George M. Mangion | Wednesday, 11 February 2009

Luxembourg or bust

News that captives are coming to Malta has been a favourite topic among practitioners. It fills oneself with hope given the present financial meltdown. A recent article published in a local newspaper stated that France is emerging as an important market as Malta’s insurance management industry which continues to attract new customers, both pure captives servicing their parent and associated companies, and direct writers with a broader client base. At least eight French insurers are registered on the island, including Peugeot, Renault and Axeria, and more are showing interest, industry sources say.
In a recent interview the Chairman of the Malta Financial Services Authority Professor Joe Bannister said “Like the British, Germans and others, the French are coming to Malta to benefit from the advantages of a well-regulated sector, seeing Malta an approachable yet respected regulator, the availability of all the skills financial firms require and the EU-approved tax structure.”
Overall trends show an accelerating development in the Maltese insurance arena. Last year, registered insurers almost doubled, from 22 in December 2007 to 43 in December 2008. Many establish themselves as direct writers, catering to a broader market than captives do, and increasingly a number of the insurers are choosing self-management over the services of insurance managers. Bearing this in mind PKF has been active in promoting captives.
PKF operates under severe quality controls, as set by PKF International to all its member firms, thus guaranteeing the required standards being met. We pride ourselves in the quality and professional manner with which we implement our captive insurance and protected cell company (PCC) service offerings.
Equally, it is important that practitioners go forth and promote Malta‘s potential in the financial services sector and for this purpose, PKF Risk Management Services has been instrumental in promoting different types of companies, including captives, in Malta and has developed relationships with European market leaders in Ireland, Belgium, Germany, Austria, the Czech Republic, Poland, Hungary and the Scandinavian countries, as well as other global entities. Each year we organise a comparative captive seminar as a direct approach to the industry, meeting key players in order to assess and keep abreast with this market’s needs.
In fact this year PKF hosted a first-rate Captives seminar this week at the luxurious Hotel Le Royale in Luxembourg under the support of the Malta Financial Services Authority. With great satisfaction our event received attention from various European countries from Luxembourg, France, Brussels, Netherlands, Germany, Austria, UK, Guernsey, Malta and Isle of Man attended our full technical programme. Experts from various jurisdictions tackled the problems and solutions arising from the severe financial fallout for the insurance industry expected this year. It also introduced in detail the new regulatory arena following the finalisation of QIS 4 assessment within Solvency 11. We had delegates from various sectors such as banking, accounts and audit, airline/aviation, financial services, consultancy, legal, wine and food, automotive, furniture, investment funds and insurance/assurance.
The good 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 (PCCs).This was first introduced in Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004; Legal Notice 218 2004. Protected cell companies hold assets in one or more separate cells. Organisations which are not large enough to set up a captive may use a “captive-type” structure.
This was also the opinion of Professor Joe Bannister 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.
Major entities are currently finding problems to make fronting arrangements with insurance companies as a result of which they are forced to make strategic choices to form captives. Only well organised captive units can provide a superlative measure of risk management in a turbulent market. Their main advantages of captives are 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.. To quote an example we recognise that operating 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. Having explored their advantages, will risk managers be tempted to relocate in Malta to exploit PCCs unique features? From market research one can expect a number of positive enquiries originating at the Luxembourg seminar. 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. 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 .Malta is not new to attract attention of other bigger countries.
Historically, we have always attracted the attention of dominant civilisations: such as the Phoenicians, the ancient Greeks, the Roman empire, the Normans, the Ottoman empire, the Knights of St John, the Napoleonic empire and finally the British empire. It served as a strategic and economic trading post over the centuries.
Today, Malta has to compete with Gibraltar, Ireland and Luxembourg for this business and is the newcomer in that regard. 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. Naturally, this will further pave the way for more applications.
It’s ability to ‘passport’ insurance to all territories to 27 countries of the EU apart from the European Economic Area (EEA) and 48 double tax agreements (including USA) are living credentials of Malta’s growing appeal.
To conclude, Malta 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.

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



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11 February 2009

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