Why do Cruise Ships Sail Under Foreign Flags?

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If you’ve taken a cruise or visited a cruise port, you’ve likely noticed that most ships have a foreign flag.

According to Cruise Lines International Association, over 90% of commercial vessels that call in U.S. ports fly foreign flags.

This article will explore why do cruise ships sail under foreign flags and the benefits for cruise lines.

What Does it Mean for A Ship to be “Flagged”?

Flags on the Mast of a Cruise Ship

According to international law, every merchant ship must register in a country. The country of registration is known as the vessel’s “flag state.”

If you’ve visited a port, you’ve likely noticed that ships have their name on the back and the name of a country or major city. The name identifies which country the ship is registered in, also known as the ship’s “flag state.”

You might be surprised to learn that merchant ships don’t need to register in the country where they are homeported or where their operator is registered.

The ship’s registration gives the vessel its “nationality.” Vessels can be flagged in any country that accepts their registration.

There’s no requirement for ships to register in the same country as the ship’s operator or the country where they are homeported.

The ship’s flag state also exercises regulatory control over the vessel. According to Maritime Law, the flag states must perform regular inspections, issue safety and environmental protection documents, and certify the ship’s equipment and crew members.

The laws of the flag state are used to settle private maritime disputes.

Flagged ships are allowed to travel to any country where citizens of the flag state can travel.

Why do Cruise Ships Sail Under Foreign Flags?

Rear view of Royal Caribbean's Enchantment of the Seas sailing under the Nassau, Bahamas flag

Cruise ships sail under foreign flags to benefit from more relaxed laws and regulations. Flying under a foreign flag provides cruise lines with more favorable regulations for employment, taxes, insurance, construction, maintenance, and more.

Ships are international in nature, often completing sailings between dozens of countries throughout their lifetimes. Their global nature makes it sensible to register vessels in foreign countries that provide operational benefits.

This practice is known as operating under a “flag of convenience.”

Many large corporations use a similar tactic by registering in one country while their primary operations are in another.

Common foreign flags include Panama, Bermuda, and the Bahamas.

A short history lesson: The Passenger Vessel Services Act of 1886 forbids passenger ships from sailing under the U.S. flag unless the vessel is US-built, owned, and operated. Additionally, U.S.-flagged vessels must comply with U.S. employment and tax laws and operate with an entirely American crew.

Further, only US-flagged vessels can transport passengers directly from one U.S. port to another. As a result, ships registered in foreign countries must call in a foreign port before returning to the U.S. This is why so many ships sail to Nassau or Canada.

The U.S. government enacted the laws to protect the U.S. shipbuilding industry and prevent foreign competition.

However, these restrictions make it costly to operate cruise ships flagged in the U.S.

Employment

One of the main reasons that cruise ships sail under foreign flags is that it provides the ability to hire employees worldwide.

According to Business Insider, the median annual earnings of cruise ship workers are around $16,000 per year.

While crew members receive free accommodations and food, they work notoriously long hours with few days off.

By law, ships registered in the U.S. must hire American citizens.

Crew members on cruise ships come from around the globe. Many members are from countries other than the U.S.

However, it’s common to find that the musicians, performers, and officers come from countries with higher wage requirements, such as the US, Canada, or Europe.

Cruise lines hire an international crew because it allows them to pay lower wages than they would otherwise pay U.S. citizens. According to a report from the U.S. Department of Transportation, US-flagged ships have a wage cost that is 5.3 times higher than foreign-flagged ships.

You won’t notice it when you cruise, but staff with similar jobs are often paid different wages based on the country that they come from.

Additionally, international crew members can work longer hours with fewer breaks and days off.

Taxes

One of the primary reasons for a cruise ship to fly under the flag of foreign countries is to take advantage of tax savings.

And it’s not just the ships that sail under a foreign state. Many major cruise lines are incorporated as foreign entities to take advantage of lower tax rates.

Along with employee wages, taxes are one of the largest expenses for cruise lines. By registering their ships in foreign countries, cruise lines can save millions of dollars on taxes.

Cruise lines take advantage of Section 883 of the Internal Revenue Code, which states, “gross income derived by a foreign corporation from the international operation of ships or aircraft shall not be included in the gross income of such foreign corporation.

In other words, foreign-owned cruise lines are exempt from U.S. federal tax if they earn income from the operation of ships, the registered country offers similar exemptions to U.S. vessels, and the company meets specific ownership rules.

Here’s where the major cruise operators are registered:

  • Royal Caribbean Group is registered in Liberia and based out of Miami, Florida.
  • Carnival Corporation & plc is dual listed. Carnival Corporation is incorporated in Panama and headquartered in the U.S., while Carnival plc is based in the U.K.
  • Norwegian Cruise Line is registered in Bermuda and operates out of the United States.
  • MSC Cruises is the largest private cruise line. They are based in Switzerland.
  • Virgin Voyages has headquarters in Plantation, Florida

Operating Costs and Insurance

You might be surprised to learn that the benefits of foreign flags extend to the vessels’ construction, maintenance, and insurance.

For a cruise ship to sail under a U.S. flag, it must be built in the U.S. This presents a problem as U.S. shipyards have little experience constructing cruise ships. U.S. shipyards primarily build commercial and military vessels.

Most cruise ships are constructed in Europe.

Another requirement of US-flagged vessels is the requirement for maintenance, servicing, and refitting to be performed at an American shipyard.

Any repairs completed in a foreign shipyard are subject to a 50% ad valorem duty—an extraordinarily high fee considering that ship maintenance can cost upwards of hundreds of millions of dollars.

Even if the vessel owner had the intention to complete all maintenance and servicing at American shipyards, emergencies could happen at any time.

If the ship cannot safely sail back to America for repairs, it will have to undergo servicing at a foreign shipyard. The cruise line will be hit with a 50% ad valorem duty following the completion of repairs in a foreign country.

Finally, insurance and liability are other major expenses for cruise lines. With thousands of passengers and crew sailing at any given time, cruise lines need to be prepared for the unexpected.

According to the Department of Transportation, insurance and liability costs are four to five times higher for US-flagged vessels.

Weddings/Regulations

Bride and groom walking in the distance with bouquet in front on a deck of a cruise ship

Weddings are a big moneymaker for cruise lines.

It’s not just the cost of the wedding that cruise lines love. Weddings bring lots of cabin bookings full of passengers who spend more than the average passenger. Think drink packages, gambling, room service, and specialty dining reservations.

Weddings on a cruise ship can be cheaper than those on land. Plus, nothing beats the incredible view, ambiance, and photographs from a wedding at sea.

Most cruise lines offer the choice of getting married on the ship or at the port.

In 2011 Cunard Line transferred the registration of all its ships to Bermuda so that captains could marry couples at sea.

In 2017 Celebrity Cruises registered all of its ships in Malta after the country legalized same-sex marriage. By using Malta as a flag of convenience, Celebrity Cruises can offer same-sex weddings onboard their cruise ships.

Drawbacks of Using Flags of Convenience

Sailing under a flag of convenience isn’t without drawbacks.

The drawbacks of foreign flags became very apparent during the coronavirus pandemic.

As a result of the global health crisis, an industry-wide pause in sailing operations meant cruise lines faced a sudden halt in operations. The pause meant little to no revenue for cruise operators – many of which struggled to stay afloat.

While many industries, including hotels and airlines, received government bailouts and subsidies, cruise lines were excluded due to their foreign status.

While the cruise line’s operated as foreign entities to avoid taxes and U.S. employment laws, it also meant they couldn’t be included in a bailout package intended to support domestic businesses.

As a result, cruise lines issued large amounts of stock, took on additional debt, and scrapped old vessels to stay solvent during a nearly two-year pause in sailing operations.

Additionally, you may notice that cruise ships always make a stop in a foreign country. While this makes sense for the Caribbean, the Mediterranean, and Australian itineraries, it might seem odd that Alaskan and New England sailings always have stops in Canada?

The U.S. passenger Vessel Services Act has a unique clause that prevents foreign-flagged ships from transporting passengers from one U.S. port to another.

The Act states that only US-flagged vessels can transport passengers directly between U.S. ports. Ships sailing under a foreign flag must stop in a “distant foreign port” before returning passengers to the U.S.

As a result, almost every cruise itinerary that departs and returns to the U.S. must call in a foreign port.

Alaskan cruises call in Victoria or Vancouver, Canada, and New England sailings call in Bermuda or Eastern Canada before returning to the United States.

This requirement is a minor inconvenience for cruise lines during regular sailing times. However, when the Canadian government extended its ban on cruise ships, it meant that cruise ships would not be able to sail Alaskan itineraries.

Although the U.S. Center for Disease Control had lifted the “No Sail Order,” Alaskan sailings could not call in Canadian ports. The inability to call in Canada effectively halted sailings for several popular cruise itineraries until 2022, when the ban lifted.

How Can a Cruise Ship Fly a Flag of Convenience?

The registration process for obtaining a flag of convenience is surprisingly simple.

Closed Registries

Countries with a closed registry require that the ship must be owned and/or constructed by the country to sail under the flag.

Closed registries are the most common ship registrations. However, many cruise lines avoid registering ships under closed registries as they are the most restrictive and typically result in higher operating costs.

Open Registries

Countries with open registries allow almost anybody to register a ship in that country, with very few restrictions and regulations.

In some countries, registering a ship is as easy as filling out an online form.

Are There Any U.S. Flagged Cruise Ships?

Norwegian Cruise Line's Pride of America US-flagged cruise ship sailing in Hawaiian waters
(Photo Credit: Norwegian Cruise Line)

At the time of this writing, there is only one US-flagged cruise ship, Norwegian Cruise Line’s Pride of America.

The vessel was initially ordered by American Classic Voyages and financed by U.S. government loans. The Mississippi shipyard halted construction on Pride of America after the owner filed for bankruptcy.

The U.S. government decided to sell the ship to recoup its money. After some negotiation, they reached a deal with NCL, which granted the cruise line an exemption allowing it to finish construction in Germany and still fly under the U.S. flag.

Thanks to its exempted status, it doesn’t have to call in foreign ports before returning to the U.S. As a result, Pride of America is the only cruise ship offering year-round Hawaiian sailings.

When Did Foreign Flags Start?

Foreign flagged vessels first appeared in the 1920s. Under prohibition laws that began in 1920, passenger vessels could not legally serve alcohol.

The law put American passenger ships at a substantial competitive disadvantage over foreign cruise ships, which could still serve alcohol to guests.

Cruise ships registered in foreign countries with relaxed drinking laws to get around prohibition laws.

The benefits of sailing under a foreign flag went beyond serving alcohol. Ship owners benefited from lower taxes, fewer restrictions, access to cheaper labor, and more.

Although prohibition ended in 1933, many cruise companies continued flying foreign flags.

In a way, the prohibition kickstarted the process of flying flags of convenience.

Final Thoughts

It’s no secret that cruise lines receive benefits when sailing under a foreign flag.

The opinion on flying flags of convenience is mixed.

Many people argue that it allows cruise lines to underpay crew, make staff work long hours, avoid paying taxes, and commit crimes.

However, the cruise industry claims that the money saved is passed down to consumers through lower cruise fares. They argue that the cruise industry wouldn’t exist without it.

Cruise lines point out that they provide employment opportunities to people from poorer countries when it comes to employment.

While cruise ship workers’ salaries are far lower than the average American, the wages are often higher than if they were to find work in their home country. Further, they are provided free food and accommodations and several other perks.

It’s hard to say which side of the argument is correct.

I do know that it won’t be changing any time soon.

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Victoria

I love to travel, see new places, and meet new people. I have been lucky enough to travel on multiple continents, as well as several cruise lines. I am passionate about sharing my experience with readers.

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