Captive Insurance and Protected Cell Companies
in Malta

This update was posted on September 20, 2005
By Ganado & Associates - Advocates, Malta
171, Old Bakery Street, Valletta VLT 09, Malta - Tel: (+356) 21 235 406 Fax: (+356) 21 225 908
57, St. Christopher Street, Valletta VLT 08, Malta - Tel: (+356) 21 247 902 Fax: (+356) 21 240 550
http://www.jmganado.com

Established in the early 1900s, Ganado & Associates, Advocates (G&A) has become a prominent player in local legal practice and has contributed to Malta’s internationally recognised reputation as a centre for financial services, commercial and maritime law. The firm has been a keen promoter of Malta as a captive domicile and is assisting a number of insurance companies, captives and brokers to establish their operations in Malta

Contents

1. General Environment
2. The Regulator - Malta Financial Services Authority ("MFSA")
3. Registration of Captives
4. General Legal Considerations
5. Taxation of Captives
   1. Double Taxation Relief
      • Malta’s Double Tax Treaty Network
      • Unilateral Relief
      • Flat-Rate Foreign Tax Credit (“FRFTC”)
      • 2/3 Tax Refund to Non-Resident Shareholders
   2. Captives as International Trading Companies (ITC)
6. Captive “Own Funds” or Capital requirements
7. Protected Cell Companies - Insurers, Brokers & Managers
8. Continuation
9. Contact Persons

Introduction

We are pleased to provide you with this brief analysis of Malta as a Captive Insurance destination. We hope to give you a general overview of the legal and fiscal treatment of Captive Insurance companies, Captive managers and their foreign staff operating in Malta, in the light of the recent overhaul of Malta's insurance and fiscal legislation.

1. General Environment – Why Malta?

Malta is :

• An independent democratic State with a history of political stability and Parliamentary Consensus to promote Malta as a financial Authority
• A member of the European Union as of 1st May, 2004
• English Speaking and fluent in Italian
• Already an established Banking and Financial Services Authority of international repute with highly skilled and experienced professional expertise
• In the Central European Time Zone and only a stone’s throw away from Europe’s Capitals (all linked to Malta’s International Airport daily)
• Relatively inexpensive in most respects
• Temperate climate

In spite of Malta's favourable economic and political environment it has not as yet been able to establish itself as a Captive location. In a bid to better place Malta as a contender in this market, the legislator has introduced sweeping changes to Malta's insurance and fiscal legislation (including Protected Cell Company legislation) aimed particularly to attract captive insurers and captive managers.

This memorandum addresses some the major components of this legislative package, and the new legal implications for Captives and their Managers.

2. The Regulator - Malta Financial Services Authority ("MFSA")

The Maltese Financial Services industry regulatory framework has been largely revamped in recent years and the business of insurance is certainly no exception. The MFSA approach is commonly said to be ‘firm but flexible’ it encourages informal discussion at all levels with investors, applicants and other interested parties.

The MFSA Insurance Unit recognises the varying business techniques and numerous accounting conventions applicable in different countries where Captive parent companies may be situated and the overall approach is generally aimed at establishing acceptable requisites tailored to meet the applicant’s specific business requirements.

3. Registration of Captives

Applicants are encouraged to hold informal discussions with the Authority (generally through their representatives in Malta) before lodging a final application form with the Authority. Applications and other documents may be submitted in draft initially and reviewed by the Authority in order to avoid hiccups at a later stage.

The relevant application form and a list of materials that must be attached thereto are contained in Insurance Directive 6 issued by the MFSA and a copy of same may easily be procured through a local representative.

4. General Legal Considerations

Captive Insurance is referred to as “Affiliated Insurance” (“AIC”) in Maltese law and it is defined as:

“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”.

Captives may insure risks originating from a wide range of persons including:

• parent companies;
• associated or group companies;
• individuals or other entities having a majority ownership or controlling interest in the Captive, and
• members of trade, industry or profession associations insuring risks related to the particular trade, industry or profession.

These shareholding or other connecting relationships between undertakings are determined by Insurance Directive 21.

5. A. Taxation of Captives

The Insurance legislation package introduced in 1996 introduced sweeping changes that mirrored those previously adopted in the field of financial services. It sought to remove the distinction between onshore and offshore insurance activities by combining domestic and international business under one law. It did away with the concept of a ‘zero/low tax domicile’ for offshore companies and applied a tax rate (35%) across the board with innovative incentives tailored specifically to attract certain classes of business including the Captive Insurance business.

Maltese resident Captive companies are also allowed to benefit from Malta’s double tax relief provisions and its diffuse double taxation network now without falling foul of inland revenue legislation in their parent’s domicile.

Double Taxation Relief

Double taxation relief is available under the provisions of the Income Tax Act:

• If foreign tax has been suffered in a country with which Malta has a Double Tax Treaty, or
• In respect of Commonwealth income tax, or
• Through unilateral relief, or
• Through a system of a flat-rate foreign tax credit.

Malta’s Double Tax Treaty Network

Malta has a sizeable network of double tax treaties. The Government is actively pursuing additional treaties with particular emphasis on potential treaty partners with a focus on financial and investment services.

Malta's current network includes over 25 countries.

• Unilateral Relief
  
  Unilateral relief is allowed from double taxation where overseas tax has been suffered on income received from the country with which Malta does not have a treaty and where relief from Commonwealth tax is not applicable.
  
  
• Flat-Rate Foreign Tax Credit (“FRFTC”)
  
  FRFTC is available to a Maltese company (Captive) that receives income or capital gains from overseas and is allocated to its Foreign Income Account (“FIA”).
  
  With effect from basis year 1999 all income and gains - in relation to risks situated outside Malta are allocated to a Captive’s FIA and may benefit from the FRFTC which is granted at a standard rate of 25%, provided that the amount of FRFTC cannot exceed 85% of the FIA’s chargeable tax. FRFTC is available to Captive Companies in Malta even if no tax is suffered in a foreign jurisdiction.
  
  Captives with high expenses chargeable to their FIA (such as reinsurance costs) are keen to benefit from this incentive, as the Captive’s final tax burden is reduced considerably as may be evidenced below in TABLE 1.
  
  
• 2/3 Tax Refund to Non-Resident Shareholders
  
  Moreover, a non-resident shareholder (Captive parent company) receiving a dividend payment from a Maltese company (Captive) out of its FIA is entitled to a refund of 2/3 of the tax paid by the company in respect of its income. This results as an effect of the imputation system applicable to distributions from companies.
  
  TABLE 1 below illustrates the manner of computation of the tax relief afforded to Captives and their shareholders by FRFTC and the 2/3 refund to non-resident shareholders:
  
  

  TABLE 1 Income allocated to FIA 1,000,000 FRFTC (25%) 250,000 ________ Grossed Up Revenue 12,500,00 Expenses charged to FIA ( 450,000) ________ Taxable Income 800,000 Company Tax (35%) 280,000 ________ Less FRFTC (limited to 85% Taxable Income) (238,000) Company Tax Due 42,000 Less 2/3 refund to non-resident shareholders on distribution of dividends of FIA (28,000) ________ Ultimate Tax Burden 14,000 ________

5. B. Captives as International Trading Companies (ITC)

Alternatively, Captives may choose an ITC corporate structure. An ITC is a company whose operations are restricted to carrying out trading activities from Malta (and not in Malta) only with persons not resident in Malta. ITC’s are not entitled (for tax purposes) to maintain a FIA as that described above and their taxability is computed as follows :

• ITC’s are subject to income tax at the normal 35% rate on all chargeable income
• Non-resident shareholders (including Maltese companies wholly owned by non-residents) are taxed at the rate of 27.5% on dividends earned from ITC.
• As the ITC suffers tax at 35%, non-resident shareholders are eligible to a 7.5% refund on the tax paid by the ITC.
• Non-resident shareholders are further allowed the 2/3 refund on the amount of tax paid by the ITC (i.e. 2/3 of the full 35% charged to the ITC)
• Resulting in an Ultimate Tax Burden in respect of non-resident shareholders of 4.17%

TABLE 2 illustrates the tax liability of an ITC and its computation:

6. Captive “Own Funds” or Capital requirements

Companies carrying on affiliated insurance are required to possess own funds, whether in Maltese liri or in other currencies acceptable to the Authority amounting to not less than the applicable minimum guarantee fund as determined in the Fourth Schedule to the Insurance Business (Insurers’ Assets and Liabilities) Regulations, 2004. Such funds must be unencumbered.

The components making up the own funds may consist of (i) paid up share capital which must not be less than 50% of the value of the own funds requirement; and (ii) a mixture of issued and unpaid share capital, preferential share capital and subordinated loans, retained profits and reserves

7. Protected Cell Companies - Insurers, Brokers & Managers

The Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004 allow a licensed insurance company, insurance manager or an insurance broker to be registered as or convert to a protected cell company.

The law allows for:

• Formation of multiple cells forming part of a single corporate person;
• Creation and issue of cell shares,
• Segregation and protection of cellular assets from other assets of the company,
• Transfer of cellular assets to other persons, and extension of protected cell assets concept to the transferee,
• Use of non-cellular assets as a secondary asset base where cellular assets are exhausted

The Protected Cell Company Regulations apply to Captive insurance companies, Insurance Managers and Insurance Brokers which are licenced by MFSA.

8. Continuation

In terms of the Insurance Business (Continuance of Companies Carrying on Business of Affiliated Insurance) Regulations, 2003 and insurance company, insurance management company or insurance broker licenced in another jurisdiction may be authorised by the MFSA to be registered as continuing in Malta. Other than the requirement of MFSA’s authorisation, the procedures for continuation of these insurance companies, Managers and Brokers are similar to those applicable to continuation of companies generally.

Continuance of companies ensures the continuation of the corporate existence of the body corporate or similar entity in its new domicile.

9. Contact Persons

This memorandum has been prepared for information purposes only and should not be treated as legal advice.

Should you require any further information, please contact Dr. Max Ganado or Dr. Matthew Bianchi at the following legal offices:

e-mail addresses :

Dr. Max Ganado : mganado@jmganado.com
Dr. Matthew Bianchi : mbianchi@jmganado.com

171, OLD BAKERY STREET,
VALLETTA VLT 09, MALTA
Telephone (+356) 242 096; (+356) 235406/7/8;
Fax: (+356) 225 908

57, ST. CHRISTOPHER STREET,
VALLETTA VLT 08, MALTA
Telephone (+356) 247 902/3/5/6
Fax: (+356) 240 550

For more information on Malta, see these articles: