Malta has recently updated its insurance legislation. The enactment of the Insurance Business Act, 1998 and the Insurance Brokers and Other Intermediaries Act, 1998 have placed Maltese regulatory standards on par with those found in major European countries, writes Stephen Gauci.
In the Insurance Business Act, 1998 captive insurers are referred to as affiliated insurers. 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 companies being members of a group of companies, of which it is itself a member, having one parent or holding company or with companies who are the sole shareholders of the insurance company carrying on such business and their subsidiaries”.
Affiliated insurance companies are required to maintain a margin of solvency, its computation being based on European Union Directives, together with adequate technical provisions which should be covered by safe and marketable investments adequately diversified and hedged. However it is interesting to note that captives are exempt from currency matching and asset localisation rules applicable to other insurance companies.
Furthermore affiliated insurance companies shall maintain minimum own funds equivalent to Maltese Liri Lm 100,000 or any other currency acceptable to the Malta Financial Services Centre. Such own funds may include:
• Paid up share capital which shall be equivalent to not less than fifty per centum of the value of the own funds.
• Reserves (statutory reserves or free reserves) other than reserves corresponding to the technical provisions.
• Any profits brought forward.
• Cumulative preferential share capital and subordinated loan capital up to fifty per centum of the value of the own funds of the company concerned, no more than twenty-five per centum of which (12.5% of total own funds) shall consist of subordinated loans with a fixed maturity, or fixed term cumulative preferential share capital.
Company registration fees are based on a sliding scale depending on the authorised share capital with a fixed minimum of Lm 100 and a maximum of Lm 575. A fee of Lm 1,000 is also payable to the Malta Financial Services Centre on application and annually thereafter.
Affiliated insurance companies are required under the Insurance Business Act, 1998 to comply with the provisions relating to financial reporting. In this respect an affiliated insurance company is required to notify the Malta Financial Services Centre of its financial year end within three months from the date of authorisation and subsequently thereafter submit audited financial statements to the Centre prepared in accordance with the law. However, captives are exempt from publishing and exhibiting their financial statements.
The Insurance Business Act, 1998 also contains a provision for the amendment of the Companies Act, 1995 to enable the minister of finance in consultation with the Malta Financial Services Centre to make regulations which provide for the formation, constitution, authorisation and regulation of cell companies. A cell company is consequently defined as “a company formed or constituted as such or converted into a cell company and creating within itself one or more cells for the purpose of segregating and protecting the cellular assets of the company in such a manner as may be prescribed”.
An additional amendment to the Companies Act, 1995 provides for the redomiciliation of affiliated insurance companies both from Malta to another jurisdiction or from another domicile to Malta. In this context a company incorporated or registered in a country outside Malta and having characteristics which are similar to an affiliated insurance company established under Maltese law may continue its operations in Malta or vice versa.
Redomiciliation may only take place if the continuance is approved by an extraordinary resolution. Furthermore a company to be redomiciled in Malta, shall deliver to the Registrar of Companies an instrument of continuance containing in addition to the declarations relating to the continuance, the equivalent of a memorandum and articles of association.
Conversely, continuance of an affiliated insurance company in another jurisdiction other than Malta shall only take place if the laws of the foreign jurisdiction permit such redomiciliation and the body corporate will continue to retain or will succeed to all assets, rights and liabilities of the affiliated insurance company.The Insurance Business Act, 1998 has also provided for a number of amendments to the Income Tax Act. In this context one important development consists of the widening of the definition of the foreign income account. In fact, the profits or gains of a company resident in Malta (not being an offshore company) from the business of insurance in relation to risks situated outside Malta will now be allocated to the foreign income account. In addition double taxation relief is available to companies through a network of double taxation treaties, and other methods aimed at minimising the incidence of double taxation.
Affiliated insurance companies underwriting risks situated outside Malta are able to apply for the status of an international trading company (ITC). An ITC is a company registered in Malta which is engaged solely in trading activities, from Malta but not in Malta, with persons outside Malta and which has its object expressly limited to such trading activities as well as to such activities as are necessary for the conduct of its operations from Malta.
The company is taxed at the normal company rate of tax which currently is 35%. Upon the receipt of a dividend, the non-resident shareholders (including Maltese resident holding companies fully owned by non-residents) are:
• Taxed at a flat rate of 27.5% on the grossed up dividend and are credited with the amount of tax paid by the company on the profits out of which the dividend was paid. This results in a refund equivalent to the difference between the tax paid by the company (35%) and the non-resident shareholders' tax (27.5%).• Entitled to a further refund of two-thirds of the Malta tax paid by the company on the same profits. This refund is payable by not later than the fourteenth day following the end of the month in which the refund becomes due. Since the implementation of these provisions in September 1994, all refunds have been issued prior to the statutory time limits imposed.
In addition, ITCs may also benefit from:
• Exemption from stamp duty on the issue, acquisition and transfer of shares, and other marketable securities.
• Eligibility to apply for an Advance Revenue Ruling confirming the company's status as an ITC and ensuring the tax position for a minimum period of five years which can be extended on expiry.
• Eligibility to apply for an Exchange Control Exemption issued by the Central Bank of Malta.
Stephen Gauci is the managing director of International Insurance Management Services Ltd which specialises in the registration and management of insurance, reinsurance and captive insurance companies registered and operating in Malta. Tel: +356 235860/1. Fax: +356 248774. E-mail: firstname.lastname@example.org