement under IRC §883(c). The change provides that a foreign corporation qualifies for the reciprocal exemption if it’s organized in a country that exempts U.S. corporations from tax and the foreign corporation’s stock is primarily and regularly traded on an established securities market in that country, another foreign country that grants U.S. corporations the appropriate exemption, or the United States.

In addition, if stock of one foreign corporation (organized in a country that exempts U.S. corporations from that country’s tax) is owned by a second publicly traded corporation (organized in either the same foreign country, a second foreign country that exempts U.S. corporations from that country’s tax, or the United States), and the second corporation’s stock is primarily and regularly traded on an established securities market in its country of organization, another foreign country that grants U.S. corporations the appropriate exemption, or the United States, the new law treats the stock of the first corporation as owned by individuals who are resident in the country in which the second corporation (that is the shareholder) is organized.” - [word for word from the nation’s top publishers of U.S. tax laws]. 

Example #2: Four foreign corporations own all the stock of another foreign corporation. All five corporations are organized in countries that exempt U.S. corporations from tax. The stock of the first four corporations is primarily and regularly traded on established securities markets in their respective countries. Result: Each of the four corporations’ stock will be treated as owned by individuals resident in the four corporations’ respective countries of organizations. (The same conclusion would follow if the stock of one or more of the first four corporations were primarily and regularly traded on an established U.S. securities market, or a foreign securities market that exempts U.S. corporations from tax). Because more than 50% of the value of the fifth corporation’s stock is considered owned by residents of countries that exempt U.S. persons from their tax, the fifth corporation is eligible for the reciprocal exemption. 

The publicly traded stock exception allows any publicly traded Bahamian holding company (trading on the NASDAQ or other exchange) to avail itself of the exemption under IRC §883. Thus, Americans (and foreigners) can operate an international shipping company free from U.S. federal income taxes, and free from the new 4% gross basis tax. 

New 4% Gross Basis Tax 

The TRA ’86 enacted a gross basis 4% tax on certain transportation income of foreign persons. This tax was intended to apply to shipping income treated as 50% U.S. source, i.e., income where the shipment (or trip) ends or begins in the U.S. Shipping income to which the 4% tax applies is the same income eligible for the reciprocal exemption of IRC §883(a), thus the 4% tax does not apply when a company satisfies the Reciprocal Tax Exemption requirements. 

Example #3 All the stock in Bahamian cruise Line Company X is owned by publicly traded Bahamian company Y, which trades on the NASDAQ. Bahamian company Y is a closely held non-controlled foreign public corporation owned by Americans T & S. In the month of January, 1990 Bahamian cruise customers in Miami and sails to ports in the Caribbean, returning only to drop off and pick up new customers. Each customer pays $800 for his ticket. The total revenues for the month of January, 1990 amount to $4,000,000. This $4,000,000 is not subject to the USA’s federal income tax (28% rate in 1990), and is also not subject to the new 4% gross basis tax (which would amount to a tax of $160,000). Both Bahamian company Y and company X are entitled to the exemption under IRC §883. Bahamian company X is entitled to the exemption because its parent company is publicly traded on a U.S. stock exchange. 

It isn’t necessary to use 2 Bahamian holding companies to procure the “reciprocal exemption”. One publicly traded Bahamian company X would be enough. However, to avoid the CFC provisions under IRC §951, it might be prudent to use two foreign companies (or one company and a trust).

(Courtesy of New Providence Press: Tax Havens of the World).

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