In March 2012, a much needed reform of the Cyprus International Trusts Law of 1992 was finally effected with the passing of the International Trust (Amending) Law 2011. In general, the new framework has strengthened the jurisdictional protection of the Settlor and the Beneficiaries, it has given new extended powers to Settlors, has improved the confidentiality restrictions providing maximum protection to the assets of the Cyprus International Trust and has created a more flexible legal framework for International Trusts. Overall, it offers an excellent opportunity for non-residents to create a Trust in Cyprus.
The concept of a trust arises where the Settlor arranges for the interests of a Beneficial Owner to be held on trust by the trustees. The trustees hold the legal interest for the benefit of the Beneficial Owners and manage the structure created under the trust.
A Cyprus International Trust is created where:
the Settlor is not a permanent resident of Cyprus;the Beneficiaries are not permanent residents of Cyprus;one Trustee is a permanent resident of Cyprus;the trust property includes any immovable property situated both in Cyprus and overseas, including shares in companies incorporated in Cyprus.
The Trust deed setting up the Cyprus Trust should include, amongst others, the following:
The names of the Trustee and the Beneficiaries;Type of the trust;The powers and duties of the Trustees;The details and the transfer of the property from the Settlor to the Trustee;A provision whereby the Trustee can accept further property as part of the Trust Property;Applicable law;Period of accumulated income.
There are no particular formalities for the creation of trusts. However, where a trust is created by a will, the particular requirements relating to wills have to be observed. Under the new law many restrictions and limitations have been removed, adapting the provisions of the law to the needs of investors today.
Types of Trusts
A fixed trust does not give the Trustees any discretion when distributing the assets to the beneficiaries. The Settlor expressly requires the Trustees to distribute the income of the trust property to a particular individual who is specified in the trust deed.
The Settlor gives the Trustees discretion as to the distribution of the income of the trust property (i.e. as to which beneficiary, when and how is to be benefited). The Beneficiaries may be defined either by name or by reference to a class of persons (e.g. the Settlor’s children) or it may be left to the discretion of the trustee. In such a case, the Settlor indicates to the Trustee his wishes by means of a Letter of Wishes. It is further possible to appoint a “Protector”, i.e. an independent third party whom the Trustees must consult before exercising any power of discretion.
The Law provides a legal definition of a Purpose Trust. This can be useful to international corporate planning and can be used to accumulate corporate earnings for general corporate purposes rather than for a defined group of individuals.
The idea of a protective trust is to provide maintenance of someone whose management of his own affairs is not reliable.
Under a Trading Trust, the Trustee is usually a company which has the power to trade and employ staff to manage its business. Third parties are not aware of the existence of the trust as all documentation is in the name of the Trustee company.
Benefits of the Cyprus International Trust:
Trusts and Beneficiaries of trusts are not taxed in Cyprus;No capital gains tax is paid by the International Trusts;Income tax paid by non-residents is only in relation to Cyprus income. Therefore income from overseas is tax free;Distributions to beneficiaries are not subject to tax in Cyprus;Assets can be added to the trust at any time;The trust can be a shareholder in a Cyprus company or a foreign company;If the Cyprus Trust is a shareholder in a Cyprus company it will enjoy the tax and other benefits of the Cyprus international company;Trust assets are permanently separated from the Settlor’s personally owned assets;The trust can be revocable or irrevocable;There are no registration or reporting requirements for trusts established in Cyprus and the names of the trustees or beneficiaries named in the trust document are not disclosed, which ensures confidentiality;There is no estate duty or other inheritance tax in respect of assets belonging to the trust;There is a power to change the applicable law of the international trust.
Validity and Asset Protection
According to the Law, the validity of an International Trust is not in any way affected by any succession provisions in the law of Cyprus or any other country, not by the bankruptcy, legal action by creditors or repossession of the property of the Settlor, unless it can be proved that the Trust was set up to defraud the creditors. The onus of proof shall be on the creditors. No action may be brought against the trustee after 2 years from the date of the transfer of the property.
The most important changes imposed by the 2012 Law are the following:
The restriction that the Trustee and the Beneficiaries should be non-residents has now been limited to the year preceding the year of the creation of the trust, allowing the settlor or the beneficiary to locate to Cyprus after the creation of the trust. Trust property may include immovable property in Cyprus.
Cyprus tax shall apply to non-residents only with regard to their Cyprus income and not for income sourced overseas.
Any matter arising in relation to the International Trust or the disposition of property to such trust shall be governed by the Cyprus Law without any reference to the law of any other jurisdiction; any reference to the inheritance or succession law of Cyprus or any other jurisdiction has been excluded and cannot in any way affect the transfer, disposition or validity of an International Trust.
The Settlor may choose and change the governing law of the trust, revoke, vary or amend the terms of the trust; and also act as a director, appoint or remove a Trustee, a Beneficiary or a director of any of the Companies that belong to the trust.
An International Trust can exist in perpetuity and thus there will be no limit on the period for which a trust may continue to be valid and enforceable. The new law did not affect the provisions regarding charitable trusts and non-charitable purpose trusts, which were permitted to exist in perpetuity.
The Trustees can invest in movable and immovable property both in Cyprus and overseas, including shares in companies incorporated in Cyprus.Dispositions of a trust property cannot be considered void or voidable on the grounds that they are inconsistent with the laws of other jurisdictions, for example regarding family and succession issues, or prohibit or do not recognize the concept of the trust.
A new party, namely, the “Protector” may advise the Trustees in the way they exercise their powers and in relation to the appointment or cancellation of the appointment of the Trustees.
Cyprus Law exclusive application
Under the new law, any matter arising in relation to the International Trust or the disposition of property to such trust shall be governed by the Cyprus law without any reference to the law of any other jurisdiction.
The new law specifically refers to the following matters:
The validity, interpretation or result of the trust or any disposition to a trust;The validity or result of any transfer or other disposition to a trust;The administration of the trust – whether in Cyprus or not;The powers, duties and fiduciary duties of the trustees or any protector of the trust; More specifically, any reference to the inheritance or succession law of Cyprus or any other jurisdiction has been excluded and cannot in any way affect the transfer, disposition or validity of an International Trust.
Relocation of International Trust
The law allows the removal of an International Trust from Cyprus and vice versa, provided the following conditions exist:
There must be a provision in the trust deed for the change of jurisdiction; when a trust moves to another jurisdiction from Cyprus, Cyprus Law requires that the new jurisdiction recognizes the validity of the trust and the respective rights of the beneficiaries; when a trust is to be moved to Cyprus from another location, the move must be recognized by the laws of the jurisdiction it intends to leave and which had governed the trust previously.
There are no registration or reporting requirements of any nature in relation to trusts. Even the identity of a settlor may be obscured as the trustees may execute a declaration of trust in which the Settlor is not named.
Section 12(1) of the Law provides that the income and the gains of an international trust derived or deemed to be derived from sources outside of Cyprus shall be exempt from all tax imposed in Cyprus and no estate duty or inheritance tax shall be chargeable in respect of assets belonging to an international trust.
Therefore there is total exception from income tax, capital gains tax, special contribution tax or any other taxes in Cyprus. Also, interest deriving from trust funds vested in any type of Cyprus bank account is also tax exempt. It should be noted that the wording of the section is such that the trust is liable to taxation in Cyprus (though its foreign income is taxed at zero rate), thus preserving the possibility of arguing that it is a resident for the purpose of the various tax treaties.
The instrument creating an international trust is subject to a flat stamp duty of €430.
This publication has been written in general terms and is intended to be seen as a brief summary of the issues surrounding Cyprus International Trusts. The application of the proposals to specific situations will depend on the particular circumstances of each scenario. Accordingly, we recommend that readers seek appropriate professional advice regarding any query they may have. This publication should not be relied on as a substitute for such advice.