I often hear of the Marshall Islands in connection with MLPs. Where are the Marshall Islands?
The Marshall Islands are located in the Pacific Ocean, east of the Philippines. Most shipping MLPs are considered foreign private issuers and are organized as Marshall Islands LPs.
Which MLPs are organized under the laws of the Republic of the Marshall Islands?
Why are so many marine transportation MLPs organized in the Marshall Islands?
The Marshall Islands act as a flag of convenience for shipping companies throughout the world. So although all shipping MLPs are organized here, the Marshall Islands have a stronger connection to the maritime industry in general than to the MLP space specifically. The reason for this is that a company which does not actually conduct business in the Marshall Islands is exempt from taxes on income and assets. Shipping vessels transporting goods between ports do not generate income within the borders of the Marshall Islands and enjoy this tax advantage. With this benefit, the Marshall Islands has the world’s third largest ship registry.
Since marine transportation MLPs do not conduct business in the US, there are typically limited US income taxes applicable to their companies. This allows them to function as quasi flow-through entities and enjoy some of the same benefits of MLPs, while still being taxed as a corporation. Electing to be taxed as a corporation allows investors to receive a Form 1099 instead of a Schedule K-1, which broadens the investor base given general preference for the simplicity of the former. MLPs taxed as corporations also are not restricted by the qualifying income rules that govern domestic MLPs. Teekay LNG Partners (TGP) is the only Marshall Islands MLP not taxed as a corporation.
So, why these MLPs and not all of them?
An MLP will be taxed on any effectively connected income, which is income received from conducting trade or business in the US. For this reason, MLPs whose assets are in the US would not enjoy the same tax advantages as marine transportation MLPs registered in the Marshall Islands even if they were organized in the same manner.