Cyprus: Business And Investment Opportunities in Cyprus - 18. International Trusts

Last Updated: 17 December 1999

18.1 The Law of Trusts in Cyprus

Cyprus has inherited its trust law from England so the doctrines of equity on which trust law is based have long formed part of the Cypriot legal system. In 1955, Cyprus enacted the Trustees Law, Cap. 193 and that was the basic structure that covered some of the principal aspects of the trust relationship. Thus, up to the date of independence in 1960, Cyprus trust law was to be found in its own domestic law and in the doctrine of equity and the case law in England. The strength of the English principles was reinforced by the enactment of section 29 of the Cyprus Court of Justice Law, 14 of 1960. In this legislation the civil and criminal courts were expressly instructed to adhere to the common law and equity principles, "save insofar as other provision has been or shall be made by any law and so long as not inconsistent with the Constitution". Indeed, in cases where Cypriot law has not made provision for a specific legal point, the courts of the island have held that reliance may be placed on common law or equity law.

18.2 The International Trusts Law 69 of 1992

In 1992 a Bill providing for the formation and administration of international trusts was enacted. By this Law, No. 69/92, which is called the "International Trusts Law", Cyprus modernised its existing legislation on trusts and now offers considerable incentives for the establishment of trusts in Cyprus.

The Law accords with the proclaimed government policy to enhance further the attractions of Cyprus as an international jurisdiction and the range of facilities offered to private and institutional clients.

It does not attempt to introduce a new comprehensive code to govern all aspects of trust law. Instead it builds on the existing law of trusts in Cyprus and offers to non residents the possibility of creating a trust which will have certain features that were not available previously.

The specific provisions of the new Law may be briefly summarised as follows:

18.2.1 Definition of an International Trust: An International Trust is defined as a trust in respect of which:

18.2.1.1 the settlor is not a permanent resident of Cyprus;

18.2.1.2 no beneficiary (other than a charity) is a permanent resident of Cyprus;

18.2.1.3 the trust property does not include any real property situated in Cyprus; and

18.2.1.4 at all times there is at least one trustee resident in Cyprus. Moreover, a trust will still qualify as an International Trust even if the settlor, the local trustee or a beneficiary (or any combination of those) is a Cyprus international company or partnership.

18.2.2 Validity: A Cyprus International Trust can be validly created by any non-resident who is of full age and sound mind under the law of his domicile, and no foreign law relating to inheritance or succession will invalidate the Cyprus Trust. Moreover the Trust will not be set aside by the settlor's creditors in the event of the settlor's bankruptcy or liquidation unless and to the extent that the creditors can show that the trust was made with intent to defraud them; the onus of proof will be on them. This provision effectively allows the use of Cyprus International Trusts as asset protection vehicles.

18.2.3 Irrevocability: An International Trust will be presumed to be irrevocable by the settlor or his lawful representatives unless a specific power of revocation is reserved in it.

18.2.4 Perpetuity period: An International Trust may remain in force for up to one hundred years notwithstanding any statutory provision of Cyprus or any other country to the contrary. This provision is considered to be very advantageous. The rule against perpetuities does not apply to purpose and charitable trusts.

18.2.5 Accumulation of income: The income of an International Trust can be accumulated for the whole of the perpetuity period.

18.2.6 Purpose Trusts: Trusts for a purpose, i.e. trusts which are not necessarily only for established charitable objects, or are for the benefit of ascertained individuals, such as to promote the understanding and cooperation between nations, are valid.

18.2.7 Authorised investments: The trustees of an International Trust have extensive investment powers which must be exercised with the prudence and diligence of the reasonable person.

18.2.8 Proper law of the trust: The law applicable to a Cyprus International Trust can be expressly changed to a foreign law provided that the new law recognises the validity of a trust and the respective interests of the beneficiaries; a trust established in a foreign jurisdiction may by its terms select Cyprus law provided that the foreign law itself recognises such a change. This provision ensures flexibility which might be important if a change in government fiscal or other policy makes it beneficial to change a trust's location.

18.2.9 Variation of trusts: The Cyprus courts have powers to vary the terms of a trust on the lines of the English Variation of Trusts Act, 1958. More specifically, the courts upon application may amend or repeal the terms of the trust or the powers of the trustees to manage the trust, if they are satisfied that the proposed arrangement will be in the interest of the person on whose behalf the application is made and will not substantially prejudice any other interested party.

18.2.10 Registration: International Trusts are exempt from the duty of registration under the provisions of any law. There is, however, a fixed stamp duty of CY£250 payable on the creation of a trust.

18.3 Confidentiality

Confidentiality and privacy of the constitution of International Trusts, as well as their transactions and activities, are assets which are highly prized. This aspect is a cornerstone of the new Law which ensures that a trustee or any other person, including officers of the Government and of the Central Bank of Cyprus, may not disclose to any person any information or documents in relation to:

18.3.1 the name of the settlor or any of the beneficiaries;

18.3.2 the consultations of a trustee regarding the exercise of his power, discretion or duties;

18.3.3 the reasoning for any specific exercise of power, discretion or duties or the elements supporting the reasoning;

18.3.4 the exercise of the power, discretion or duties of a trustee;

18.3.5 the accounts of an International Trust.

To the secrecy of the affairs of an International Trust there are only two exceptions:-

  • A trustee is under an obligation to disclose all documents and information relating to the accounts of the trust to a beneficiary, or all documents and information relating to a charitable trust to a charitable institution which appears to be a beneficiary in the trust instrument.
  • The courts, before which criminal or civil proceedings are pending, may order the disclosure of documents or information relating to an International Trust, if they are satisfied that such a disclosure is of substantial importance to the outcome of the pending proceedings.

The above non-disclosure provisions of the new International Trust Law are unique in that they entrench in an almost absolute manner the secrecy and confidentiality of a trust’s affairs.

18.4 Taxation

The income and profits of an International Trust derived or deemed to be derived from a source outside Cyprus are exempt from income tax or any other tax imposed in Cyprus such as capital gains, special contribution etc. The property of the trust is not subject to estate duty.

Trust income such as royalties, interest or dividends received from an international company is exempt from income tax in the hands of the trustees, and the beneficiaries of an International Trust are also exempt from the payment of income tax in respect of any monies they receive from the trustees.

Apart from the above-mentioned advantages, the following further benefits are available to Cyprus International Trusts:

18.4.1 An International Trust enjoys complete freedom from all exchange control provisions.

18.4.2 Most importantly, an International Trust may establish a Cyprus international company and thus take full advantage of the beneficial status of international companies as set out in section 9.

18.4.3 An International Trust may also establish a Cyprus international partnership, the profits of which are not taxable in the hands of the partners nor is tax payable by the partnership, or may register an international branch in Cyprus through a wholly or partly owned foreign company. The net profits of this international branch are either totally exempt from payment of tax where its management and control is outside Cyprus or are taxed at the rate of 4.25 per cent where its management and control is based in Cyprus.

18.4.4. An International Trust may be allowed to participate in local business and investments in accordance with the laws and regulations which govern investment in Cyprus by non-residents, but in such a case all income arising from local sources will be subject to the normal tax rates.

18.5 Conclusion

The advantages of using a trust for regulating family and commercial affairs are well known to those accustomed to the English common law. It appears that the trust concept is also becoming popular with people familiar with civil jurisdictions and it is expected that the use of trusts will increase in the future. Cyprus as an expanding international centre has shown that it may become a considerable trust jurisdiction. This is also due to the fact that a Cyprus trust may in certain cases be used to obtain the benefit of an applicable double taxation treaty or provide asset protection where this is required.

The purpose of this publication is to assist clients and associates in clarifying and appreciating the range of opportunities which are available in or through Cyprus. Although every effort has been made to provide the reader with a clear and comprehensive picture of the island's beneficial regime, it should be appreciated that is not possible to cover all aspects comprehensively in a publication of this size.

Individuals or companies who are seriously considering using Cyprus for any of their international business activities are advised to obtain expert professional advice before taking positive action.

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