USA - NATIONWIDE: An Introduction to Transportation: Shipping/Maritime: Finance

The Impact on Sale Leaseback Financings of the USTR Notice of Action Regarding Fees on Chinese-Owned Vessels

On April 17, 2025, the Office of the United States Trade Representative (USTR) announced that it will be imposing fees on certain vessels owned, operated or built in China, following its determination in January 2025 that China’s targeting of the maritime, logistics and shipbuilding sectors for dominance is unreasonable and burdens or restricts U.S. commerce. The fees, which commence October 14, 2025, have already had a significant impact on vessel-financing structures, as vessel owners and operators try to understand the particular issue of whether having a Chinese lease financing in place can subject the vessel’s operators to fees when arriving at a U.S. port. In a typical sale leaseback with a Chinese leasing house, the owner of a vessel sells the vessel to the Chinese leasing house and then charters it back, thereby making the Chinese entity (or its subsidiary) the owner of the vessel. As a result, a vessel that is not otherwise owned or operated by a Chinese entity, could be subject to fees, simply by virtue of the financing structure.  

Summary of fees on vessels owned by a “vessel owner of China”

Under Annex I of the formal notice of action published by the USTR under Section 301 of the Trade Act of 1974 on April 17, 2025 (the “Section 301 Notice”), vessels owned (or operated) by Chinese entities entering a U.S. port will be subject to a fee (“Annex I Fees”) based on net tonnage (“NT”), starting at USD50/NT and rising to USD140/NT by 2028. The fee is capped at five entries per vessel per year and applies per rotation of U.S. port calls. For the purposes of the Annex I Fees, a vessel owner is the entity “which is identified as the owner of the vessel and whose name would appear on the Vessel Entrance or Clearance Statement (CBP Form 1300) or its electronic equivalent.” Therefore, indicating who the vessel owner is a self-reporting exercise by the vessel’s operator completing the CBP Form 1300 at port. Unfortunately, however, Form CBP 1300 does not provide guidance or context on how to determine the owner for the purposes of the form. The owner listed on CBP Form 1300 will thus be the presumptive owner for the Annex I Fees.

Annex I also specifically sets out what constitutes a “vessel owner of China” for the purposes of the Annex I Fees in six prongs. There are clear direct elements, such as an entity whose country of citizenship is identified as the People’s Republic of China (PRC), Hong Kong or Macau on the CBP Form 1300, an entity that is organized in any of these jurisdictions or whose headquarters or parent’s headquarters are in any of these jurisdictions; however, there are also more complex elements, such as an entity that is “subject to the jurisdiction or direction” of any of these jurisdictions, including by virtue of 25% of the entity’s voting interests, board seats or equity interests being held “directly or indirectly” by an entity resident, incorporated or controlled by the government of these jurisdictions. Shipowners may therefore attempt to add intermediate holding companies, or redomicile entities in order to avoid direct ownership by these jurisdictions. Ultimately, however, the 25% direct or indirect ownership and control test would likely prevent any such structures from successfully evading the fees. Annex I further enumerates specific entities in China which are “Chinese Military Companies” pursuant to the William M. (“Mac”) Thornberry National Defense Authorization Act for Fiscal Year 2021, some of which include sale leaseback houses.

Key implications and takeaways

One of the most common questions that has been asked recently as a result of the Annex I Fees is who should be reported on CBP Form 1300 as the owner of the vessel. As mentioned above, the owner of the vessel will be reported by the operator. Typically, in sale leaseback financings, the operators contract directly with the ‘demise owner’, or the ‘bareboat charterer’, who was historically the owner but has financed with the leasing company and leased the vessel back. Therefore, if an operator has historically reported the demise owner as the owner on the CBP Form 1300, the question arises as to whether this remains acceptable. Further, operators, as the payor of the Annex I Fees, are now incentivized to report the demise owner to avoid payment of such a fee.

As Annex I is drafted, the granting of a mortgage over a vessel in favor of a Chinese bank alone would not result in a vessel incurring the Annex I Fees, leading some to suggest that subjecting Chinese sale leaseback financed vessels to Annex I Fees is an unintended consequence of the drafting of Annex I. One counterargument to that is that prong (5) of the definition of a “vessel owner of China” specifically includes any entity that is ”controlled by” one of the named Chinese Military Companies, including some which are active in the sale leaseback financing space. For this reason, and others, including the reasoning behind the USTR’s initial determination in January 2025, it is unclear whether, if the USTR addressed this question, it would determine that a vessel whose sole tie to China is its sale leaseback financing should be exempt from the Annex I Fees.

Given the information available at this time, the safest course of action, as some companies have done, has been to unwind sale leaseback financings with Chinese leasing houses, or in other words, buying back the vessel and paying an early termination fee under the bareboat charter. Ultimately, however, owners would need to weigh the benefits of the higher advance rates and potential lower cost typically associated with Chinese sale leaseback financings against the additional fees to which the vessel would be subject when calling on U.S. ports (and to what extent these fees will be for an owner’s account rather than an operator’s). For a vessel that regularly calls on U.S. ports, the fees charged on a Chinese-owned vessel may be substantial enough that a Chinese sale leaseback financing of a vessel no longer makes economic sense, and alternative financing sources may be the most cost-effective approach.