George M. Mangion | Wednesday, 07 January 2009

Captives - Promoting Malta in Luxembourg

News that captives are coming to Malta has been a favourite topic doing the rounds at Christmas parties among lawyers and insurance practitioners. A first-rate Captives seminar is being hosted by PKF on 12 February at the Le Royale Hotel in Luxembourg. One looks forward that PKF’s initiative to promote the commercial use of captive insurance receives the support it merits from organisations such as Malta Enterprise, MFSA and Finance Malta. During the one day seminar, PKF invites practitioners for a free pass. So far it received attention from various Scandinavian and northern countries to attend a packed technical programme. Experts from various jurisdictions will tackle the problems and solutions arising from the severe financial fallout for the insurance industry expected next year. It will also introduce the new regulatory arena following the finalisation of Q4 assessment within Solvency 11. From the feedback of many practitioners attending the previous seminar held in Dublin this year it has encouraged PKF to host its third year consecutive seminar in Luxembourg. The news that Malta is back on the radar is confirmed by the issuing of licences to insurance brokers acting as global operators namely Marsh, AON , AIG , and others. The financial regulator MFSA is committed to the development of the captive insurance sector and it is considering how legislation can be updated to allow finer alignments to rules in setting up of Protected Cell Captives (PCC’s). This was first introduced in Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004; Legal Notice 218 2004.
This was also the opinion of Professor Joe Bannister (chairman MFSA) concerning the regulation in new-emerging jurisdictions. In his words, the attractiveness of Malta’s 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. 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.
There are exemplary tax advantages since a ‘Captive ‘ is taxable at the normal company rate of tax which currently is 35 per cent. 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 5 per cent. There are no withholding taxes, no CFC and no transfer pricing rules. But one may well ask with some much competition and with a financial turmoil do captives retain their advantages in Malta. One may doubt the appeal of Malta when captives remain under the unchallenged sphere of influence in centres such as Bermuda, Cayman Islands, Hong Kong, British Virgin Island, and some US States. In Europe one finds Dublin and Luxembourg. But the added pressure resulting from the credit crunch and the unexpected fall of AIG has resulted in attempts to relocate to more cost efficient centres. Delegates attending the Dublin seminar at the luxury Four Seasons Hotel, this year concurred that due to the soft market corporate insurance buyers have added leverage to cling a harder bargain. In this unprecedented financial squeeze on premiums captives are proven to be the right and cost effective solution for well organised insurance services. If anything, owners found additional, creative ways to utilise their captives more so in the cut-throat competition for new business suffering particularly from low yields on investments. Undoubtedly there is a very competitive market among risk managers to present the most cost effective solution for relocating captive insurance companies. Captives permit 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.
Speakers at the Luxembourg seminar shall dwell in detail on the best solution on how to tackle the added pressures arising from tougher regulation which countries may impose next year to combat the aftermath of the sub-prime collapse and its disastrous effect on bank credit insurance. Only well organised units can provide a superlative means of risk management in a turbulent market. Their main advantages are factors such as reduced costs, flexibility and improved claims management. With heightened frequency, corporate insurance buyers and mid-sized business owners who are squeezed by higher costs are exacerbating the compensation of captive ownership. As these factors can be significant in case of larger corporate structures it goes to show why captives are considered to be a more cost effective solution in a downturn. To quote an example we can say that living in a soft market, risk managers can opt to rent a captive, thus taking advantage of the low rates by reinsuring a relatively large proportion of risks. The lower cost of reinsurance allows the captive to build its reserve base. This is because of the clever way that captives generally retain a portion of the overall risk and reinsure the balance. Once mentioning the subject of rent-a-captive, some may well ask what are the rewards for using a protected cell company when current market conditions are so appalling. Will risk managers be tempted to relocate in Malta to exploit PCC’s unique features? From market research one can expect a number of positive enquiries at the Luxembourg seminar to be held in February. Risk managers are becoming more interested to explore the unique qualities of a protected cell company, or PCC, which 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.
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.
o conclude, 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. It is becoming an increasingly attractive domicile for multinational companies in which to form a captive. Since joining the EU, Malta has taken bold steps towards implementing a robust regulatory regime which is in line with the European Union Insurance Directives.
The ability to ‘passport’ insurance to all territories within the European Economic Area (EEA) and the double tax agreements held with 48 countries ( including USA ) are clear examples of Malta’s growing appeal.
Readers interested to apply for a free pass at the Le Royal Hotel Seminar on 12 February may email Audrey–Ann Casingena at or call +356 27 484375
A prosperous new year to all readers.

George Mangion
Partner at PKF – an audit and business advisory firm



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07 January 2009

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