Set up your business in
Cyprus

Generally, trusts are most suitable for protection of an existing asset portfolio and for personal succession planning purposes, also including charity.

In contrast, companies (corporations) are designed for launching, building and managing an active business, be it in trading, services or any other segment of commercial activity.

As a typical interaction, many trusts are shareholders in business corporations. Or, to put it otherwise, business companies are often part of a trusts’ asset portfolio.

The main differences between companies and trusts are in their purposes and operational mechanics.

A company is a separate legal person. It is owned by shareholders. There can be just a single shareholder, or there can be thousands of them – it does not significantly change the mechanics of how the company operates.

The shareholders elect directors to manage the company. The directors, in turn, hire employees and junior managers to run the routine business of the company. Companies are meant to operate businesses for profit. The profits are either reinvested in growth and expansion of the asset base, or distributed to shareholders as dividend. There is absolutely no ambiguity in that the company is owned by its shareholders and it exists, works and makes profit for them.

Companies act through the various individuals who run them in their various roles. These roles are defined by the corporate documentation – memorandum and articles of association, shareholder resolutions, director’s  actions. The company directors and officers can bind the company by signing contracts and other binding documents on its behalf. The company directors and officers are accountable directly to the shareholders to run the corporation for the benefit of the shareholders.

A trust is usually not a separate legal person. It is a legal arrangement between three main parties – the Settlor, the Trustee and the Beneficiary. Those roles can also overlap.

The most significant distinction in a trust is the split between the ownership of the trust property, which vests in the Trustee, and the economic benefit (a.k.a. beneficial interest) of the trust property, which vests in the Beneficiaries. In comparison, in any corporation both the ownership and the beneficial interest vest in the shareholder.

Trusts are also different in terms of assets. By definition, there must be some materially valuable asset, which the Settlor has transferred into the Trust, for the Trustee to keep and manage for the ultimate benefit of the Beneficiaries. Without such asset the Trust has no reason to exist and should in all fairness cease to exist.

This is not necessarily the case for all business corporations. A company can carry on without a meaningful asset base or even with negative assets – provided that the owners and managers of the business have a feasible plan of how to ultimately generate earnings. The presence of a meaningful, valuable, income-generating property is not really a mandatory pre-requisite for a corporation, but is for a trust.

The mechanics of operation of trusts are also different.

Trusts have beneficiaries, for whose benefit the trust is established and is to be managed. The beneficiaries do not necessarily need to be people. They do not even need to currently exist – for example, an unborn child can be designated as a trust beneficiary. Some trusts are known to have animals as chosen beneficiaries. Trusts can be established for charitable purposes, where specific charitable organizations are set out as beneficiaries, or some general charitable purpose is to be supported.

In stark contast to company shareholders, the trust beneficiaries do not have much of a say in how the trust should be ran. They can’t remove the Trustee. (The Protector can, though.) They can’t resolve to wind up the trust and distribute its assets. They can’t demand if, when or how much they will be paid. All of that has already been pre-determined by the Settlor through the Trust Deed, which binds the Trustee to act accordingly.

In a proper trust, the beneficiaries are like passengers in an airplane. They will get the benefit of travelling in comfort to their desired destination, but they most definitely are not allowed to fly the aircraft.

To continue with that analogy, the Trustee is the captain of the aircraft. Trustee is designated with the responsibility and the authority to carry out the instructions of the Settlor, which are embedded in the terms of the Trust Deed. The Trustees are entitled and responsible to make decisions when decisions need to be made. Same like company directors, Trustees have the authority to bind the trust assets through deeds and contracts. The Trustee is accountable to the beneficiaries to handle the trust for their benefit, but enjoys significant discretion of decision under the laws and the Trust Deed. As a safety mechanism against dishonest trustees, a Protector can be appointed to remove such trustees or override their decisions.

Trusts are usually set up for private, personal purposes. The most typical purposes are asset protection and efficient transition of the Settlors’ estate to its designated successors.

Companies are usually set up for active business and for-profit purposes. They are great for scaling and attracting capital, running a wide variety of business models and management structures. Unlike trusts, companies do not accommodate legal separation between their formal and beneficial ownership.

A bank reference is also one of the usual documents for “know your client” (due diligence) purposes. Bank references are routinely asked from new clients at new bank account openings. Bank references are required from all individuals involved with the new account, including the beneficial owner of the company. Requests for bank references from new clients, especially foreign clients, are standard procedure in most banks. As part of our own due diligence procedure, we also require a bank reference or a professional reference from previously unknown clients.

A bank reference is a short letter from the bank where You have an account. A reference should simply state that You are their customer for a number of years (preferably, 3 or more) and should confirm that your banking relationship has been normal, without any defaults from your part. The bank reference can also confirm Your residential address, as it features in the records of the bank. This way the bank reference can also serve as proof of address, so there may be no need to provide a separate proof of address. A bank reference may be obtained on the basis of any banking relationship – a personal account, joint account or a business account (of a company), insofar as You have signatory rights in that account.

A bank reference is not a guarantee. It is just a standard, informative letter. As such, a bank reference is well known to all bankers, so they won’t be surprised when You ask for it. Every bank usually has its own wording for a reference. That’s perfectly acceptable. Some banks may also include a disclaimer to the extent that the reference letter is for information purposes only and does not provide any representations or guarantees on banks’ part. Such wording is also no problem, as the purpose of bank reference is not to guarantee anything – just provide a basic confirmation.

The bank reference does not have to reveal any confidential information! Bank reference does not have to state the account number, the amount of funds on the account, the outstanding loan or any other kind of personal financial information! If by some reason or misunderstanding the bank is purporting to include any more confidential details in the reference (like the account number), You may request them to withold any such details or You may black them out by yourself. A bank reference should be nothing more than just an informative letter, stating that the bank knows You for certain period of time as a decent customer – without going into any further detail.

The underlying logic for the bank reference is to establish that the particular person is a regular member of society with some economic activity or vocation – as all such individuals would normally have some sort of bank account. The secondary purpose of a bank reference may be to confirm the identity and address of an individual by an independent, reputable financial institution (the bank).

The preventive purpose for requesting the bank reference is to avoid fraudulent attempts to register a company in the name of a “ghost”, a dead person, or based upon a stolen identity.

In Cyprus, the names and addresses of the shareholders of all Cyprus private companies are filed with the Companies Registry, and thus part of the public record. Consequently, the shareholder of a Cyprus company is the person in whose name the shares in a particular company are registered, as per the official records in the Registry of Companies. That shareholder can be a private individual or another corporate body.

However, the shareholder may not always be the ultimate beneficial owner. A distinction can be made between “holding” the shares and actually owning them. While the shareholder may hold shares in his own name, he may at the same time hold those shares on behalf of another person on a contractual basis. Accordingly, that other person would be the actual, ultimate beneficial owner of those shares. Such arrangement is called nominee shareholding. Effectively, then, a nominee shareholder acts as a stand-in for the beneficial owner, preventing general public from seeing who is the real owner of the company.

The signal distinction between the nominee shareholder and the ultimate beneficial owner is that the nominee would only be entitled to a contractual fee for its service, while the beneficial owner retains the full economic interest (and risk) in the underlying business.

Yes. However, bear in mind that the residence of the director(s) is one of the criteria that determines the location of the tax-residence of the company itself. There are, of course, many other variables that determine the tax residence of a corporate body – the location of the board being just one of them. So it must be viewed in context. To avoid even a theoretical controversy in this respect, the obvious option is to engage only Cyprus-based directors (individual or corporate).

It’s a component of the standard “know your client” (due diligence) process. A proof of address is any original document which features the full name of the person together with his/her residential address. A utility bill, bank statement, credit card statement, mortgage or credit union statement, local authority tax bill, home security services bill, landline telephone bill, local council rent card, or an official statement of the residential address issued by the local municipality, notary or banker can serve as proof of address. A national identity card or drivers licence can also serve as proof of addres, if it contains the residential address and if such document is provided in addition to the passport of the same person. For due diligence purposes, a proof of address must be in original (no photocopies!), and issued in the past three months.

The proof of address document is supposed to provide a believable information as to what is the real, actual residence address of an individual.

An account signatory is an individual who has signatory rights in the bank account. Such rights are granted by a Company Mandate (a special resolution, signed by the company Director(s), resolving to open a bank account and to appoint particular individuals as account signatories). An account signatory may “sign” on the account – which means, he or she can execute transfers, sign cheques and otherwise dispose with the money on the account. An account signatory may either have a single signatory right, or a joint signatory right together with another person. In the latter case, only two signatures are good to execute a transaction. In principle, there is an endless variation of options of how to configure joint signatory rights on a bank account.

For any regular company, the most obvious option is that the director is also the account signatory. However, anyone can be an account signatory to a corporation – even if such person is not formally related to the company.