Malta has shown a lot of success in the insurance sector, partly due to being a Member State of the European Union (‘EU’). Its membership allows Malta-licensed companies to carry out business in other Member States. Malta is a pioneer, among the EU Member States, in adapting cell structures available for Insurance Linked Securities (‘ILS’) Transactions.
A securitisation cell company (‘SCC’) is an insurance linked securities platform for private collateralised reinsurance transactions. An SCC is a single legal entity that can establish one or more segregated cells for the purpose of entering into securitisation transactions. The platform allows for each transaction to be set up quicker and at a lower cost. Under the Maltese Reinsurance Special Purpose Vehicle (‘RSPV’) Regulations, and SCC would be authorized as a RSPV and must be fully compliant with the EU Solvency II Regime.
Prior to its creation, a cell in an SCC must receive regulatory approval. Under Maltese legislation cells can be established as multi-currency cells. Said cells can issue notes in one or more currencies.
In the SCC Structure, multiple securitisation cells have one securitisation cell company core. The core is prohibited from transacting in order to limit contagion risk. The SCC’s Board of Directors is responsible for the entire entity, including its cells. SCCs require the authorisation of the Malta Financial Services Authority (the ‘MFSA’) and can be managed by a licensed insurance manager. The establishment of cells is not subject to minimum capital requirements. Under Maltese law, the assets and liabilities attributable to each cell established by a SCC constitute a separate patrimony from that of the SCC. This implies that assets attributable to a particular securitisation cell are only available to creditors transacting with that cell.
The benefits from provisions in the Securitisation Act apply to securitisation transactions that are structured through the use of an SCC. These benefits confirm the bankruptcy remoteness of securitisation vehicles. Similarly, Regulation 16 of the RSPV Regulations, grants the same benefit to RSPVs. This is done by the application of certain provisions of the Securitisation Act, including confirmation of bankruptcy remoteness of RSPVs; affirmation that RSPVs are not collective investment schemes and alternative investment funds; and provisions on the privileged position of securities holders of an RSPV in respect of the assets held by the RSPV, subject to the terms of a subordination agreement.
The SCC benefits from tax rules applicable to securitisation vehicles. In addition to the deductible expenses which may normally be claimed by a Maltese Company, the Securitisation Transactions (Deductions) Rules of 2011(the ‘Tax Deduction Rules’) provide a wide list of deductions that can be used by SCCs. The Tax Deduction Rules establish a framework for the determination of the income of securitisation vehicles; the applicable deductible expenses; and the originator’s deemed income. The additional deductible expenses (over and above those which are normally allowed in terms of the Income Tax Act) consist of the following:
- Sums payable by the securitisation vehicle to the originator or assignor of the securitised risk;
- Premiums, interest or discounts in relation to the financial instruments issued, or funds borrowed, by the securitisation vehicle;
- Any expenditure incurred by the securitisation vehicle in respect of its day to day administration, and collection of receivables; and
- Any fees of third party service providers to whom the day to day administration is delegated.
In the event of a securitisation vehicle having any remaining income following the deduction of the aforementioned expenses, it may choose to claim a further deduction equal to the amount of remaining income. Following this, the securitisation vehicle will end up with no chargeable income, thereby resulting in tax neutrality at the Maltese level. This option can only be exercised following the irrevocable written consent of the originator or assignor.
The deductions, claimed by the securitisation vehicle, that relate to the cost of acquisition of the securitisation assets; or the cost of the assumption of risk or the further deduction referred to above, are all deemed to be income of the ceding undertaking – income or gains from a business or trade. In accordance with the Tax Deductions Rules, income attributable to the ceding undertaking is considered to arise in Malta unless the control and management of the business of the ceding undertaking is exercised outside Malta. Such income is only liable to Maltese tax if the ceding undertaking is either incorporated in Malta, or incorporated outside Malta but is a tax resident in Malta by virtue of having its control and management exercised in Malta.