Nicosia May 2012
A ground-breaking reform of the Cyprus International Trusts Law of 1992 has put Cyprus at the top of the league of International Trust Jurisdictions
Authored by Aris Kotsomitis, BSc FCA and Loukis Loucaides LLB - Trust and Estate Practitioners (TEP), Members of The Society of Trust and Estate Practitioners of the UK – “STEP” (Cyprus Branch)
The amendment of the Cyprus International Trusts Law, has become reality with the International Trust (Amending) Law of 2011. Cyprus is now the most favourable trust jurisdiction in the EU.
The new Cyprus International Trust (CIT) regime enables settlors and beneficiaries to enjoy the highest possible degree of protection internationally and formidable asset protection capability together with the unmatched tax advantages afforded in Cyprus.
The reform of the International Trusts Law place Cyprus at the top of the league as a modern, favourable and flexible trust jurisdiction.
Cyprus law is the only applicable law without reference to foreign laws
The New Law provides that any matter relating to the validity or administration of an international trust, the trustees' fiduciary powers and duties and the powers and duties of any protectors of the trusts are governed exclusively by Cyprus without reference to the laws of any other jurisdiction.
To add to that the law relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the international trust or any transfer or disposition of property to it.
An international trust containing Cyprus Law as a choice of law provision is fully protected from foreign judicial claims as a matter of public policy.
This development protects trust property from challenges mounted by foreign countries including foreign tax authorities where the settlers may be resident.
Residence - Trust Property – Beneficiaries and pre-immigration planning – Taking up residence in Cyprus and including assets located in Cyprus not affecting right to enjoy tax and asset protection advantages
The amending law provides that the settlor should be non-Cyprus tax resident only in the year preceding the year of the creation of the trust thus settlors could relocate to Cyprus after establishing a Cyprus International Trust.
This provision opens the doors to foreign residents with assets and property to move to Cyprus and become Cyprus tax residents without losing out on the tax and asset protection benefits of a Cyprus international Trust.
Beneficiaries no longer need to be non residents and trust property may include immovable property in Cyprus.
This enables foreign settlors to include their Cyprus assets in the Trust property and enjoy the considerable tax and asset protection advantages.
Sale of trust property protected from foreign challenges
Sales of trust property cannot be challenged by foreign countries on the grounds that they are inconsistent with the laws of another jurisdiction, for example regarding family and succession issues, or on the grounds that the other jurisdiction does not recognise the concept of trusts.
This provides significant asset protection and succession planning capabilities.
Significant control of the Trust by the settlor and flexibility to adapt to future changes in circumstances
The settlor has the ability to change amongst other things the governing law of the trust and also to revoke, vary or amend the terms of the trust as well as impose a general stipulation that the trustees’ powers are exercisable only with the consent of the settlor or any other person specified in the terms of the trust, without such provisions affecting the validity of the trust.
The settlor can now:
- maintain powers to himself or herself
- be a beneficiary in trust property
- act as the protector or enforcer of the trust
- revoke, vary or amend the terms of the trust
- apply any income or capital of the trust property
- act as a director or officer of any corporation wholly or partly owned by the trust
- give binding directions to the trustee in connection with the trust property
- appoint or remove any trustee, enforcer, protector or beneficiary
Abolition of restrictions on duration of trusts
There will be no limit on the period for which a trust may continue to be valid and enforceable.
Extension of Trustee’s investment powers to invest in local or overseas investments as well as movable or immovable property
The new law also allows trustees to invest in movable and immovable property both in Cyprus and overseas, including shares in companies incorporated in Cyprus.
In simple terms:
Trust setup and subsequent sales of trust assets are fully protected from foreign challenges and only the law of Cyprus applies
Trust assets can be local or overseas, movable or immovable of any kind
Settlors maintain significant control
The Trust can have unlimited duration
The settlor’s decision to move to Cyprus or acquire Cyprus assets does not affect the status of the trust or eliminate the significant tax and asset protection advantages while at the same time enjoying the tax advantages of Cyprus tax residence as an individual.
How do clients use Cyprus International Trusts (CITs)?
The usual structure we see from clients is the trust – offshore company (e.g. Seychelles IBC) – onshore company (Cyprus and Malta) structure. The trust owns the shares of the offshore company and the offshore company the shares of the onshore company.
Trust or Foundation – Cyprus International Trust or Nevis Private Foundation - can be used, which in many aspects is similar to a Trust and serves the same purpose.
Uses of Structure (this is only some of the important uses)
1. Asset protection and tax minimization - The assets and trading or investment operations – functions are undertaken by the low or no tax companies who are subsidiaries – belong to the Trust and profits, gains, assets and property accumulate in those with minimum tax leakages if structured properly.
Any income derived from the assets/property of the Cyprus International Trust may be accumulated for the Trust's duration. This income is tax-free.
In this way the clients accumulate wealth with maximum tax efficiency that they control but not “own” in the strict legal sense and nobody (including aggressive foreign tax – authorities) can challenge and mount an “attack” as they don’t form part of the settlors’ assets.
2. Pre-immigration planning
To shelter assets prior to immigration / change of tax residence in a way as to avoid taxes in both countries and protect assets.
3. Asset protection from claims
To make sure that assets are protected from all kinds of claims on the client’s personal property as the Trust Assets are outside the scope of the claims.
The Cyprus International Trust cannot be deemed void, under any jurisdiction, if the settlor/donor is declared bankrupt or goes into liquidation (company). Furthermore the law sets out that only the Cyprus Courts can set aside a Cyprus International Trust.
To achieve this, potential creditors must prove to the Court that the Cyprus International Trust was set up by the donor/settlor for the purpose of defrauding his/her creditors. There is a time limit set for bringing such an action, namely, within two years of the assets in question being settled to the Cyprus International Trust.
4. Succession planning
The rules of distribution to the beneficiaries of the Trust can be structured in such a way as to form part of a successful succession planning strategy and to avoid “break-up” of the structure at succession.
Avoidance of forced inheritance
The International Trust Law provides that no inheritance or succession law in Cyprus or elsewhere, will have any bearing on any transfer to a Cyprus International Trust, as long as the donor/settlor is an adult, of full age and of sound mind under the law of his country of permanent residence (domicile).
5. Corporate tax planning
The Trusts are also used extensively in international tax structuring of multinational enterprises as well as in the set-up and operations of pension schemes for organizations.
Further benefits of the Cyprus International Trust:
6. Court Intervention in the running of a Trust
Although, a well drafted trust deed should in essence need to ever go to court, in certain cases the court can be petitioned to amend the trust document if it is convinced it is in the best interest of the beneficiaries to do so.
7. Stringent Confidentiality provisions
The general principle is that no individual has access to information on the Cyprus International Trust as the trust document is a private document. A beneficiary may obtain information from the trustees on certain issues. The law sets out that the holders of information on the Cyprus International Trust are strictly forbidden to disclose any information relating to it unless a Cyprus court specifically orders them to do so as part of civil or criminal proceedings.
8. No Income Tax, Gains or Inheritance Tax. Section 6(12) provides that:
"The income and gains of an international trust derived or deemed to be derived from sources outside the Republic (of Cyprus) shall be exempt from all taxes imposed in the Republic (of Cyprus) and no estate duty shall be chargeable in respect of assets belonging to an international trust."
The only fee payable to the Republic of Cyprus is stamp duty charge of about €430 on the trust agreement.
Background Information on Cyprus Trusts and the recent amendments
The Cyprus Trustees Law of 1955 (CAP 193) was enacted based predominantly on the Trustees Act of the United Kingdom of 1925. The 1925 Trustees Law is still in effect today. The above law remained primarily unchanged until the enactment of the 1992 International Trusts Law.
What is a Trust?
In brief, a Trust is an ‘obligation’ or ‘duty’ created when one person (legal or natural), the Trustee, is appointed or is deemed to be appointed by way of his actions, to hold in law or is in effective possession of property or a thing which can be held on behalf of others, the beneficiaries, or, which has the aim of achieving a particular purpose. The person divesting, settling or giving by way of gift, the property which forms the subject of the Trust is the Settlor or Donor.
The Trustee(s) exercise all rights and obligations on the property or assets, or for that purpose for, and on behalf of, the benefit of the beneficiaries, who may be individuals or corporate entities.
Cyprus International Trust Law of 1992
The International Trust Law of 1992 was enacted, not to supersede or abolish any part of existing Cyprus Trust Law, but to make the necessary amendments so as to make it more attractive and applicable to international clients.
Furthermore, the International Trust Law has received a further long awaited amendment which came into force on the 23rd of March 2012.
The general requirements and restrictions on the founding of a Cyprus International Trust (The "CIT")
(a) the donor must not be a permanent resident of Cyprus for at least a year before the date of the formation of the Trust.
(b) at least one of the trustees must be a permanent resident of Cyprus
(c) the beneficiaries, may be a permanent residents of Cyprus
(d) the Trust property may include immovable property in Cyprus.
Who can be appointed as Trustee?
The Cypriot trustee will inevitably be a professional or a corporate body of professionals who have a background in trusts and/or law and/or tax matters. The Cypriot trustee is not required to be a person but could be a company or partnership resident in Cyprus and may even be a Cypriot company which is not tax resident in Cyprus. The duties of the Trustee are those of any person who owes a fiduciary duty to another.
Powers of the Settlor/Donor
The amended law allows the Settlor/Donor to:
(a) Revoke and/or modify the terms of the Trust;
(b) Instruct the transfer, distribution, payment or transfer of income or capital from the trust property or the issue of binding instructions and/or directions with regards to the abovementioned;
(c) Appoint or remove a Trustee, a Beneficiary or a Director of any company wholly or partially owned by the Trust, including to act as a director himself;
(d) Issue binding instructions to Trustees in relation to the exercise of any power;
(e) Choose the applicable law that will govern the Trust and change the governing law or the forum of administration of the Trust.
Duration of the Trust
The new law abolishes all restrictions on the duration of trusts and there is now no limit in the period over which a trust may continue to be valid and enforceable.