Malta: Captive Insurance: Malta Updates Its Rules

The international environment for captives has changed. Corporate insurance buyers are facing higher primary premiums and related taxes, higher reinsurance prices, lower policy limits and less cover. In the captive sector, major corporations are also finding problems to make fronting arrangements with insurance companies as a result of which they are forced to make strategic choices. There is a need for captives to be financially stronger and to be able to take more risk. There are options such as direct underwriting and cost reduction to be considered. It is time new business models are explored and new locations studied.

Over recent years Malta has established itself as a model jurisdiction in financial services regulation. As in other successful economic sectors the regulatory framework combines well with other advantages that Malta can provide in terms of low cost, ED membership, strategic access to southern Mediterranean markets and a good working environment.

Malta provides the opportunity for companies to locate their captive insurance business and insurance management activity within an OECD-recognised tax environment that combines tax efficiency with controlled foreign company tax legislation requirements.

Malta's insurance legislation is based on research carried out among Maltese and international insurance operators and provides opportunities for captive insurance business and related activities, including cell companies, insurance management companies and regional operations for insurers, re-insurers and brokers.

Captive insurance business is regulated under a set of tailor made rules that take into consideration the current state of the market and possible future developments. These rules provide for the registration and operation of captive insurance companies which within the Maltese insurance legislation are termed "Affiliated Insurance Companies" ("AICs").

Technical Definitions

"Affiliated Insurance" 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".

AICs 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 AIC;

• members of trade, industry or profession associations insuring risks related to the particular trade, industry or profession.

Companies carrying on affiliated insurance are required to possess own funds. The components making up the own funds are to consist of:

• Paid up share capital which must not be less than 50% of the value of the own funds requirement;

• a mixture of issued and unpaid share capital, preferential share capital and subordinated loans, retained profits and reserves

AICs carrying on general business of a prescribed nature are required to maintain an equalisation reserve but some companies are exempted from this obligation if they meet certain criteria. An insurance company, including an affiliated insurance company, is required to cover its technical assets and margins of solvency requirements by admissible assets. Moreover to ensure the safety, yield and marketability of the assets must be diverse and spread. There are no investment restrictions with respect to that portion of assets that is not required to cover technical provisions and margins of solvency. For the purposes of the technical reserves, assets are taken into consideration up to a certain limit.

An application for authorisation by an affiliated company is processed within a statutory period of three months. Approval is granted after the Malta Financial Services Authority is satisfied that:

• an application is filed in writing on the prescribed form;

• the company has the appropriate own funds for the type of business to be carried on or being carried on by the company;

• the company's objects are limited to business of affiliated insurance and operations arising directly therefrom to the exclusion of other commercial business;

• sufficient information is made available on persons having any proprietary, financial or other interest in, or in connection with, the company;

• all qualifying shareholders, controllers, and all persons who will effectively direct the business of insurance are fit and proper to ensure the company's sound and prudent management;

• a scheme of operations has been submitted in accordance with the relevant Directive.

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 shareholders. A company carrying on affiliated insurance, is taxable at the normal company rate of tax which currently is 35%. 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 4.17%.

Technical provisions and equalisation reserves are allowed as a deduction in the computation of taxable income. Captive management services are also zero rated for VAT purposes under the Value Added Tax Act.

AICs may request an advance tax ruling that guarantees the tax position of the company for a minimum period of five years. Such ruling may be renewed for a further period of five years. Any changes in the tax legislation during these periods will not become operative before the lapse of two years from the coming into force of any new law.