Protected Cell Companies Are Superior To Normal Investment Vehicles

MAURITIUS is now well known as an international financial services center for setting up and administering investment funds.

Indeed as at 31 March 2007, more than US$36 billion were invested by Mauritius funds into equities globally, and principally in emerging markets. The jurisdiction has a strong financial services system as endorsed by the World Bank and IMF and it applies best global practices in regulation of investment businesses.

Protected Cell Companies

Whilst umbrella/multi-class funds have been popular in Mauritius for the past 12 years, the trend now is towards the structuring of multi-class funds as Protected Cell Companies (PCCs).

A PCC is similar to a multi-class company/fund whereby there are various classes of shares which may either invest collectively in one or more portfolio(s) or separately in distinct portfolio(s). The distinguishing features of a PCC as compared to a normal multi-class company/fund are:

1. each share class is referred to as a cell;
2. the PCC has a core cell and one or more non core cells;
3. there is a legal segregation of net assets attributable to each non core cell of the company- hence the cellular assets attributed to a non core cell will only be affected by the liabilities of the company arising from transactions attributable to that cell.

This legal segregation is often described as 'ring fencing' and is the main attraction of PCCs.

Given this ring fencing, a PCC structure is very useful for any investment entity with various investment portfolios, where each has its own investment strategy and risk profile, and is even more attractive where investors are not common for each portfolio.

Applications of PCCs

Below are a few examples of the main applications of PCCs:

1. Side By Side Portfolios

   ABC Managers wishes to offer three distinct strategies (e.g., Fixed Income, Long Equity and Long Short Equity) to investors, each strategy entailing a different level of risk. The manager has three structuring possibilities:

   Option A. sets up three funds, one dedicated for each strategy;

   Option B. sets up a multi-class company whereby each class invests in one strategy;

   Option C. sets up a PCC in Mauritius – ABC Fund Ltd, PCC.

   The share capital of ABC Fund Ltd, PCC is made up of shares of the following cells:

   Cells	Shares issued to:	Investment portfolio
   Core cell	Investment Manager	Nil
   Fixed Income	Risk-adverse investors	Fixed income instruments
   Long Equity Cell	Medium risk taking investors	Listed Equities
   Long Short Cell	Higher risk-taking investors	Equities and derivatives

   The comparative advantages:

   (i) Option A perfectly segregate risks from each strategy. For instance there is no way for any adverse exposure on the writing of a put option to affect investors of the fixed income strategy.
   (ii) Option B is a very cost efficient solution compared to Option A as it avoids the setting up and administration of three entities. However the risk contagion across strategies/classes is very important and might not be acceptable to all investors.
   (iii) Option C – the PCC – seems to be the best solution. It is not more costly than Option B and yet offers the same level of risk segregation as Option A due to the ring fencing feature explained above.

2. Cost Efficient Assets Holding

   XYZ Asset Manager advises a number of clients. Each of the clients needs from time to time an investment holding company to hold specific assets/investments. XYZ Asset Manager has two options:

   (i) Sets up one investment holding company for each client and/or for each investment/asset;
   (ii) Sets up a PCC whereby XYZ Asset Manager holds the shares of the core cell and each client is offered a non core cell for holding its investment/asset; some clients may wish to have more than one non core cells so as to internally segregate the risk of each of its investments.

   fig: side by side asset holding

   Comparative advantage of this Asset Holding PCC is again the streamlining of the structure and elimination of excess cost and administrative burden.

   Apart from cost implication, each investment holding company under Option A might have its own regulatory burden (renewal of licenses, submission of returns to government...). With the PCC, all regulatory burden is taken care of by XYZ Asset Manager at the PCC level.

Investment Management

It is customary for the Investment Manager to hold the shares of the core cell of the PCC and for these shares to carry all the voting rights of the PCC such that the investors would leave the actual running of the fund to the Investment Manager and its nominated directors and administrator.

Nevertheless, the law provides that the rights attached to shares of any non core cell cannot be altered without the requisite votes of the holders of such shares.

Though the above is customary, the law also allows the shares of any non core cell to have all the voting rights with respect to that cell. This gives maximum protection to the investors of each cell with respect to corporate governance issues in each cell.

Ideal Location for a PCC

Choosing the right jurisdiction where to establish a PCC is relatively more critical than when it comes to set up an investment holding company or a multi-class fund. Indeed, given a PCC tends to host relatively more strategies and groups of investors than other types of structures, a PCC is likely to conduct business with more jurisdictions than other types of entities. Hence it is important that the PCC is established in a financial center which can deal with various jurisdictions in a cost, time, regulatory and tax efficient manner.

The key comparative advantages of Mauritius in this respect are:

1. Mauritius has in place a network of non double taxation treaties with 32 countries. Under all the treaties, capital gains on portfolio investments are taxable only in the country of residence of the seller of the investments; Mauritius does not tax capital gains. – more details on www.imm.mu;
2. Mauritius does not impose any withholding tax on distributions made to any country;
3. Mauritius is located at GMT+4; The island is 8 to 9 hours ahead of New York and just 2 hours ahead of Geneva. It is normal for Mauritius service providers to participate in teleconferences early in the morning with the Far East, handle work flow from Europe late morning, and interact with the United States in the evening, or early next morning Mauritius time.

Of course, Mauritius also has ALL the benefits that are offered by traditional jurisdictions which may or may not offer protected cell companies. These include (a) flexible and appropriate legislation, (b) exchange liberalization, (c) free repatriation of profits and capital, (d) no withholding taxes, (e) no capital gains and inheritance taxes, (f) no capital duty on issued capital, (g) confidentiality and banking secrecy, and (h) well regulated businesses.

An annexure is provided below with more details of the features of a PCC.

More Details On The PCC

A PCC is licensed by the Mauritius Financial Services Commission ("FSC").

A brief overview of the features of PCCs is set out below. For more information, please do not hesitate to contact IMM.

Type of entity	PCCs
General Overview
Type of Licence	Category One Global Business Licence (GBL 1) (Please also read on GBL 1 Company in our paper on "Global Business Companies")
Type of company under company law	Protected Cell Companies
Main governing laws	Companies Act 2001 Protected Cell Companies Act 1999 Financial Services Development Act 2001
Dealing with a cell	A person transacting with a PCC must be informed of the PCC nature and the cell with which the transactions is taking place must be identified
Name	Name must end with the expression "Protected Cell Company" or 'PCC'
Can seek benefits of treaty	Generally Yes
Tax
Corporate income tax,	Headline tax rate is 15%; But maximum effective rate is 3% 15% on chargeable income less foreign tax credit; if proof of foreign taxes cannot be provided, claim is allowed for a deemed tax credit of 80% of Mauritius tax payable. Consequently the maximum effective rate is 3% Credit for foreign underlying taxes may be claimed with respect to dividend income received from holdings exceeding 5% and normally eliminates all residual taxes in Mauritius
Capital gains,	Tax exempt income in Mauritius
Withholding tax,	Nil
Stamp duty/capital duty	Nil, unless company holds (with special permission) immoveable property in Mauritius
Can seek benefits of treaty	Yes
General minimum conditions for grant of Tax residence certificate	Central management and control in Mauritius (see "Directors" below) Bank account in Mauritius Accounting records kept in Mauritius

 

Type of entity	PCCs
Share Capital / Shareholders
Permitted capital	No minimum capital requirement is imposed for the PCC and each cell except for insurance business
Composition of share capital	Share capital consists of different cells of shares, of which one is a core cell Unlimited number of cells may be provided, with each cell having its own name or designation
Legal segregation/Ring-fencing	Legal segregation and protection of assets and liabilities for each cell The cellular assets attributed to a cell will only be affected by the liability of the company arising from transaction attributable to that cell Creditors of any cell may have a claim on net assets of the core cell Nevertheless, the PCC as a whole remains a single legal entity
Residency of investors	Generally from any country except Mauritius
Distribution	A PCC may effect distributions in respect of cell shares by reference only to the cellular assets and liabilities attributable to the cell in respect of which the cell shares were issued
Meetings	At any place inside and outside Mauritius
Directors
Local Director	Minimum: 1 For tax residency purposes: 2
Board meetings	Anywhere but for tax residency purposes: held and chaired in Mauritius Telephonic meetings allowed
Financial Statements
Preparation of accounts	Yes, for each cell and for the overall company
Accounting standards	The norm is IAS/IFRS Also acceptable: US, UK and South African GAAPs For other GAAPS, specific prior approval must be sought from FSC
Audit statutorily required/Local auditor statutorily required	Yes
Filing of financial statements with Authorities /	Yes within 6 months of year end
Pubic access to financial statements	No
Proper segregation	The Directors of a PCC are bound by law to keep the assets and liabilities attributable to one cell separate and separately identifiable from assets and liabilities attributable to other cells.
NAV calculation	Generally must be signed off in Mauritius prior to circulation to investors

 

Type of entity	PCCs
Confidentiality
Notify Authorities for each share allotment	Open ended funds: No Others: Yes, but nominee shareholder can be used
Beneficial ownership disclosed to Authorities	Asset Holding activity: disclosure of beneficial ownership to FSC Funds: disclose only identity of fund manager/promoter However the FSC may request for information on investors and other parties, if necessary (in practice the FSC will do so only if there is reason to suspect the investor) Information confidentially kept
Exchange of information	Strict confidentiality is enshrined in the Law No disclosures shall be made by the FSC to any court, tribunal, committee of enquiry or other authority in Mauritius or elsewhere except on a court order made only if the court is satisfied that the confidential information is bona fide required for the purpose of any enquiry or trial into, or relating to, the trafficking of narcotics, drugs, arms trafficking or money laundering The powers of the FSC to transmit information have been extended to include disclosure to foreign supervisory agencies – applies only with respect to financial services providers only Mauritius has in place a network of Double Taxation Agreements and hence the Mauritius Revenue Authority is allowed to obtain and exchange information under the relevant provisions of these treaties

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.