- For the purpose of attracting foreign investors the International Trusts Law of 1992 has been passed that deals with the establishment and regularization of international trusts. This law is not a self-contained law on trust but it is builds on the existing Cyprus Trust Law, which is based on the English Trust Law. This Law offers freedom of movement of funds and it removes certain doubts as to whether the existing legislation could cover arrangements such as those, which are common in other jurisdictions.
- An international trust may be described as a trust created by a non-resident Settror for the benefit of non-resident beneficiaries. Beneficiaries may be legal or natural persons, including persons not yet born at the time of the creation of the Trust, or a person(s) who is part of a class of people entitled to a right or interest in property which is subject to the trust. A trust can still qualify as an international trust for the purposes of the law even if the Settlor, Trustee or the Beneficiaries are International Business Companies or International Partnerships.
- In order to establish an international trust:
- The settler must not be a permanent resident of Cyprus during the calendar year immediately preceding the creation of the trust;
- No beneficiary, other than a charity imputation, is not a permanent resident in Cyprus during the calendar year immediately preceding the creation of the trust;
- c) At least one of the trustees for the time being is a resident in Cyprus during the whole duration of the Trust.
- There is no longer a requirement to inform the Central Bank of Cyprus and get their respective permission in respect of the trustee of the International Trust since Cyprus’s accession to the EU;
- The Settlor may retain an interest in the trust fund and can also reserve powers to himself (i.e., to revoke, vary, amend the terms of the trust, to appoint or remove any trustees etc) whether as protector and/or otherwise and such reservation by the orpora will not affect the validity of the trust or delay its implementation
- No rule against perpetuities or remoteness of vesting or any analogous rule applies to a trust or to any advancement, appointment, payment or application of property from a trust; The 100 year maximum duration for a trust has been abolished so that the trust can now continue for an indefinite period of time.
- The International Trust is irrevocable unless a specific power of revocation is reserved in it
- Under section 8 of the Law, the trustees of an international trust have extensive investment powers, which must be exercised as he would have done so had he been the absolute with the prudence and diligence of a reasonable person .
- Cyprus courts may amend the terms of international trusts or the powers of the trustees to manage the trust property if satisfied that the proposed amendment will be in the interest of the beneficiaries and will not adversely prejudice their interests.
- Subject to the terms of the trust, all matters arising in respect of an international trust or any disposition of property under such trust, including, without any limitation, any matters concerning:
- a) The validity, interpretation or effect of any trust or disposition or any variation thereof;
- b) The validity or effect of any transfer or other disposition of property in trust;
- c) The management of the trust, whether it is carried out in the Republic or elsewhere, including matters concerning the operations, appointment or removal of trustees, protectors and enforcers of a trust;
- d) The existence and extent of any operations in relation to the trust, including, without limitation, the powers to vary, revoke and make any appointment as well as the validity of trustees, protectors and enforcers of a trust;
- e) The powers, obligations or duties of trustees, protectors or enforcers of a trust or regarding the duties or rights of trustees, protectors and enforcers of a trust;
shall be determined in accordance with the laws in force in the Republic, without reference to the Laws in force in any other jurisdiction provided that, the Laws in force in the Republic or in any other jurisdiction inrespect of any inheritance or succession shall not in any manner affect, in accordance with the above, the transfer or disposition or validity of any international trust;
Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities. The following advantages are indicative of the possible options for tax minimization:
All income, whether trading or otherwise, of an International Trust (i.e. a Trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus.
- Dividends, interest or other income received by a Trust from a Cyprus international business company are neither taxable nor subject to withholding tax.
- Gains on the disposal of the assets of an international Trust are not subject to capital gains tax in Cyprus.
- An alien who creates an International Trust in Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a beneficiary.
- The assets of an international trust outside Cyprus are not subject to estate duty in Cyprus.
- Trusts, as such, are not taxable in Cyprus but the beneficiaries are taxable through the trustees.
- Where the beneficiaries of a trust are not Cyprus tax residents, only the Cyprus-sourced income and profits of the trust are subject to taxation in Cyprus at the rates prevailing in Cyprus.
Trusts are usually used by wealthy individuals for the purpose of protecting their inheritance or capital gains taxes in their home country. They can also be used by expatriates settling into a trust before repatriating, assets acquired while working abroad, to protect such assets from the tax net of their home country.
Double Tax Treaties. It is possible for trusts to come under the score of double taxation treaties. This will depend on whether the other signatory state recognizes trust structures and principles of equity and whether the trust itself meets the eligibility criteria set out in the given treaty.
- International Trusts and Asset Protection Planning
The most important provision of the Law is found in section 3 that allows the Cyprus trust to be used as an asset protection vehicle.
Cyprus international trusts are immuned from forced heirship and ‘claw-back’ rules. This is especially useful in civil law jurisdictions that have forced heirship rules applicable on death.
An international trust shall not be void or voidable and no claim may be made in respect of the assets that have been transferred to an international trust in the event of the settlor’s bankruptcy or liquidation of his property or in any action or proceedings against the settlor at the suit of his creditors unless that it is proven to the satisfaction of the Court that the International Trust was made with the intent to defraud the creditors of the settlor at the time of the transfer of his assets to the trust. The onus of the proof of such intent on the part of the settlor lies with the such creditors. Such action against a trustee of the International trust must be brought within a period of two years from the date on which the transfer or disposal of assets was made to the trust
The key test is whether, at the time of setting up the trust, the Settlor had sufficient property to meet all his liabilities, other than the trust property. If this test is met and provided that the Settlor did not anticipate bankruptcy at the time of setting up the trust then the intention to defraud cannot be proven. The burden of proof is on the person alleging the fraud and the standard is the balance of probabilities. For the trust to be set aside, it must be the creditor and not any other party that was defrauded. must be filed within a two year period from the date of transfer of the property to the trust. After the lapse of the two year period, no action can be brought against the trustees. Creditor means any legal or natural person or persons to whom the sector owes a debt of other obligation at the time when a trust is created or a disposition of the property held on trust;
During 2012 a new sub-section has been added to expressly safeguard the validity of the trust and any disposition to the trust as well as the capacity and rights of the Settllor, the trustee, the protector or the beneficiaries against any challenges on the grounds that the concept of a trust is prohibited or not recognized by the legal provisions of any jurisdiction or by reason of the fact that the trust cancels or overrides interests and liabilities arising under the laws of any jurisdiction.
- Shams Risk
Parties to a trust which has been properly and validly created may successfully resist a claim that the trust is not really a trust but some other legal arrangement such as an agency or a nomination, or merely an empty pretence, on the basis that equity looks to substance, not form. This applies to both local and international trusts.
If an arrangement masquerading as a trust is found to be a sham, any transfer of property to the purported trustees will be rendered ineffective, no title will have been transferred and the transaction will be set aside. The purported trustees will have never been more than nominees or bare trustees, holding the property on a resulting trust for the Settlor who will have remained the sole beneficial owner. Any action of the purported trustees inconsistent with the continued beneficial ownership of the Settlor will have been unlawful and the trustees will have to make good any losses caused, unless they can demonstrate that they were not aware that the Settlor lacked the necessary intent and they were not knowing participants in the sham.
- Convention on Recognitions and Enforcement of Foreign Judgements (Forced Heirship)
With regard to local trusts, there appears to be no legislative or common law provisions relating to forced heirship. It seems likely that a local trust would not be defeated by a forced heirship claim in the Cypriot Courts especially where the trust assets are situated in Cyprus.
For International Trusts, the International Trusts Law expressly provides that no foreign law relating to inheritance or succession shall invalidate such a trust or affect any transfer or disposition relating to the creation of such a trust in any way. Article 1 of the 1976 Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, which was ratified by Cyprus clearly states that the provisions of the Convention do not apply to decisions concerning the capacity of persons or questions of family law, including personal or financial rights and obligations between parents and children or between spouses and questions of succession. It seems clear, therefore that international trusts are immune from forced heirship claims.
- Pre-Migration Arrangement
Individuals moving to a high tax country may obtain fiscal advantages in their new country by placing funds in an International Trust created in Cyprus.
Investing in Business Overseas
An individual, who wishes to invest in business overseas but wishes to ensure that the profits and dividends received are not remitted to the country of his residence, may set up an International Trust in Cyprus to invest in overseas business.
- Investment Holding Company
A trust can be used in one country to own an underlying investment holing company in another. This type of tax planning device has many advantages in providing the maximum possible protection for both settlor and beneficially alike.
- Exchange Control
An individual with assets outside his country of residence and whose country of residence may in future extend its exchange control restrictions to include remittance of overseas funds, may wish to retain the flexibility of overseas funds by transferring them to an International Trust created in Cyprus.
- Global Estate Planning
An individual, through the use of a trust can arrange to be succeeded in inheritance by persons who due to the legislation of the individual’s country would otherwise be excluded from the inheritance.
There is no registration or reporting requirements for trusts established in Cyprus nor are the names of trust or of the persons referred to in the trust deed disclosed. The only authority to be informed of the creation of an International Trust is the Central Bank of Cyprus and only in cases where bank accounts are opened in Cyprus. Again no names are disclosed. The confidentiality of the identity of the Settlor and the beneficiaries, of the deliberations of the trustees for the exercise of their powers and the financial statements of the trust is preserved in the absence of a court order.
The list of matters relating to the trust or any disposition of the trust property which are to be determined in accordance with the laws of Cyprus, to the exclusion of the law of any jurisdiction, has been greatly extended to cover, indicatively and not exhaustively, the validity, interpretation and administration of the trust, the validity and the effect of the transfer of property to the trust, the trustees´ fiduciary and other powers and duties. At the same time, the new law reiterates that the disposition to a trust and the validity of the trust may not be challenged under the inheritance or succession laws in force in Cyprus or any other jurisdiction.
- Stamp Duty
There is a fixed stamp duty of Euro 450 payable on their creation.