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News that world class captives are coming to Malta has been a favourite subject among insurance practitioners. Top of the notch names such as Aon, Marsh and McLennan and AIG among others have spotted us on their radar. Certainly this is good news for the financial services industry and augurs well for a number of professional practitioners who have been active to promote the island as competitive.
The attractiveness of the legislation can be measured by the ease that a body corporate licensed in another jurisdiction to carry out any insurance business or to provide insurance management or broking services, may be authorised to continue as a company formed or registered in Malta. The regulator MFSA has appointed the world known Steve Butterworth, a former director of insurance at the Guernsey Financial Services Commission, as their adviser on captives. In fact it was Steve Butterworth who in 1997 was instrumental in introducing the Protected Cell Companies (PCC) legislation as a hybrid type of special vehicle most suited for captives in Guernsey. It comes as no surprise that the financial regulator MFSA is committed to the development of the captive insurance sector, and last year it announced that legislation was being introduced to allow the setting up of Protected Cell Captives (PCC's) within the jurisdiction Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004; Legal Notice 218/2004.
Some may well ask what is a protected cell company and how can it be used to exploit the unique features in Malta? The answer is that the unique qualities of a protected cell company, or PCC, can be thought of as being a standard limited company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole.
In terms of the PCC regulations a ‘Cell Company’ is a company constituted or converted into a cell company having within itself one or more ‘cells’ for the purposes of segregating and protecting the cellular assets of the company in accordance with the regulations. A cell company is a single legal person. A ‘Cell’ is in turn a class of shares within a cell company designated as a cell and created for the purpose of segregating and protecting cellular assets belonging to the company in the manner provided by the regulations. A cell is not bestowed with separate legal personality. Due to its inbuilt flexibility a PCC can provide a means of entry into captive insurance market to entities for which it was previously uneconomic. The overheads of a protected cell captive can be shared between the owners of each of the cells, making the captive cheaper to run from the point of view of the insured.
There is a growing number of PCCs being incorporated worldwide and Malta hopes to attract its fair share in the coming years. As another advantage Malta provides state-of-art EU-complaint legislation that is well drafted not to overburden captives while allowing investors to make use of passporting rights to write business in any EU state. A tangible fiscal benefit is that of an outright exemption from duty under the Duty on Documents and Transfers Act 1993 in respect of any contract of insurance relating to a risk situated outside Malta.
Furthermore, captive management services are also zero rated for VAT purposes under the Value Added Tax Act. A company carrying on affiliated insurance, is taxable at the normal company rate of tax which currently is 35%. However, if such a company underwrites risks situated outside Malta, it is able to operate the foreign income account and non-resident shareholders may benefit from the refund of tax on distributions from this account bringing the effective tax rate to 4.17%.
It is not surprising that the market leaders in captive management are slowly by steadily focusing on the opportunities in the sector available in the island. But what has made captives the flavour of the month? One may say that traditionally captives were in the domain of established centres such as Bermuda, Cayman Islands, Isle of Man, Hong Kong, BVI, some US States, Dublin and Luxembourg. The reason for their success is simple to explain. We notice over the past decades that corporate insurance buyers have determined the value of captives and have found ways to utilize them in developing strategic risk financing programs. Once captive owners saw the numerous advantages that are associated with captives, they rarely returned to the conventional insurance market. They are proven to be the right and cost effective solution for organised insurance services. If anything, they found additional, creative ways to utilize their captives. There is a very competitive market among countries to attract captive insurance companies.
But captive owners were not the only ones to see the opportunities from this alternative risk transfer method. Movement to captives also provided opportunities for many types of service providers. Captives allowed their parent companies to release unique services that were previously provided by a single insurance carrier. Critical insurance services such as administration/management, actuarial, legal, accounting, claims and loss control all had to be included in the captives operations.
Having waxed lyrical about the attributes of captives, one may step back and ask what is a captive insurance company. A captive insurance company is, in its purest form, a subsidiary company formed to insure or reinsure the risks of its parent and/or associated group companies. Captives are usually formed to provide alternative risk management solutions to that of the conventional insurance market. An interesting aspect of the island’s insurance legislation caters for the registration and operation of captive insurance companies which are termed “Affiliated Insurance Companies” (“AICs”). To clarify this term one notes that “Affiliated Insurance” encapsulates the business of an insurance company which is registered in Malta and whose business of insurance is restricted to risks originating with shareholders or connected undertakings or entities. The flexibility of the vehicle can be demonstrated by the ease that AIC s may insure risks originating from a wide range of persons including parent companies, associated or group companies, apart from individuals or other entities having a majority ownership or controlling interest in the AIC, and invariably members of trade, industry or profession associations insuring risks related to the particular trade, industry or profession.
To conclude Malta’s coming of age in the insurance market is being crowned by the attention it is enjoying in the captives sector. For captive insurance companies, the Island has the necessary local expertise to ensure that the formation and running of a captive insurance company can be achieved with maximum ease. Malta is becoming an increasingly attractive domicile for multinational companies in which to form a captive. One and a half years since joining the EU we have taken bold steps towards implementing a robust regulatory regime which is in line with the European Union Insurance Directives. A valiant step has been taken in the right direction, let us hope it will lead us to better fortunes.
gmm@pkfmalta.com
The writer is a partner with PKFMALTA, an audit and business advisory firm.
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