Captive Insurance
The use of Protected Cell Companies (PCC) is perhaps one of the most significant developments in the field of corporate finance. Maltese law has recently introduced regulations, which allow the PCC structure to be adopted by regular Insurance Companies, Insurance Brokers and Insurance Managers alike.
Introduction
The Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004 (‘PCC Regulations’) provides that any insurance company, insurance broker of insurance manager licenced by the Malta Financial Services Authority may be either constituted or converted into a ‘Cell Com-pany’ provided the necessary regulatory approvals are sought and the company observes the relevant statutory requirements.
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. 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. A cell is not bestowed with separate legal personality.
Features of Protected Cell Companies
A protected cell company is, in broad terms, a company that operates in two parts –
(i) the company core (the non-cellular part), and
(ii) any number of cells (distinct classes of shares in the company) formed for the purpose of segregating and protecting cellular assets.
The core part comprises all non-cellular as-sets including the company’s core share capital, investments, liabilities and so forth. The core share capital may be the minimum required at law or it may be much larger depending on its activities.
A cell company may have any number of ‘cells’. Each cell is independent and sepa-rate from the others, as well as from the core company. Cells are represented by a class of shares in the company, termed ‘cell shares’ subscribed to by the shareholders of the particular cell (or class of shares). The ‘cell share capital’ is accordingly the amount of the proceeds of the issue of the cell shares to the cell shareholder. A cell’s share capital constitutes the initial cellular assets attribut-able to the cell.
The cell company may distribute profits earned by a cell or capital reserves belong-ing to it to its shareholders as ‘cellular divi-dends’. Such dividends may be paid in re-spect of cell shares by reference only from the profits attributable to the cell and only by reference to the cellular assets and liabili-ties of the cell in respect of which the cell shares were issued. When distributing cellular dividends no account is taken of any non-cellular profits or losses, or to any profits or losses attributable to any other cell of the company.
Creditor & Third Party Rights
Maltese law insulates the assets and liabili-ties of a cell from those of other cells in a cell company. Cellular assets attributable to a particular cell are only available to credi-tors of that particular cell, and a creditor a particular cell does not have recourse to assets of another cell of the same cell company. The cellular assets attributable to a particular cell are primarily liable to satisfy all its cellular liabilities. The cell company’s core/non-cellular assets may be secondarily liable to satisfy any cellular liability of one of its cells in the event that the cellular as-sets attributable to the particular cell have been exhausted. Cellular assets, which are attributable to a particular cell, may not be used to satisfy the liability of another cell in the same cell company. The company’s core/non-cellular assets will be liable for all liabilities of the cell company, which are not attributable to a particular cell.
As outlined above, the company’s non-cellular assets may also be secondarily liable for cellular liabilities, if the particular cell is exhausted of cellular assets.
Unless expressly excluded in writing there is implied in every transaction entered into by a cell company that no party to the transac-tion may seek to make or attempt to use any cellular assets attributable to any cell of the company to satisfy a liability not attributable to that particular cell, and if any party succeeds by any means whatsoever in using assets attributable in using cellular assets attributable to any cell of the company to satisfy a liability not attributable to that cell, that party will be liable to the company to pay a sum equal to the value of the benefit thereby obtained. This payment will be attributed to the cell concerned.
Where an executive warrant has been is-sued or enforced against assets of a cell for liabilities not attributable to that cell, and for any reason such assets may not be restored or otherwise compensated for, the cell com-pany will itself be liable transfer to the cell enough assets to restore or compensate the cell the value of the assets lost.
Protected Cell Companies - Tax Considerations
Malta’s full imputation system of taxation and the refund of tax provisions contained in the legislation make Maltese companies efficient vehicles for non-resident sharehold-ers.
Under Malta’s tax system a company is considered resident if it is incorporated in Malta or, in the case of a body of persons, if its control and management are exercised in Malta. Protected Cell Companies resident in Malta are subject to the normal Maltese company tax rate of 35% on worldwide income.
Under Maltese law a PCC is considered as a single entity for tax purposes, and irrespective of the separate cells in a PCC, a PCC is treated for tax purposes as one whole company. Distribution is apportioned between the different cells depending on the accumu-lated profits of each cell. Under the Maltese legislative framework insurance managers, insurance brokers and insurance companies (including captive companies) can be set up to operate in or from Malta within a regula-tory environment which is consistent with that found in most other modern jurisdictions.
Duty is not chargeable under the Duty on Documents and transfers Act, 1993 in respect of any contract of insurance relating to a risk situated outside Malta.
Captive management services are also zero rated for VAT purposes under the Value Added Tax Act
Insurance Management Companies
An Insurance Manager is a person author-ised to carry out activities that consist of accepting an appointment from a company to manage any part of its business, or to exercise managerial functions therein, or to be responsible for maintaining accounts or other records of such company. Manage-ment functions may include the authority to enter into contracts of insurance on behalf of such company under the terms of appoint-ment. A local company authorised under the Insurance Intermediaries Act, 2006 as insur-ance intermediary and carrying on business as an insurance broker, restricted to con-tracts of insurance relating to risks situated outside Malta, may appoint an insurance manager authorised under the Act to man-age such business.
Companies carrying on affiliated insurance may employ the services of an insurance management company.
An insurance management company must be a Maltese registered company. Such com-pany would require a license if it carries out activities which consist in the management of any part of another company’s insurance business; the exercise of managerial func-tions therein and the maintenance of accounts or other records of such company. Such activity could also include the authority to enter into contracts of insurance on behalf of the company under the terms of the appointment.
Re-Domiciliation of Captives
A body corporate licensed in another juris-diction 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 Insurance Business (Continuance of Companies Carrying on Business of Insur-ance) Regulations, 2003 provide that the MFSA may authorise such companies to re-domicile to Malta and operate under Mal-tese insurance legislation if they originate from an approved jurisdiction. Prior to applying for such authorisation, such company must first approve such continuance by a corporate decision which is valid under the laws of its country of origin and that would be equivalent to an extraordinary resolution under Maltese law.