Labuan Protected Cell Companies: An Effective Risk

Management Solution
By Sazali Suzin, Trust Officer of Labuan Borneo Trustees Limited (01/12/2012)

Have you ever heard the saying dont 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 IBFCs 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 companys
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 Companys 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.