Flag of convenience (business)
Encyclopedia
In business and commerce, the term flag of convenience is the use of a place, jurisdiction, state or country as a nominal
(in name only) "home base" for one's operations or charter, even though either no or virtually no operations or business are conducted there. It is also used where the organization operates in one place even though nearly all of its customers are from somewhere else. It is a type of jurisdiction shopping.
There are several reasons for doing this.
or Delaware because of favorable corporate governance rules. The reason for this sort of a choice is that, in general, in the United States, a corporation which operates in more than one state (or country) has a particular state where it is incorporated, to which it is a domestic corporation. In all other states where it operates and has filed papers to be allowed to operate, it is a foreign corporation
, and the requirements for corporate governance in the case of a law suit do not use the law where the corporation is sued, but instead, the law where the corporation is a domestic corporation.
For example, because of the provisions on "piercing the corporate veil
" are corporate governance matters, if a corporation is chartered in California, for example, (which has much more creditor friendly provisions permitting this) is sued anywhere, California law applies, but a corporation chartered in Nevada, which operates only in California, is sued in a California court, the California court would use Nevada law in determining what the requirements permitting this, and in this issue Nevada law applies (which is much more supportive of the corporation's interest), even if the corporation only operates in California and has never had any other contact with Nevada and is simply chartered there as a flag of convenience.
for more information on television and radio.
(in name only) "home base" for one's operations or charter, even though either no or virtually no operations or business are conducted there. It is also used where the organization operates in one place even though nearly all of its customers are from somewhere else. It is a type of jurisdiction shopping.
There are several reasons for doing this.
Corporation requirements
The most common use of a flag of convenience is a U.S. corporation being chartered as a domestic corporation in NevadaNevada Corporation
A Nevada corporation is a corporation incorporated under Chapter 78 of Nevada Revised Statutes of the U.S. state of Nevada.Nevada, like the state of Delaware , is well known as a corporate haven...
or Delaware because of favorable corporate governance rules. The reason for this sort of a choice is that, in general, in the United States, a corporation which operates in more than one state (or country) has a particular state where it is incorporated, to which it is a domestic corporation. In all other states where it operates and has filed papers to be allowed to operate, it is a foreign corporation
Foreign corporation
A foreign corporation is a term used in the United States for an existing corporation that is registered to do business in a state or other jurisdiction other than where it was originally incorporated...
, and the requirements for corporate governance in the case of a law suit do not use the law where the corporation is sued, but instead, the law where the corporation is a domestic corporation.
For example, because of the provisions on "piercing the corporate veil
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
" are corporate governance matters, if a corporation is chartered in California, for example, (which has much more creditor friendly provisions permitting this) is sued anywhere, California law applies, but a corporation chartered in Nevada, which operates only in California, is sued in a California court, the California court would use Nevada law in determining what the requirements permitting this, and in this issue Nevada law applies (which is much more supportive of the corporation's interest), even if the corporation only operates in California and has never had any other contact with Nevada and is simply chartered there as a flag of convenience.
Legal Restrictions on operations
Use of a different base of operations than one normally operates within can often be done because of legal restrictions on operations in one area which are avoided by changing the nominal base of operations.Television
See city of licenseCity of license
A city of license or community of license, in American and Canadian broadcasting, is the community that a radio station or television station is officially licensed to serve by that country's broadcast regulator....
for more information on television and radio.
- Television station WPCWWPCWWPCW is a The CW-affiliated television station for Pittsburgh, Pennsylvania that is licensed to Jeannette. WPCW is owned by the CBS Corporation and serves as an affiliate of The CW Television Network for the television market...
is licensed to Jeannette, PennsylvaniaJeannette, PennsylvaniaJeannette is a city in Westmoreland County, Pennsylvania, United States. The population was 10,788 at the 2000 census.-Geography:Jeannette is located at ....
, even though it serves the city of Pittsburgh because no station allocation slots are available for Philadelphia. - During the 1960s, it was noted that San Diego, CaliforniaSan Diego, CaliforniaSan Diego is the eighth-largest city in the United States and second-largest city in California. The city is located on the coast of the Pacific Ocean in Southern California, immediately adjacent to the Mexican border. The birthplace of California, San Diego is known for its mild year-round...
could support another television station, but because of allocations already given to Los Angeles, and the Mexican Government having two channels allocated to it for the neighboring city of Tijuana, there were no channel spaces available, so a Mexican corporation obtained a license from that government to operate XETVXETVXETV is a television station licensed to Tijuana, Baja California, Mexico, serving as the CW Television Network affiliate for the San Diego, California area across the international border in the United States...
, Channel 6, which operates exclusively in English and basically serves the city of San Diego even though it broadcasts from Tijuana. - RKO GeneralRKO GeneralRKO General was the main holding company through 1991 for the noncore businesses of the General Tire and Rubber Company and, after General Tire's reorganization in the 1980s, GenCorp. The business was based around the consolidation of its parent company's broadcasting interests, dating to 1943, and...
was the owner of New York CityNew York CityNew York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
television station WORWWOR-TVWWOR-TV, virtual channel 9 , is the flagship station of the MyNetworkTV programming service, licensed to Secaucus, New Jersey and serving the Tri-State metropolitan area. WWOR is owned by Fox Television Stations, a division of the News Corporation, and is a sister station to Fox network flagship...
, channel 9, when a series of scandals broke involving its parent company, General TireGeneral TireThe General Tire and Rubber Company is an American manufacturer of tires for motor vehicles.General Tire was founded in 1915 in Akron, Ohio by William F. O'Neil. Products included the low-pressure "General Balloon Jumbo" and the "Dual 90" tire...
. As part of the settlement of issues, Channel 9 moved from New York City to Secaucus, New JerseySecaucus, New JerseySecaucus is a town in Hudson County, New Jersey. As of the 2010 United States Census, the town population was 16,264. Located within the New Jersey Meadowlands, it is the most suburban of the county's municipalities, though large parts of the town are dedicated to light manufacturing, retail, and...
in 1983 in order to give New Jersey its first commercial VHF television station since 1962 (NewarkNewark, New JerseyNewark is the largest city in the American state of New Jersey, and the seat of Essex County. As of the 2010 United States Census, Newark had a population of 277,140, maintaining its status as the largest municipality in New Jersey. It is the 68th largest city in the U.S...
's original independent WATV 13WNETWNET, channel 13 is a non-commercial educational public television station licensed to Newark, New Jersey. With its signal covering the New York metropolitan area, WNET is a primary station of the Public Broadcasting Service and a primary provider of PBS programming...
had become what is now WNETWNETWNET, channel 13 is a non-commercial educational public television station licensed to Newark, New Jersey. With its signal covering the New York metropolitan area, WNET is a primary station of the Public Broadcasting Service and a primary provider of PBS programming...
). Nonetheless, the station's market is almost exclusively the New York City area. Channel 9's renewal was approaching, and at the time, a federal law had been passed that gave automatic renewal to any station that moved to a state that did not have a TV station. The only states this applied to were New Jersey and Delaware, so to get around its licensing problems, RKO moved its station from New York to New Jersey to take advantage of the automatic approval of renewal.
Fireworks
- The tourist trapTourist trapA tourist trap is an establishment, or group of establishments, that has been created with the aim of attracting tourists and their money...
, South of the BorderSouth of the Border (attraction)South of the Border is a rest stop and roadside attraction on Interstate 95 and US Highway 301/501 between Dillon, South Carolina and Rowland, North Carolina. It is named "south of the border" being south of the U.S. state of North Carolina...
, is located in Dillon, South CarolinaDillon, South CarolinaDillon, South Carolina, the county seat of Dillon County, was established on December 22, 1888. The name of the city came from James W. Dillon, who was a key component in bringing a railroad through this area of the state, which led to development and formation of the County. Dillon’s population...
, about 100 meters from the border between North CarolinaNorth CarolinaNorth Carolina is a state located in the southeastern United States. The state borders South Carolina and Georgia to the south, Tennessee to the west and Virginia to the north. North Carolina contains 100 counties. Its capital is Raleigh, and its largest city is Charlotte...
and South CarolinaSouth CarolinaSouth Carolina is a state in the Deep South of the United States that borders Georgia to the south, North Carolina to the north, and the Atlantic Ocean to the east. Originally part of the Province of Carolina, the Province of South Carolina was one of the 13 colonies that declared independence...
, and sells tremendous amounts of fireworks to people from other states, including North Carolina, where such sales are illegal. - It is illegal in the CommonwealthCommonwealthCommonwealth is a traditional English term for a political community founded for the common good. Historically, it has sometimes been synonymous with "republic."More recently it has been used for fraternal associations of some sovereign nations...
of PennsylvaniaPennsylvaniaThe Commonwealth of Pennsylvania is a U.S. state that is located in the Northeastern and Mid-Atlantic regions of the United States. The state borders Delaware and Maryland to the south, West Virginia to the southwest, Ohio to the west, New York and Ontario, Canada, to the north, and New Jersey to...
for residents of the state to have fireworks and it is illegal to sell fireworks in Pennsylvania to a resident, however, it is legal to sell fireworks to non-residents of Pennsylvania who are buying them to take them out of the state, thus a number of fireworks stores in Pennsylvania operate to sell fireworks only to non-residents, who must show an out-of-state license. - A number of small towns in California permit some fireworks to be sold, while the nearby larger communities forbid them, so residents will often visit small towns nearby to buy fireworks to take home and use.
- Washington, D.C permits the sale of fireworks while the neighboring jurisdictions of MontgomeryMontgomery County, MarylandMontgomery County is a county in the U.S. state of Maryland, situated just to the north of Washington, D.C., and southwest of the city of Baltimore. It is one of the most affluent counties in the United States, and has the highest percentage of residents over 25 years of age who hold post-graduate...
and Prince George'sPrince George's County, MarylandPrince George's County is a county located in the U.S. state of Maryland, immediately north, east, and south of Washington, DC. As of 2010, it has a population of 863,420 and is the wealthiest African-American majority county in the nation....
counties in MarylandMarylandMaryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
do not; in some cases, police from those jurisdictions would watch fireworks stands outside of the state, collect license tagVehicle registration plateA vehicle registration plate is a metal or plastic plate attached to a motor vehicle or trailer for official identification purposes. The registration identifier is a numeric or alphanumeric code that uniquely identifies the vehicle within the issuing region's database...
numbers of cars that visited them, and if the person drove into Maryland, would stop and ticket them for having illegal fireworks.
Alcohol
- In some parts of the United States the local community has banned the sale, and possibly, the use of alcohol in a so-called dry countyDry countyA dry county is a county in the United States whose government forbids the sale of alcoholic beverages. Some prohibit off-premises sale, some prohibit on-premises sale, and some prohibit both. Hundreds of dry counties exist across the United States, almost all of them in the South...
. In this case, a nearby county which is not dry will have a liquor store which is much larger than that county could actually support because it also provides alcohol for the residents of the (one or more) dry counties near it. - Very high excise taxes on alcohol in the Nordic countriesNordic countriesThe Nordic countries make up a region in Northern Europe and the North Atlantic which consists of Denmark, Finland, Iceland, Norway and Sweden and their associated territories, the Faroe Islands, Greenland and Åland...
has resulted in considerable reimportation of alcohol and conflicts with European UnionEuropean UnionThe European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
legislation. For example, Åland, an autonomous province of Finland, declined membership in EU. The consequence is that it is not a part of the EU VATValue added taxA value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
area and ships stopping at MariehamnMariehamnMariehamn is the capital of Åland, an autonomous territory under Finnish sovereignty. Mariehamn is the seat of the Government and Parliament of Åland, and 40% of the population of Åland live in the city...
, Åland can sell tax-free alcohol, much of which is often Finnish-produced.
Excise goods
- Items which are subject to heavy taxes at point of sale (such as motor fuels, alcohol and tobacco, perfumes and luxury items) often are offered for sale at border crossings. Some are the staples of "duty-free shopDuty-free shopDuty-free shops are retail outlets that are exempt from the payment of certain local or national taxes and duties, on the requirement that the goods sold will be sold to travelers who will take them out of the country...
s", which sell solely to clients who are leaving the country and who otherwise would need to pay a higher price for the identical commodities at their intended destination. One of the rare instances in which a Petro-CanadaPetro-CanadaPetro-Canada was a crown corporation of Canada in the field of oil and natural gas. It was headquartered in the Petro-Canada Centre in Calgary, Alberta. In August, 2009, Petro-Canada merged with Suncor Energy, a deal in which Suncor investors received approximately 60 per cent ownership of the...
station has operated abroad was to serve a busy interstate highway at a Québec border crossing near St. Albans/Jay Peak, VermontSt. Albans, VermontPlaces named St. Albans, Vermont:*St. Albans , Vermont, town in Franklin County, Vermont, established in 1763**St. Albans Raid, 1864*St. Albans , Vermont, city in Franklin County, Vermont, established in 1902...
.
Merchandising
- Due to opposition from residents in the community in which it would normally operate, some operators of big box stores will move into a small community and operate there, even though the general customer base of the store is the much larger (intended) community. Builders of large factories and shopping centres have often chosen locations just outside a community's city limits to take advantage of more favourable municipal tax ratesProperty taxA property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
or less stringent urban planningUrban planningUrban planning incorporates areas such as economics, design, ecology, sociology, geography, law, political science, and statistics to guide and ensure the orderly development of settlements and communities....
restrictions in an adjacent municipality or semi-rural area.