With companies facing increasingly expensive and more difficult insurance cover, many industry players have resorted to captive insurance to manage risks inherent in their business or subsidiaries and finance retained losses in a formal structure.
Malta has established itself as a front-runner in captive insurance business (referred to as “Captives”) through the establishment of a robust regulatory framework that combines tax efficiency with controlled foreign company legislation requirements and a comparatively low cost base in the EU.
The regulatory body is the Malta Financial Service Authority (MFSA), which is responsible for the licensing, regulation and supervision of insurance companies and intermediaries.
Insurance Business in Malta is regulated under the Insurance Business Act, which provides for the authorisation and supervision of insurance companies and the MFSA is the competent authority for the purposes of the Act.
Malta’s insurance legislation provides opportunities for captive insurance business and related activities such as:
- Insurance Management Companies;
- Protected Cell Companies;
- Regional Operations for Insurers;
- Insurance Brokers.
Requirements for a Captive Insurance
The MFSA is dedicated to process the application for the licensing of a captive within a statutory period of three (3) months provided the following conditions are met:
(i) An application is filed in writing in the prescribed form;
(ii) 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;
(iii) The company has appropriate own funds for the type of business to be carried on or being carried on by the company;
(iv) The company’s objects are limited to business of affiliated insurance and operations arising directly therefrom to the exclusion of other commercial business;
(v) A scheme of operations has been submitted in accordance with the relevant insurance rules.
The fees payable to the MFSA may be summarised as follows:
|Affiliated Insurance Company|
|Application for Authorisation||1800|
|Acceptance of Application||2500|
|Continuance of Authorisation||5000|
Minimum Guarantee Fund
Captive insurance companies are required to possess own funds. This minimum guarantee fund depends on the type of insurance business (long-term or general business insurance) and the risk insured.
The required guarantee fund of a long-term insurance business company is of:
(a) €3,500,000 in the case of general business;
(b) €2,300,000 in the case of general business restricted to certain classes;
(c) €1,100,000 in the case of an affiliated reinsurance company;
(d) €3,200,000 – EUR 3,500,000 in combined cases e.g. (i) general business and reinsurance; and (ii) long term business and reinsurance
In the case of an insurer which is authorised to carry on reinsurance where (i) the reinsurance premiums collected exceed 10% of the insurer’s total premium; or (ii) the reinsurance premiums collected exceed € 50,000,000; or (iii) the technical provisions resulting from its reinsurance acceptances exceed 10% of its total technical provisions, the minimum guarantee fund shall be of €3,000,000.
Where the business is restricted to that of an affiliated reinsurance company, the minimum guarantee fund shall be of €1,000,000. In the case of a pure reinsurer, other than an affiliated reinsurance company, the minimum guarantee fund shall be of € 3,000,000.
Every company authorised to carry on general business of a prescribed description must maintain an equalisation reserve in respect of its general business of that description.
The Equalisation Reserve is calculated by transferring a percentage of the net premiums at the end of each financial year. This percentage of net premiums varies in accordance with the business group up to a maximum of 75% of net premiums.
Captives carrying on general business of a prescribed nature are required to maintain an equalisation reserve and shall only be exempted if -
- Their head office is situated outside Malta; or
- less than 4% of net premiums written in that financial year in respect of all its general business and less than €2,500,000, and the insurer has no equalisation reserve to be brought forward from the previous financial year.
However, since technical provisions and equalisation reserves are allowed as a deduction in the computation of taxable income, Captives carrying on reinsurance business may still elect to hold an equalisation reserve if its business is less than the aforementioned thresholds.
Every insurer must maintain a margin of solvency which shall be calculated specifically with respect to long-term and general business and shall vary in accordance to each risk and business class insured.
A Captive must establish and maintain adequate technical provisions, in respect of the business it is authorised to carry. These technical provisions must be set aside by the insurer to meet its liabilities under or in connection with contracts of insurance.
The assets covering the technical provisions shall take account of the business and the classes of the business carried on by a company in such a way as to secure the safety, yield and marketability of its investments and shall remain unencumbered at all times.
Captives are required to cover their technical assets and margins of solvency requirements by admissible assets. To ensure safety, yield and marketability of the assets must be diverse and spread as set out by the Insurance Business (Insurers’ Assets and Liabilities) Regulations 2007.
Malta’s re-domiciliation regulations enable captives operating in other jurisdictions to carry out any insurance business in Malta subject to the authorisation of the MFSA. Such authorisation shall be granted if such body corporate:
- Originates from an approved jurisdiction;
- Approves such continuance by a corporate decision which is valid under the laws of its country of origin and that would be equivalent to an extraordinary resolution under Maltese Law.
Upon acceptance and registration and MFSA authorisation such company shall cease to be a body corporate under its previous jurisdiction and shall continue its corporate existence under the laws of Malta. The company will retain its assets, rights and liabilities as a company otherwise formed and registered under the Companies act and authorised under Maltese insurance legislation.
Like all companies resident in Malta, Captives would be subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system, wherein tax paid by a company in Malta is, on the distribution of a final dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company.
The full imputation tax credit thereby renders Maltese companies highly efficient tax vehicles, with a number of applicable refunds to shareholders possible. The default refund applicable to Captives in respect of active trading income, is a refund of 6/7ths.
Furthermore, foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid. Effectively, it is possible to envisage situations where no Maltese tax leakage would be suffered by the Captive in the manner set forth below:
|Maltese Company||No Foreign Tax||With Foreign Tax|
|Net Foreign Income||2000||2000|
|Grossing up with Foreign Tax||0||105|
|Tax at 35%||700||737|
|Credit- Double Tax Relief||0||105|
|Malta Tax Payable
(tax at 35% less tax credit)
|Shareholder of Maltese Company|
|Refund on distribution
(6/7 of Malta Tax Payable)
|Effective Tax Paid in Malta||100||0|
|Effective Tax leakage in Malta on Net Income||5%||0%|
*632 (6/7th of 737)
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