Cyprus International Trust

WHY A TRUST?

Here’s your predicament: You have significant assets. A profitable private business. An investment portfolio that generates capital gains, interest and dividend income. Perhaps some real estate, at home or abroad.

You also have a family. They will inherit your wealth once You’re gone.

Last Will and Testament? Could work … but the probate through courts can be arduous, complex and costly. Inheritance taxes will also make a killing. Ultimately, the end result could be your lifes’ work damaged, scattered and in disarray.

Here’s another: You are in a high-risk profession. You have worked hard and accumulated some wealth. Yet You are vulnerable to frivolous lawsuits, aimed at your business and at your personal assets, too. If You have meaningful assets, it’s not a matter of “if”, but “when” it will happen.

One final example: Your personal life has been wild and complicated. Marriages and divorces. Some troublesome relatives. Promiscuous kids. But there is also that one special person who really deserves your love. The one who is worthy to take over your hard-earned fortune and carry it into the future. When all is said and done, it’s your decision to make.

But how?

WHAT IS A TRUST?

To start with, a trust is not a company. It’s different.

A Trust is a legal arrangement. Under a Trust, an owner of a certain asset – the Settlor – transfers to another person – the Trustee – the ownership title of the asset. Under the terms of the Trust, the Trustee is obliged to hold, protect and use the asset for the benefit of certain persons named by the Settlor – the Beneficiaries.

The crucial advantage of a Trust is the legal separation between the ownership (legal title) of an asset and the beneficial interest (actual economic income and benefits) arising from that asset. The Settlor establishes the trust. The Trustee is the legal owner of the trust property. Yet the Trustee is compelled to act in the best interests of the Beneficiaries. The Beneficiaries are the ones to whom the economic benefits from the trust property fall – albeit strictly in the manner set out by the Settlor.

Why is it good?

For the Settlor: What does not belong to You can not be taken away from You. Safety through separation. At the same time, determine exactly how the assets will be used, by whom, when, how much and to whom will they ultimately accrue – during your lifetime and beyond. It’s what a last will does, only better.

For the Beneficiary: Enjoy the income without carrying the burden of ownership. Respect the boundaries set by the Settlor.

For the Trustee: Well, there is not much in it for the Trustee. The Trustee serves as a custodian and legal guardian of the trust property. For that service he is entitled to a professional fee, as determined by the terms of the Trust. While the Trustee owns the trust property and has significant functional powers, its ultimate fiduciary duty is towards the Beneficiaries and, implicitly, towards the Settlor. That obligation is enforceable by the courts under the trust laws.

The Settlor may also appoint a Protector to the Trust. The Protectors’ function is to oversee the Trustee. The Protector has powers to remove a Trustee for breach of fiduciary duty or to veto certain decisions by the Trustee if those are deemed to be against the best interests of the Beneficiary. It is not mandatory to appoint a Protector, however, it is a common practice and provides additional assurance to the Settlor and the beneficiaries.

For passive asset protection AND succession planning all in one package, Trust is probably the most effective tool there is.

Cyprus Trusts key facts

Types of CYPRUS TRUSTS

Generally, two types of trusts can be established in Cyprus – a Cyprus (domestic or local) Trust and a Cyprus International Trust.

In simple terms, the domestic Trust must be established by a Cyprus-resident settlor. In contrast, a Cyprus International Trust must be established by a non-resident settlor and for non-resident beneficiaries only. In both cases the trust must have at least one Cyprus trustee.

SYNOPSIS OF THE SOLUTIONS ACHIEVED BY CYPRUS INTERNATIONAL TRUSTS

Avoid inheritance and estate taxes by placing assets in trust during your lifetime.
Avoid forced heirship and prevent your estate from passing to undeserving heirs.
Distribute various components of your estate exactly how You want, when You want.
Protect your assets from any future creditor claims.
Establish safeguards against spendthrift and financially incompetent dependants.
Secure long-term funding for your loved one’s education, health and other needs.
Prevent excessive loss due to disruptive personal events, such as divorces.
Structure cross-border investments in the most efficient manner.
Defer or minimize income tax on passive investments.
Divest from assets in case of an expediency, such as a political engagement.
Avoid public knowledge and scrutiny into your wealth.

LEGAL BASIS FOR CYPRUS TRUSTS

The legal framework governing trusts in Cyprus is based on The Trustees Law, Cap. 193, (“The Trustees Law”), which is largely based on the English Trustee Act of 1925 and on The International Trusts Law, No. 69(I)/92, enacted in July 1992 and amended with the International Trusts (Amending) Law, No. 20(I)/2012.

Cyprus has also ratified the Hague Convention on the law applicable to trusts and on their recognition (“The Hague Convention on Trusts”) which sets out rules as to the recognition of trusts of one jurisdiction to another and resolves conflict of laws issues.

Common Law and the Principles of Equity are also part of the Cyprus legal system as per article 29 (1) (c) of the Courts’ of Justice Law no. 14/60 (as amended), provided they do not come in conflict with local statutes.

The Trustees Law, the Common Law and the Principles of Equity apply to Cyprus domestic trusts and to Cyprus international trusts. The provisions of The International Trusts Law apply exclusively to Cyprus international trusts.

TAX ADVANTAGES OF CYPRUS INTERNATIONAL TRUST

Cyprus international trusts enjoy significant tax advantages which can be used as part of a wider tax planning strategy.

A Trust is not a separate legal person and therefore has no tax obligations on its own merit. Where the assets held by the Trustee under the terms of the Trust generate income, that income is taxed as per the tax status of the beneficiary. Thus the tax residency test for the imposition of tax on various types of income of Cyprus International Trust is at the level of beneficiaries and not at the level of the trustees.

If the beneficiary of the trust is a resident of Cyprus then the income or profits of such trust, which arise in and out of Cyprus, will be taxed according to the Cyprus tax code. If the Beneficiary is not a tax resident of Cyprus, then only the income or profits of the trust that arise solely from sources in Cyprus are taxed.

In the case of a mixture of beneficiaries in a Cyprus international trust (Cyprus residents and non-residents), the Cyprus Tax Department will consider the percentage of beneficiaries who are Cyprus tax residents and will decide whether to treat the trust as a local or international trust.

DIVIDEND INCOME: Dividends, interest and other income received by a trust from a Cyprus company are not taxable or subject to withholding tax. Foreign-source dividends received by a Cyprus international trust are also not taxable.

GENERAL INCOME: General income (profit) received by Cyprus international trust from sources located outside Cyprus is not taxable in Cyprus if the beneficiary is not a Cyprus tax resident. Local-source income is taxable at Cyprus domestic rates (which at 12.5% are also rather modest.)

CAPITAL GAINS: Cyprus international trusts are not subject to any tax on capital gains achieved on the disposal of its assets. There can be exceptions in respect to gains derived from sale of Cyprus real estate.

Cyprus international trusts are routinely used to hold assets in foreign countries which allows their beneficiaries to avoid capital gains tax in their countries of residence.

ESTATE TAXES: A Cyprus international trust is not subject to any estate duty and there is also no inheritance tax or wealth tax in Cyprus.

PAYMENTS TO BENEFICIARIES: Non-resident beneficiaries are not subject to tax on the payments that they receive from a Cyprus trust.

NO EXCHANGE CONTROLS: There are no currency exchange controls or restrictions on the transfer of funds into or out of Cyprus International trust.

NO AUDIT REQUIREMENTS

Unlike most Cyprus companies, Cyprus International Trusts are not required to procure annual audit reports. There is no obligation on the Cyprus international trust to file financial statements or tax returns. Accounting records though, must be kept and the Trustee must have a clear record of the assets, liabilities and incomes of the trust.

ESTABLISHMENT OF A CYPRUS INTERNATIONAL TRUST

The pre-requisites for establishment of a Cyprus International Trust are the following:

– The settlor, whether a physical or legal person, must not be a resident of Cyprus during the calendar year, which precedes the year of creation of the trust.

– The beneficiaries, either physical or legal persons (with the exception of charities), must not be resident of Cyprus during the calendar year, which precedes the year of creation of the trust.

– At least one of the trustees must be resident of Cyprus.

*The term “resident of Cyprus” has the meaning given to it by the Income Tax Laws of Cyprus. Typically, a physical person is considered tax resident of Cyprus if he/she resides in Cyprus for a period which exceeds in aggregate 183 days in a tax year. Cyprus also has a special non-domiciled tax resident status to certain qualifying individuals who reside in Cyprus for at least 60 days in a tax year (the general requirement being that they are not tax-resident elsewhere). A company is considered tax resident of Cyprus if its management and control is exercised in and from within Cyprus.

TRUST PROPERTY

The trust property can include all kinds of assets, tangible or intangible, situated anywhere in the world, provided that the Trustee has legal control and ownership of those assets. Immovable property situated in the Republic of Cyprus may also form part of the trust property of a Cyprus international trust.

CERTAINTY OF ESTABLISHMENT

In order to be properly established, any Cyprus trust must fulfill three pre-conditions (“Certainties”), which are as follows:

Certainty of Intention: this is the requirement that the settlor must clearly intend to create a trust and not something else – for example, a direct transfer of property, a gift or a loan.
Certainty of Subject Matter: this is the requirement that the Cyprus trust property must exist and must be clearly identifiable – for example, “x” number of shares in a specific company, a certain sum of money, an immovable property.
Certainty of Objects: this is the requirement that the Cyprus trust beneficiaries are identifiable, so that the Trustees can at any point in time compile a complete list.

REVOCABILITY OF A CYPRUS INTERNATIONAL TRUST

Revocation is the reserved power of the Settlor to cancel the trust and in such a case the trust assets be returned to him. By clear provision in the Cyprus International Trusts Law an international trust is deemed irrevocable. The trust may be revoked only if it is clearly stipulated so in the trust deed (which is not prohibited).

A Settlor’s right to revoke the trust may raise complications in that it may be easier to attack and classify as “sham” and consequently null and void. The property of a revocable trust may also be targeted and claimed by the Settlor’s creditors, which would not be possible in case of a irrevocable trust.

CHALLENGES AGAINST CYPRUS TRUSTS

Any transfer of assets into a Cyprus International Trust may be contested in court on a basis of alleged fraud (for example, attempting to avoid collection under a legal judgment in another country). However, such action by aggrieved creditor may only be brought within a period of two years from the date when the transfer or disposal of assets was made.

The Cyprus International Trusts Law specifies that the burden of proof of such intent of the settlor (i.e. to defraud the creditors) rests with the creditors seeking to annul the transfer made to a Cyprus international trust.

Future creditors whose cause of action arose after the transfer of property into a Cyprus international trust are precluded from challenging the settlement under any circumstances.

RELOCATION TO CYPRUS

The Cyprus International Trusts Law allows the settlor and the beneficiaries to relocate to Cyprus and become tax residents in Cyprus on the condition that neither of them were residents of Cyprus during the calendar year which precedes the year of the establishment of the Trust. Such relocation does not affect the validity of the Cyprus international trust.

For further information on Cyprus International Trusts, you can explore Knowledge Base and Case Studies chapters in this website.

If that information still does not seem to answer your questions, please contact us with your question!