Trusts constitute very good tools for managing the personal wealth of individuals as well as for managing and distributing corporate profits at no tax.
The main uses of Trusts can be summarized below:
- Protection against high taxation for settlers who are tax resident in high tax jurisdictions
- Ensuring confidentiality as there is no requirement to register a trust arrangement, publish its financial results or disclose the deed arrangement.
- Organizing Collective investment and managing and sharing profits and return on investment
- Management Vehicle for the management of funds on behalf of others via a trustee
- Holding property that cannot personally be held
- Protection against Spendthrifts ensuring the safeguarding of family capital for the next generation
- Promoting causes and charities
- Protection of assets in case of litigation
- Managing profit sharing and pension schemes
Cyprus as a common law jurisdiction recognizes the concept of a trust and the trustee legislation is based on the equivalent English laws. Cyprus’ Trust regime has been enhanced with the enactment of the International Trusts Law, Law 89(I)/92 in 1992 and such governs the creation and management of international trusts.
To this respect, Cyprus is considered amongst the most popular jurisdictions for the establishment and management of an international trust in order to protect and manage assets in a tax efficient manner.
For a Trust to qualify as an “International Trust” the following conditions need to be satisfied:
a. The settlor should not be a permanent resident of Cyprus;
b. At least one of the trustees should be a permanent resident of Cyprus;
c. Beneficiaries, with the exception of a charitable institution, should not be permanent residents of Cyprus;
d. The trust property does not include any immovable property situated in Cyprus
A settlor can transfer his/her assets to an International Trust if at the time of such transfer is of full age and of sound mind in accordance with the applicable laws of the country of his/her residence.
Further, irrespective of any provisions of bankruptcy law in Cyprus or in any other jurisdiction, in the event of the settlor’s bankruptcy, any transfer of assets made to the International Trust shall not be void or voidable, unless in the case of an International Trust which is voluntary and made without consideration or made for the benefit of the settlor, their spouse or children and to the extent that it is proven to the satisfaction of the Court that the trust was set up with the intent to defraud persons who were, at the time the property was transferred to the Trust, the settlor’s creditors. The burden of proof to establish intent to defraud lies with any creditors seeking to annul the
The Trust can be valid for up to 100 years from the date of its creation. In practical terms, this means that the Trust will terminate at the expiry of 100 years from the date of its creation, if it has not been terminated pursuant to a relevant term in the instrument creating it. Charitable and Purpose Trusts are not subject to the rule and may exist in perpetuity. It is worth noting that there is no requirement for an International Trust to be registered with any government or other authority.
Powers of the trustee
Subject to the provisions of the instrument creating an International Trust the trustee will be allowed at any time to invest the whole or any part of the trust funds in any kind of investment. The trustee is expected to exercise diligence and prudence that a reasonable person would be expected to exercise in making such an investment.
The Powers of the Trustee, vary depending on the type of trust which the Settlor wishes to establish. Therefore, a Trust may be a fixed or a discretionary trust. The criterion of such distinction is whether the powers of the Trustees as to the distribution of the Income and Capital of the Trust Fund for the benefit of the beneficiaries is left to the discretion of the Trustees or they are set out expressly in the Trust Deed.
The adoption of the principle of the Nominator (the Protector) in the discretionary Trusts, sets barriers to the power and authority of the Trustees in the sense that the Settlor by appointing the Nominator, controls and supervises the Trustee in exercising the powers under the Trust Deed.
Any arrangement varying or revoking the terms of the International Trust, extending or changing the powers of management and administration of the trustees shall not be approved unless the Court is satisfied that such change is for the benefit of the persons applying for it or those categories whose interests are expressly protected under the Law and of any other interested parties.
Confidentiality takes a prominent position in the law. The settlors, trustees and beneficiaries should not disclose information to third parties relating to international trusts, unless a Cyprus Court orders the information to be disclosed.
The applicable law of Trust may be changed to or from the Law of the Republic of Cyprus provided that: (i) in case of a change from Cyprus Law to another law, the new applicable law recognizes the validity of the trust and the respective interest of the beneficiaries and (ii) in the case of a change from another law to Cyprus Law such a change is recognized by the law applied in the trust previously.
In accordance with the Cypriot taxation legislation the following should be borne in mind in relation to the taxation of a Cyprus International Trust:
The legislation endeavors to create the necessary environment for foreign investors to establish International Trusts in Cyprus, giving freedom of movement of funds and removing certain ambiguities as to whether the existing legislation could cover set-ups, such as those which are common to other jurisdictions.
- Income realized by a trust is considered to be income of the beneficiaries irrespective of whether this is paid to the beneficiaries or is accumulated by the trustee as capital
- No trust is subject to tax as a separate legal personality
- The tax assessment is issued in the name of the trustee as a representative of the beneficiary
- The income of an International Trust which is derived or is considered to be derived from sources outside of the Republic of Cyprus is exempt from any Cypriot tax
- The beneficiaries of a trust may be taxable in Cyprus on income derived or considered to be derived from sources within the Republic of Cyprus e.g. rental income from Cyprus or profits of a Cyprus permanent establishment.