The concept of a Protected Cell Company ("PCC") is new, having been founded in Guernsey in 1997/8. Since then, other captive insurance jurisdictions have followed this lead, and now PCC legislation exists in Bermuda, Cayman Islands and Jersey. Mauritius introduced such legislation in January 2000, borrowing heavily from the Guernsey model.

The legal structure of the PCC is contained in the next enclosure.

There are many very clear reasons why the use of a PCC is advantageous for a UK resident and domiciled investor. In particular, for UK resident NON-domiciled individuals the advantages are exceptional, as they may, amongst other things, run an active UK equity portfolio without having the returns taxed.

1. Better Returns

There are five reasons why investment through a PCC will give better returns:

1. funds may be rolled up gross within the cell, instead of being taxed with each sale and purchase or switching of funds;
2. taper relief is available, so that after ten years the maximum tax payable will be reduced to only 24%. Even after tax at this rate, the return is greater, as there has been ten years of gross rolling up, which yields a higher return. Ironically, the Revenue will receive more tax too !
3. cells may be aggregated to achieve a higher investment threshold for opportunities such as IPO's, private placements, private investment plans etc;
4. double tax treaties between Mauritius and certain emerging and mature markets, enable gains to realised tax free - the classic and best-known example of this is India. Mauritius has tax treaties with, inter alia, the following countries China, Singapore, Malaysia, Indonesia, Thailand, UK, France, Germany, Italy, Belgium, Sweden, South Africa, Zimbabwe, Mozambique etc. Profits realised in these jurisdictions may be realised completely free of tax;
5. As the instructions are given to a non -UK corporation, there will be no VAT on the management fees which are usually charged at 17.5% on a percentage annual charge. Although investor who has a portfolio of 1 million pounds would not have to pay an annual VAT charge of only GBP1,750, more importantly, he would not have to pay VAT on each transaction his fund manager performs for him. Without these ongoing debilitating charges, the annual returns could be improved by up to 50%. Another attractive feature of the PCC is that the fees charged by the fund manager will be deductible from the profits generated, which yet further enhances the gross roll-up within the cell.

2. Funds are Offshore

The Revenue employs two strategies to prevent investors or high net worth individuals from placing their assets outside the UK tax net.

First, in cases where ownership is clear, offshore corporations into which assets are placed, are deemed to Controlled Foreign Corporations ("CFC's"). This means any income generated by the corporation is imputed to be that of the UK person/entity who controls it. Hence the UK person or entity is taxed on the profits of the offshore corporation.

Secondly, in cases where the destination of the assets cannot be clearly identified, any transfer of assets abroad is caught by the anti-avoidance provisions of section 739 (et seq) of the Income and Corporation Taxes Act 1988 ("ICTA"). These provisions are headed "Transfer of Assets Abroad" and are designed to prevent assets being placed outside the UK tax net by taxing the returns they generate once place abroad.

In both cases, the provisions will not apply to a PCC.

First, in the case of CFC rules, a PCC does not qualify as the person investing in the cell cannot be said to "control" the corporation - the controllers are the directors who are Mauritius residents. Secondly, as the "transfer of assets abroad" does not have a tax avoidance motive, section 739 is disapplied (by section 741). At all times it is the intention of the investor to receive better returns before he brings the assets back onshore whereupon they will be taxed (after taper relief has been applied). In circumstances such as these, it is only logical that anti-avoidance provisions aimed at preventing the assets from leaving the jurisdiction, are not appropriate.

There may be an unlimited number of cells within the Company, and it is the duty of the directors of the Company to keep the funds in each cell separate from each other. Further, in the event that a cell becomes insolvent, the cell will look to the core capital of the company for redress, (but under no circumstances can a cell claim against another cell) and so it is also the responsibility of the directors to ensure that the solvency ratio between the cells and core remains at an acceptable level. Hence, speculative products such as derivatives, swaps, hedging arrangements etc., can not be permitted. However, these arrangements will probably become permissible in specific PCC's which will be established for the trading of these kinds of instruments - this is a special PCC product which the Joint Venture partners are presently assembling.

Under Mauritius legislation, the Regulations permit "Offshore Investment Funds" to be held (as well as permitting captive insurance arrangements). Whilst this definition could be interpreted as being restrictive, if the investment is properly structured, it would come within the definition. This would enable real estate or tangible assets (eg: racehorses) to be held by a cell.

These are excellent vehicles. However, should an investor take a risk (outside the permitted arrangements) and invest in something which is dangerously speculative (eg: a derivative), any losses will spill over to all the units in the trust. A "Barings" scenario is possible. With the PCC, this cannot occur - it is "Leeson-proof" !