Malta – The First EU Member State Allowing Cell Structures For Insurance Linked Securities
The key to Malta’s success in the insurance sector lies in its EU membership, which allows licensed companies in Malta to write business in any of the other member states. Furthermore, Malta is the first European Union member state to adapt cell structures available for insurance linked securities 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. It is a platform structure which offers low costs and quicker set-up time for each transaction. An SCC would be authorised as Reinsurance Special Purpose Vehicle (RSPV) under the Maltese RSPVs Regulations and must be fully compliant with the EU Solvency II Regime.
Application for Authorisation
The creation of a cell in an SCC is subject to prior regulatory approval. The MFSA is committed to processing applications in accordance with customary market-standard time frames agreed with applicants prior to the submission of all relevant application documentation.
An SCC is a company empowered to establish cells for the purpose of entering into securitisation transactions. Maltese law allows for the establishment of multi-currency cells with each cell empowered to issue notes in one or more currencies multiple series and tranches of notes can be issued in respect of the same cells, provided that each cell can only have only one cedant.
The SCC Structure
The SCC Core is prohibited to transact to limit contagion risk. The SCC’s Board of directors will be responsible for the entire entity, including cells. The SCC will have to be MFSA authorised and may be managed by a licenced insurance manager. The Cells shall be established for each hedge-fund counterparty and shall enter into risk transfer contract with European (re)insurer. There is no minimum capital requirements to establish cell. Furthermore, multiple transactions are permitted provided risk transfer counterparty is same cedant. The Cell accounts shall be in base currency, if election is made and contractual tranching within the cell is also possible.
Cells Ring-Fenced From Other Cells
The Maltese law states that assets and liabilities attributable to each cell established by a securitisation cell company constitute a separate patrimony of the SCC. Assets attributable to a particular securitisation cell are only available to creditors transacting with that cell.
Any proceedings against a cell (and any provisional administrator or liquidator appointed in respect of the SCC) will, in accordance with the SCC Regulations, be required to respect the status of each cell as a segregated patrimony that is separate from assets and liabilities of other cells and the SCC itself.
Securitisation transactions that are structured through the use of an SCC benefit from provisions confirming the bankruptcy remoteness of securitisation vehicles contained in the Securitisation Act. The same benefit is granted, by means of Regulation 16 of the RSPV Regulations applying certain provisions of the Securitisation Act to RSPVs. This includes:
• 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. Malta’s Securitisation Transactions (Deductions) Rules, 2011 (the ‘Tax Deductions Rules’) provide for a wide list of deductions which can be claimed by securitisation vehicles over and above any other deductible expenses which may normally be claimed by a Maltese company. These deductions enable a securitisation vehicle to effectively wipe out its chargeable income, thereby resulting in tax neutrality at the Malta level.
The Tax Deductions Rules establish a framework for the determination of:
1. the income of securitisation vehicles;
2. the applicable deductible expenses, and
3. the originator’s deemed income.
The Tax Deductions Rules allow a securitisation vehicle to deduct expenses over and above those which are normally allowed in terms of the Income Tax Act. These additional deductible expenses consist of:
• 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 servicer providers (including the originator) to whom the day to day administration is delegated.
Should the securitisation vehicle have any remaining income after the above allowable expenses have been deducted, it may opt to claim a further deduction of an amount which is equal to the said remaining income (the ‘Further Deduction’). In this manner, the securitisation vehicle will end up with no chargeable income. Exercise of this option is subject to the irrevocable written consent of the originator or assignor.
Tax Treatment of Ceding Undertaking
The amount of deductions claimed by the securitisation vehicle and relating 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 in the hands of the ceding undertaking, and shall be regarded as income or gains from a business or trade.
The Tax Deductions Rules provide that income so attributable to the ceding undertaking is considered as arising in Malta unless the control and management of the business of the ceding undertaking is exercised outside Malta. Thus, such income would only be liable to Maltese tax in the hands of the ceding undertaking if it is:
• either incorporated in Malta; or
• incorporated outside Malta but is tax resident in Malta by virtue of its control and management in Malta
Other ceding undertakings will not be liable to Maltese tax in respect of such income.
Malta Reinsurance Special Purpose Vehicle Structure