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VALLETTA, Malta -- Legislation to take effect beginning next month may make Malta a serious competitor as a captive domicile.

At the same time, the Mediterranean island has resumed its application to become a member of the European Union. Full membership would give it cross-border insurance trading capabilities with other E.U. countries.

Malta's Parliament this summer approved two bills, the Insurance Business Act 1998 and the Insurance Brokers and Other Intermediaries Act 1998. They will become law Oct. 1, replacing the Insurance Business Act 1981.

The insurance-related acts are the final pieces of financial services legislation designed to increase Malta's attraction as an offshore financial service center. Like the other finance-related acts enacted in 1994 and 1995, the two latest pieces of legislation aim to bring Malta's legislative environment in line with other European countries.

The Insurance Business Act 1998 "upgrades insurance legislation to international standards based on E.U. directives," explained John Bonett, director of insurance at the Malta Financial Services Centre, a government agency supervising financial services in Malta.

Previous legislation had discriminated between onshore and offshore insurance business as far as regulation was concerned, he commented, and the new act will bring all regulation under the same umbrella.

In particular, the new act allows the registration of "affiliated insurance companies," such as captives. Such companies must have minimum capitalizations of 100,000 Maltese liras ($264,900) and must maintain solvency margins at levels required by E.U. directives. Currently, this equates to 18% of annual premiums or 26% of average claims over the previous three years. In addition, captives will be required to set up and maintain adequate reserves.

Malta's new government, elected Sept. 5, already has reapplied to become an E.U. member. Malta originally applied for membership in 1990, but the application was suspended after the Maltese Labor government took power in October 1996.

The Nationalists' re-entry as the ruling party has reignited the application process, and Guido de Marco, deputy prime minister and minister of foreign affairs, formally applied to reactivate the process just five days after the government was voted in.

Gaining full E.U. status also will help Malta's ambition to become a major insurance center, as it will be able to benefit from the Third Life and Non-Life Insurance Directives, allowing insurance business to be freely transacted across E.U. member country borders.

Companies setting up captives will benefit in several other ways by domiciling in Malta, Mr. Bonett said. The island has double-taxation treaties with 26 countries and "various fiscal benefits," he said, making it an "attractive, tax-efficient jurisdiction."

In addition, the new legislation allows captives to offset reserves and provisions against taxable income and contains a provision to the Companies Act 1995 that will allow the entry of protected cell companies. The Insurance Business Act 1998 also provides for redomiciliation into and out of Malta.

Several companies in the past have been interested in creating captives in Malta but were awaiting the new legislation, Mr. Bonett said. In the meantime, two captive managers, International Insurance Management Services Ltd. and Willis Corroon Management-Malta, already are operating on the island.

Malta has low costs, good communication infrastructure, and well-educated insurance and accounting personnel, said Mr. Bonett. "In addition, it offers tax planning opportunities and is a particularly pleasant place to visit," he added, though the MFSC has not set a timetable or target number for captives.