To date, Malta is the only EU member state to have both Protected Cell Company (PCC) as well as Incorporated Cell Company (ICC) legislation in place. Malta first enacted PCC legislation in 2004 when Legal Notice 218 of 2004 introduced the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations. These regulations were subsequently revised in 2010 by virtue of L.N 243 of 2010 (PCC Regulations). There are currently five licensed PCCs with a total of thirteen licensed cells in the Maltese insurance industry.

In line with the constantly evolving international financial world, in March 2010, the Malta Financial Services Authority (MFSA) issued a note for consultation on the draft ICC regulations proposing a new corporate vehicle for insurers, building upon the PCC vehicle. On the 28th December 2010, the Companies Act (Incorporated Cell Companies Carrying on Business of Insurance) Regulations, 2010 (ICC Regulations) were introduced through L.N 558 of 2010 which came into force on the 1st February 2011.

The ICC Regulations apply to the business of insurance as defined under the Insurance Business Act, (Chapter 403 of the Laws of Malta) as well as captive insurance in terms of the Insurance Business (Companies Carrying on Business of Affiliated Insurance) Regulations 2003. The provisions of the Maltese Companies Act apply to an ICC and to an individual incorporated cell (IC) unless such provisions are inconsistent with the Insurance Business Act and the ICC Regulations, in which case the latter Act and Regulations apply.

The Concept of an ICC in the Insurance Sector

The ICC Regulations allow ICCs to form ICs, thereby giving each IC limited liability as well as a distinct and separate legal personality from other cells and from the ICC core. At the same time, the ICC may still be structured to retain certain core features that will allow it to scale up the desired efficiency levels. As a result of such separate juridical personality, each IC will have its own board of directors. Under Maltese law there is no requirement that the board of directors of each cell be the same as the board of directors sitting on the ICC core, thereby granting more flexibility to the promoters. Similarly, the company secretary of an IC, which can be a corporate entity, can also be the company secretary of the ICC. The Regulations do not make it mandatory for an ICC to take up shares in its ICs and make it clear that an IC is not a subsidiary of its ICC just by being an incorporated cell of that particular ICC. The ICC Regulations provide for the possibility of single member companies as provided under the Companies Act and allow an ICC to be the only member of an incorporated cell.

A definite advantage of the separate legal personality of an IC is the clear separation of assets and liabilities between itself, the ICC core and any other cell of the same or another ICC. This flexibility in the ICC structure allows ICs to enter into binding agreements with one another and with the ICC core, thereby facilitating the possibility of financial guarantees or reinsurance arrangements between cells as well as between cells and the ICC core, where in the case of reinsurance, the core can act as the reinsurer to the fronting cell. An ICC does not have the power to transact on behalf of any of its incorporated cells and vice versa.

While PCC Regulations provide for secondary recourse to non-cellular assets if the cellular assets attributable to the relevant cell have been exhausted, such recourse is not provided for under the ICC regulations as the ICC and each cell are separate legal entities.

Both ICCs and ICs require separate authorisation under the Insurance Business Act. In view of the ICs' independence, the individual ICs are required to abide by the statutory financial obligations applicable to insurance companies and affiliated companies. The ICC Regulations also provide that a non-cellular company or a PCC may be transformed into an ICC.

A definite advantage of the ICC vehicle is that ICCs can act as "nurseries" for new insurance companies which may start out as cells of an ICC and upon reaching certain economies of scale, be converted into separate stand-alone insurance companies in their own right.

In fact, one of the key advantages of the ICC Regulations is that separate cells can cover separate insurance businesses: for example companies can have separate cells for catastrophe and health insurance.

From a practical aspect, one can say that an IC is of utmost use when business is carried out or assets are held in jurisdictions which have not adopted or do not recognise the concept of a protected cell, due to the fact that an IC enjoys legal personality.

Establishing an ICC and Incorporated Cells

Apart from the possibility of a company being incorporated as an ICC, it is possible that a body corporate that is carrying on business of insurance, which is similar to an ICC but established outside Malta, is continued as an ICC in Malta. Provided that if such body corporate has cells which are similar to ICs under Maltese law, the continuation of the body corporate shall require simultaneous continuation of all such cells as ICs. This measure guarantees the protection of the policy holders of an IC in the case of continuation or relocation of the ICC.

Another possibility is for a body corporate, carrying on business of insurance, similar to a non-cellular company and established outside Malta, to be continued as an ICC in Malta. Furthermore, a non-cellular company can convert into an ICC or into an IC and a PCC can convert into an ICC.

Conversely, it is also possible for an ICC to be continued as a body corporate similar to an ICC outside Malta; for an ICC to be redomiciled as a body corporate outside Malta; for an ICC having no incorporated cells to convert into a PCC and for an ICC having no incorporated cells, or an IC to convert into a non-cellular company.

A PCC which has one or more protected cells may be converted into an ICC with one or more ICs. In this case, it is important that the non-cellular assets, liabilities and obligations of the company as well as all claims, actions and legal proceedings concerning the non-cellular part are allocated and delivered to the recipient ICC. Furthermore, the asset, rights, liabilities, obligations of each protected cell and all claims and legal proceedings concerning each cell are to be allocated and delivered to a separate recipient company namely an IC.

Setting up a Captive Cell Company

An ICC also has the power to establish ICs for the purpose of carrying on business of affiliated (captive) insurance pursuant to the Insurance Business (Companies carrying on Business of Affiliated Insurance) Regulations, 2003. Furthermore, Insurance Rule 21 of 2007 has considerably broadened the traditional definition of captive insurance by including risks originating with:

  • Parent or group companies
  • Undertakings having common membership up to the ultimate beneficial owner level, with the AIC, amounting to at least 51%
  • Individuals or other entities having a majority ownership or controlling interest in the AIC
  • Members of trade, profession or industry associations or organisations insuring risks related to the particular trade, profession or industry

This wide definition enables ICs established as captives to do much more than simply write the risks of their parent company.

Taxation

Each cell in an ICC is a separate legal entity and therefore each cell and the ICC are considered to be separate companies for Maltese Income Tax purposes. Each cell of an ICC will benefit from the fiscal advantages that Malta offers to any other company registered in Malta. The Maltese Taxation system is a full imputation system that eliminates economic double taxation. Similar to all other Malta Companies, ICCs and ICs are taxable at the normal corporate rate of 35%. However on distribution of profits, shareholders are entitled to a refund of 6/7ths of the total tax paid (that is including any overseas tax suffered) suffered on the distributed profits. This means that while the ICC/IC receives no tax benefits, its non-resident shareholders are entitled to a tax refund as explained above which is not subject to further taxation in Malta. In addition, Malta has concluded double tax treaties with over 60 countries. Furthermore, no duty is chargeable under the Duty on Documents and Transfers Act, 1993 in respect of any contract of insurance that relates to a risk situated outside Malta.

Conclusion

ICCs offer an alternative risk management structure with advantages relating to potential cost savings due to pooling of resources. An ICC or IC presents many opportunities for various insurers such as non-European domiciled insurers wishing to reduce their fronting costs in the EEA, any business planning to sell insurance to third-parties in the EEA, commercial groups looking for an Affiliated (Captive) insurance Company as well as reinsurers wishing to create a reinsurance/retrocession facility in Malta. Cells in Malta may also be established as fronting facilities that in turn reinsure most if not all the risk written by the cell.

The salient difference between PCCs and ICCs lies in the legal status of the cells, and this will most likely be the feature that will lead the potential promoter to choose one over another according to his or her specific requirements. Without any doubt, the ICC Regulations that came into effect earlier on this year will continue to place innovative tools at the disposal of the operators in the insurance industry.

Furthermore, Malta is an ideal financial services jurisdiction. It has a strategic geographical location in the centre of the Mediterranean Sea between Europe and North Africa. The regulator, being the Malta Financial Services Authority, is approachable, firm and efficient. The insurance regulatory framework is robust but allows market operators the degree of flexibility required to be in a position to operate efficiently and successfully. Malta also boasts a skilled and multi-lingual workforce and competent legal, financial, insurance and banking professionals who could readily service an ICC operation. The attractive tax regime and competitive cost of running an ICC are certainly other primary factors which place Malta firmly on the map for this kind of business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.