Labuan Protected Cell Companies: An Effective Risk Management Solution

Have you ever heard the saying “don’t put all your eggs into one basket”? This means that the risk of losing everything you own is higher if you put all your assets in one place, compared to dividing or allocating your assets into several different savings or investments. Diversification is the essence here. The same technique also applies for business owners who are looking to protect their assets in their business from any future creditors’ claims or liabilities.

These days, the majority of the people who are involved in high risk business are always on the lookout for suitable tools or vehicles for corporate tax planning, cost saving and protection of the assets in their business. These people are not merely looking for a suitable vehicle to protect their investments or assets, but to enjoy the benefits of increased income provided by effective planning.

Protected Cell Companies are an innovative corporate instrument introduced in several International Business and Financial Centre (“IBFC”) jurisdictions. They can be used to reduce high tax burdens and also as a legitimate vehicle for asset protection and wealth management planning.

Protected Cell Companies were first developed in Guernsey in the late 1990s and originally introduced to attract captive insurance businesses to conduct their business through Guernsey. However, the concept of Protected Cell Companies proved to be so versatile and popular, that it was subsequently applied to investment fund structures. Other IBFC jurisdictions such as the Bahamas, Bermuda, the Cayman Islands and the Isle of Man have followed suit and introduced legislation introducing Protected Cell Companies structures.

Realising the huge potential of Protected Cell Companies structures in the current business environment, the Government of Malaysia has taken a constructive approach by introducing the Protected Cell Companies model in the Labuan IBFC. The Protected Cell Companies concept was officially introduced in February 2010 mainly to cater the needs for the alternative solutions to traditional corporate structures and significantly to fulfil the potential of Labuan IBFC’s advantages. Labuan Companies Act 1990 has been amended to include new provisions of Labuan Protected Cell Companies. Section 130 of the Labuan Companies Act 1990 provides the governing law on Protected Cell Companies in Labuan IBFC.

Key Features and Main Characteristics

What is a Protected Cell Company and how it works?

In general, a Labuan Protected Cell Company is a corporate body which consists of a main core and several cells within the same legal vehicle. Each cell has its own assets, its liabilities, its own cellular capital, its own dividends and accounts. Furthermore, each cell is a legally independent unit from the others within the structure, and the debtors and creditors of each cell have no claim against the assets or liabilities of the other cells, including the core cell of the company.

Simple diagram of a Protected Cell Company

The main legal characteristics of a PCC can be listed as follows:

• Legal entity

A Labuan Protected Cell Company is a single legal entity, thus capable of owning rights and assuming obligations on its own. Although each cellular cell is an independent unit, it is not considered as a separate entity.

• Cellular allocation

A Labuan Protected Cell Company operates in two parts, with a non-cellular part commonly known as the core cell and the cellular part which can be created in any number of cells depending on the company’s structure. The assets and liabilities can be divided into different cells. Each cell of the Labuan Protected Cell Company has its own unique names, capital, and the assets and liabilities of each protected cell are ring-fenced by law from the liabilities of the other cells. Therefore, if one cell of the Protected Cell Company becomes insolvent, the creditors only have access to the assets in that particular cell and not to other cells within the Protected Cell Company’s structure.

• Core cell

It is the main core of the Labuan Protected Cell Company. It is also known as non-cellular assets. The assets are recorded as separate and distinct from other assets in other cellular cells.

• Segregation of Assets and Liabilities

The assets allocated to a specific cell may only be liable for liabilities incurred by the cell itself and thus protected from the creditors in other cells. In case the assets in a specific cell are insufficient to cover the liabilities of that particular cell, the company can use the core assets to cover or settle the liabilities. But it is only limited to the amount of shares or assets that are placed into the specific cell.

• Administration

A Labuan Protected Cell Company can have one Board of Directors only to manage the affairs of the company. However, a committee can be formed and appointed to manage the operations of each cell.

• Taxation

A Labuan Protected Cell Company is taxed under Labuan Business Activity Tax Act (“LBATA”) 1990 as the main taxable entity, regardless of the number of cells or their profits in the cells within the Labuan Protected Cell Company structure itself. The Labuan Protected Cell Company can opt to pay three per cent tax on audited net profits of the Labuan Protected Cell Company, or upon election a maximum tax of MYR 20,000.00.

• Formation of a Labuan PCC

A Labuan Protected Cell Company can be incorporated through Labuan Trust Companies in Labuan IBFC, or alternatively an existing Labuan Company can be converted to a Labuan PCC with prior consent of Labuan Financial Services Authority ("Labuan FSA").

Use of Labuan Protected Cell Companies

A Labuan Protected Cell Company can be established to conduct Labuan Insurance business or Labuan Captive Insurance business. A life assurance company can legally separate the assets of life, pension and individual policyholders, while a captive insurance company can segregate areas of risk and activity into different cells. This has benefits for multi-nationals insurance company to use the Labuan Protected Cell Company structure to operate their captive insurance, treasury and other functions globally in a single legal entity using the same core capital.

Besides that, a Labuan Protected Cell Company can be used to conduct the business of a mutual fund in Labuan IBFC. The Labuan Protected Cell Companies structure is particularly attractive to private or public funds company, where the various classes of shares or multi class funds can be placed and classified in the specific cells. These steps can ensure the risk of investments in one cell will not be affected by the investments in other cells within the company.

Advantages of Labuan Protected Cell Companies

The Labuan Protected Cell Company structure is an effective vehicle for insurance business, which offers an effective way to manage risks for captive insurance business by providing cover for uninsurable risks and also provides the flexibility in managing the risk portfolios. It is also the right vehicle for mutual fund operation as it offers diversified investments in a risk controlled environment.

Besides that, Labuan Protected Cell Companies also offer ring fencing rules to the assets placed in each cells. The insolvency of a cell will not affect the whole business and the performances of other cells. The assets that are allocated into a specific cell may only be liable for liabilities incurred by the cell itself, and the creditors to that specific cell have no access to other cells.

There are often administrative and cost savings to be found by using a Labuan Protected Cell Company structure. The cell can be added as and when required, with minimal administrative work and cost. It also reduces the cost of operation, increases the profit of the company and improves the cash flow.

The use of cell structures will grow and prosper in the future. It is expected the recent changes to the Labuan Companies Act will benefit and enhance the attractiveness of Protected Cell Company structures. The legislative changes will strengthen the Protected Cell Company structure and will provide benefits to business owners who are currently planning to use the Protected Cell Company structure.