Shipping JOLCOs and environmental regulations: Update

In our previous publication in April 2023, we reported on the recent regulatory changes impacting shipping JOLCOs.  As a result of those changes, a newbuild vessel to be owned through a silent partnership (tokumei kumiai or TK) structure may no longer be eligible for accelerated tax benefits (i.e. “special depreciation”) unless that vessel is certified as an "advanced vessel" complying with specific environmental and IT performance requirements, as more particularly set out in our original article.

Although the new regulations do make it more difficult to benefit from special depreciation, market response to those regulations seems to have been positive, with investors and arrangers proactively looking to adapt to this reform and actively engaging in dialogue to consider the necessary environmental and technological implications for their JOLCO transactions. Perhaps this should come as no surprise, particularly given the increased focus on sustainability and the reduction in carbon intensity of the shipping industry as a whole.  If these conversations keep taking place and there is an open dialogue between shipbuilders, shipowners and financiers, it may well be the case that JOLCOs under the new regime will remain attractive financing structures for more technologically and environmentally advanced vessels, which would be positive news for shipowners looking to finance the transition to a greener shipping industry. 

As to the more regulatory aspects of the new regulations, the amendments function as a part of, and in conjunction with, revisions made to the Maritime Transportation Act of Japan (Act No. 187 of 1949, as amended) (the Act) by a new act promulgated on 12 May 2023 (“Act on Partial Revisions to the Maritime Transportation Act”, Act No. 24 of 2023). In addition, The Ministry of Land, Infrastructure, Transport and Tourism announced that a Cabinet Order was to be promulgated on 2 June 2023, thereby fixing the formal enforcement date for the part of the revisions relevant to the certification of “advanced vessels” to be 1 July 2023. This has the following practical implications in the context of newbuild JOLCOs:

• the new rules will apply to any new-build vessel which is acquired pursuant to a shipbuilding contract or a sale contract dated on or after 1 July 2023; and
• it is anticipated that the grandfathering of the regulations will only apply to vessels which are subject to both a building contract and a sale contract (entered into between the prospective registered owner of the vessel and the Japanese SPC that will act as owner of that vessel under the relevant JOLCO) prior to 1 July 2023 – i.e. the chain of title running from the builder to the Japanese SPC would need to be documented and agreed by such date.

Co-authored by Saori Takahashi.