LEGISLATION IN RELATION TO TRUSTS
The legislations regulating trusts in Cyprus are the Trustees Law, Cap. 193, (the "Trustees Law") and the International Trusts Law, No. 69(I)/92, (the "Cyprus International Trusts Law"). Cyprus is also a party to the "Hague Convention on Trusts" which seeks to ameliorate the situation by providing a common and harmonized choice of law rules for voluntary written trusts. Common Law and the Principles of Equity, are also applicable, provided they do not come in conflict with the constitution.
Types of trusts established in Cyprus
The most common types of trusts that can be established in Cyprus are the Cyprus "local trusts" which are governed by the Trustees Law and the "Cyprus international trusts" which are governed by the Cyprus International Trusts Law. For a local trust to exist either the settlor or one of the beneficiaries shall be residents of Cyprus. On the contrary, for a Cyprus international trust to exist, the settlor and the beneficiaries shall not be residents of Cyprus (at the year preceding the establishment of the trust) while one of the trustees has to be a resident of Cyprus.
CONCEPT AND DEFINITION OF THE TRUST
The concept of a trust is that a person, who is the owner of an asset (the settlor) gives authority to another person, being either an individual or a company (the trustee) and this person agrees to hold the asset in its name for the benefit of another person (the beneficiary) on certain terms as set out in the trust deed and in accordance with the instructions of the settlor. The property under the trust is legally held and registered in the name of the trustee. In other words, the trustee has the legal title of the property while the beneficiary has the beneficial title. Some trusts may also have a protector, who has the power to restrict some powers of the trustee and to protect the abuse of certain powers of the beneficiary. A trust is a fundamentally flexible institution and can be modified in accordance to the needs of the person seeking to create a trust. Until this day there is not an exact and comprehensive definition of what a trust is due to the variety of the trusts that can exist and the variety of ways that can be created.
Forms of Trusts
There are mainly two types of trusts. Express trusts and implied trusts. Express trusts are created by a written trust instrument and the settlor has clear intention to create it for the benefit of the beneficiary. Implied trusts are implied by law in cases that their non-recognition would create injustice. Implied trusts are divided in constructive and resulting trusts and often end up in court, which ultimately decides if there is a trust as well as its kind.
A resulting trust which is implied by a court in certain cases where a person transfers property to another and gives him or her legal title to it but does not intend him or her to have an equitable or beneficial interest in the property. Basically in this type of trust the beneficial interest in the property comes back (results) to the settlor, who provided the property.
An example of a resulting trust would be where A gives money to B to buy an asset. If there is no evidence that A intended for B to keep the asset, then B is presumed to keep the asset as a trust for A. However if A was B's father, then there will the presumption that A intended for B to keep the asset and therefore where would be no resulting trust.
A constructive trust is not an actual trust by the traditional concept. It is a legal fiction that is used as a remedy for unjust enrichment. Such trusts are created irrespective of the intention of the parties in order to satisfy the demands of justice. When property is held by a person in such circumstances which constitutes an abuse to hold it or creates injustice then the constructive trust orders the person who would otherwise be unjustly enriched to transfer the property to the intended party.
An example of a constructive trust would be where A gives money to B to hold for C. If B gives the money to D, who knows that B was holding the money for C, then D will be construed as holding the money as a trust for C.
FORMALITIES REQUIRED TO CREATE A VALID EXPRESS TRUST
To set up a trust, it is imperative a settlor, a trustee and a beneficiary exist. It is not prohibitive for one person to fall into the category of the other. In order to create a valid express trust, the settlor must be competent at the time of the transfer and he/she must be of age and mentally sound as per the law of the country, he/she is resident. Also every trust in Cyprus shall fulfill the tree certainties. These are the following:
- Certainty of intention
The certainty of intention is the requirement that the settlor must intend to create a trust and not something else like a gift, loan or a transfer.
- Certainty of subject matter
The certainty of subject matter is the requirement that the trust property must be identifiable and specific.
- Certainty of objects
The certainty of objects is the requirement that the trust beneficiaries must be identifiable and ascertainable at the time of setting up the trust and at any point during the life of the trust.
B. THE CYPRUS INTERNATIONAL TRUST
The Cyprus International Trusts Law has been enacted in 1992 and amended in 2012. This law, established Cyprus as one of the best jurisdictions for the creation of international trusts due to their numerous benefits compared to other jurisdictions.
CONDITIONS FOR THE CREATION OF A CYPRUS INTERNATIONAL TRUST
The following conditions must be met in order to have a valid Cyprus international trust:
- 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 a charitable institution, must not be resident of Cyprus during the calendar year, which precedes the year of creation of the trust; and
- At least one of the trustees is, throughout the life time of the trust, resident of Cyprus.
All three need to exist simultaneously. The term resident of Cyprus has the meaning given to it by the Income Tax Laws of Cyprus. As provided in the Income Tax Laws, a physical person is considered a tax resident of Cyprus if he/she resides in Cyprus for a period which exceeds in aggregate 183 days in a tax year. A company is considered a tax resident of Cyprus if its management and control is exercised in Cyprus. Essentially it needs to be able to provide substance.
CHARACTERISTICS OF A CYPRUS INTERNATIONAL TRUST
A settlor is deemed to have the ability to dispose of assets to a Cyprus international trust if at the time of such transfer he/she is of full age and of sound mind under the law of the country in which he/she is resident.
Powers of the settlor
In 2012, when the Law was amended, the powers of the settlor were extended to include the following:
- the revocation, amendment of the terms of the trust or any trusts or powers arising wholly or partly from the trust;
- the allocation, distribution, payment or other disposition of income or capital from the trust property or issuance of directions for conducting such a concession, distribution, payment or disposal;
- the exercise of powers of a director or officer or the issuance of binding directions regarding the appointment or removal of any Board member or officer of any company, which is owned by the trust, either wholly or partially;
- the issuance of binding directions to the trustee in connection with the purchase, retention, sale, management, loan, pledge or charge over property of the trust or the exercise of any powers or rights conferred on such property;
- the appointment or termination of any trustee, inspector for the application of the trust, protector or beneficiary;
- the appointment or termination of any investment manager or investment adviser;
- changing the applicable law governing the trust or place (forum) of management of the trust; and
- the restriction of the exercise of any power or the discretionary power of the trustee, requesting that these be exercised only with the approval of the settlor or any other person expressly mentioned in the terms of the trust.
A Cyprus international trust may continue in perpetuity. However, the settlor has the power to cancel the trust and have the property returned to him/her if such option is provided in the trust deed.
Extension of the powers of the settlor – Sham trusts
The Cyprus International Trusts Law specifically permits the settlor to reserve for him/herself certain powers without the danger of affecting the validity of the Cyprus international trust. Such powers may include any one of the following:
- to revoke or amend the terms of the trust;
- to grant, distribute, pay or dispose of in any form, income or capital of the trust or give instructions as to the above;
- to give binding instructions to the trustee in relation to the purchase, retention, sale, administration, financing, pledging or encumbering of the Trust Property;
- to appoint or remove any trustee, enforcer of the trust, protector or beneficiary;
- to appoint or remove any investment manager or investment advisor;
- to change the applicable law which governs the Trust or the forum of administration of the Trust.
However, if such powers are to be reserved by the settlor there is a danger that the trust shall be considered as sham and consequently void. A possible and preferable solution would be to appoint a protector. An alternative and preferable option is to appoint a protector and allocate these powers to the protector. With this way, the settlor shall distance himself/herself from the administration of the trust and eliminate the possibility to be considered a sham. Also the trust may be the subject of attack by the settlor's creditors or subject to the forced heirship rules of succession.
Duties and powers of the trustee
The trustee has a number of powers and duties under the trust. For example he must comply with the terms of the trust, a duty to act impartially, treat the beneficiaries equally, duty to act in good faith, to exercise reasonable care and skill as well as other fiduciary duties. Also as per the trusts law the trustee has certain powers such as the power to sale and generally invest as if they were the absolute owners of the trust property, invest in any property, movable or immovable, situated anywhere in the world including Cyprus in accordance with all local laws, to give receipts, compound liabilities, raise money by sale charge or otherwise, devolve the powers of the trust, insure the property, employ agents and appoint new or additional trustees.
The general rule is that the trustee does not have the power to vary the trust. The only case that the trustee will be able to do this, is when all the beneficiaries are of full age and capacity and can authorize the trustee to deal with a matter differently than what is specified in the trust. Where any beneficiary is a minor or of an unsound mind the court may vary the terms that will be in the best interest of the beneficiary.
Any action taken by the trustee that is in excess or beyond his power as stated in the trust constitutes a breach of trust and the trustee shall be personally liable for the full extent of the loss incurred as a result of the breach. In such case the beneficiaries may bring an action to court.
OTHER PROVISIONS OF THE CYPRUS INTERNATIONAL TRUSTS LAW
Relocation of the settlor and beneficiaries to Cyprus
The Cyprus International Trusts Law gives the opportunity to the settlor and to the beneficiaries to relocate to Cyprus and become tax residents of Cyprus after the establishment of the trust.
Exclusive jurisdiction of Cyprus law
Any matters in relation to the validity, interpretation, amendments, revocation, powers of trustees, protectors and inter alia administration of a Cyprus international trust, are determined in accordance to the law in force in Cyprus without reference to the applicable law of any other jurisdiction. The list of matters which are exclusively determined by Cyprus law are identified in Section 3(1A) of the Cyprus International Trusts Law. Also, the trustee may apply to the court to receive directions as to how he/she will act in relation to a particular matter. Also, the court may issue any relevant order regarding the trust and such an application may be filed by the trustee, protector, trust enforcement supervisor or any other interested person.
Governing law of the Cyprus international trust/Amending the governing law
Cyprus international trusts, as per clause 12A (3) of the Cyprus International Trusts Law are governed by the law which the settlor has chosen as per the terms of the trust deed. In case that no law has been chosen, the court shall be able to identify. However, the choice of law has some limitations to the matters identified in clause 3 (1A) of the Cyprus International Trusts Law which are governed exclusively by Cyprus Law, irrespectively of the provisions of the foreign law chosen, as stated above. In case the law chosen is Cyprus law, then the provisions of the Cyprus International Trusts Law prevail over any other contrary provisions of Cyprus law.
Furthermore, the law expressly provides for the amendment of the governing law of the trust, in both cases for a change from a foreign law to the law of the Republic of Cyprus as well as to a change from the law of the Republic of Cyprus to any other jurisdiction. However, for such a change to be allowed under the Cyprus International Trusts Law, the following conditions must be met:
- In the case of a change from the law of the Republic of Cyprus to a new law, the new law must recognize the validity of the trust and the respective interest of the beneficiaries; or
- In the case of a change from a foreign law to the law of the Republic of Cyprus, such change is recognized by the previous proper law of the trust.
Benefits of a Cyprus International Trust
Cyprus International Trusts offer the following benefits:
- Confidentiality (as well as permitted by relevant laws from time to time);
- Difficult to challenge since the only reason it can be challenged is for defrauding creditors. The burden of proof in this case lies on the creditors.
- Tax benefits for the parties involved;
- Asset protection against creditors, forced heirship rules or legal action;
- Flexibility in relation to the powers of the trustee;
- Low costs for administration;
- Indefinite in duration; and
- No obligation to prepare or file audited accounts.
Exclusion of forced heirship rights
The Inheritance Law of the Republic of Cyprus or of any other country shall in no way prevail or affect any transfer or disposition made to a Cyprus International Trust and the validity of such transfer shall not be challenged.
An international trust shall not be void or voidable in the event of the settlor's bankruptcy or liquidation notwithstanding any provision of the law of Cyprus or any other country. An International Trust may be only set aside by the settlor's creditors if they are able to prove to the court that the trust was made by the settlor with the intent to defraud the creditors. The burden of proof lies on the creditors.
More specifically, a Cyprus International Trust benefits from the favorable current tax system of the country with the following advantages:
- No Capital Gains Tax is paid on the disposal of assets of a Cyprus trust
- No estate or inheritance tax
- Income received from local or overseas sources is taxable in Cyprus where the beneficiary is a Cyprus tax resident. If beneficiaries are non-tax residents of Cyprus, only Cyprus sources of income are taxable under Cyprus's income tax law.
A Cyprus International Trust is subject to stamp duty. If the trust deed is stamped thirty days after the date of its creation then a late payment fine is charged. The amount of the late payment fine depends on the length of the delay.
Each supervisory body for the purposes of the Fiduciaries Law (CySec, the Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus) will maintain a register of trusts and as such Trustees will need to register the Trust to such supervisory body they fall under its regulations. Also as per the new regulations of Prevention and Suppression of Money Laundering Activities Law, CySec shall also keep a trust register as explained above.
C. LICENSED ENTITIES AND TRUST REGISTER
Creation, administration and management of trusts are regulated activities subject to the provisions of the Law Regulating the Businesses Providing Administrative Services and Related Matters of 2012, Law No. 196(I)/2012, as amended, hereinafter referred to as the "Fiduciaries Law" and may be offered only by licensed legal persons pursuant to a license granted either by the regulating authority which is the Cyprus Stock Exchange or by fiduciaries, namely lawyers who are members of the Cyprus Bar Association and accountants who are members of the Institute of Certified Public Accountants of Cyprus. The Cyprus Bar Association, The Institute of Certified Public Accountants of Cyprus and The Cyprus Stock and Exchange Commission, are obliged to maintain registers of trusts where particular information is submitted in relation to trusts established in Cyprus.
Upon registering a trust with the appropriate regulating authority, as stated above, the following information must be submitted:
- The name of the Trust;
- The names and addresses of the Trustees;
- The date of establishment of the Trust;
- The date of change of the proper law of the Trust, if any; and
- The date of termination of the trust once taken place.
This information is not open to the public, but only be viewed by the regulating authorities. Furthermore, no information is given as to the content of the trust deed or the settlor or the beneficiaries.
Any person providing trustee services, administers and manages trusts, must collect and have at all times available in Cyprus for possible disclosure to the relevant regulatory authority the following information, where applicable:
- the identity of all trustees;
- the identity of the settlor;
- the identity of all beneficiaries or information on the class of beneficiaries;
- the identity of the protector (if applicable);
- the identity of the fund manager, accountant, tax official (if applicable);
- the activities of the trust; and,
- The identity of any other person who exercises control over the trust.
UBO Trust Register
In case the shareholder of a company is an express trust or a similar legal arrangement, then the name of the trust shall be submitted in the UBO Companies Register and depending on its place of administration, its details shall also be submitted in the UBO Trust Register. The term "express trust" is defined as the trust which is created explicitly and voluntarily by the settlor and does not include any trust arising by operation of law or any trust or decision for which the settlor has no explicit intention to create.
Any express trust or similar legal arrangement must be registered therein provided that: (a) its trustee is located or residing in the Republic of Cyprus, or, (b) its trustee, which is located or residing outside the EU, establishes a business relationship or acquires immovable property on behalf of the express trust in the Republic of Cyprus.
Information to be submitted in the UBO Trust Register
A. For the express trusts or similar legal arrangements
- Country and date of creation and/or establishment;
- Applicable law;
- Termination Date (if applicable);
- In case of a similar legal arrangement, the kind of such arrangement;
- Information in regards to the country of establishment or residence of the trustee, as well as his address;
- In case where the trustee is situated outside the EU and creates a business relationship in the Republic, the date of the beginning of the business relationship, the name of the person to whom such business relationship is established and the document regulating such relationship;
- In case where the trustee is situated outside the EU and acquires immovable property on behalf of an express trust in the Republic, the registration number of such immovable property and its title.
- Any other information and/or supporting documentation requested by CySEC for identification purposes.
B. For the Ultimate Beneficial Owners of the Trust (Trustee, Settlor, Protector, Beneficiaries, any other physical person exercising final control of the trust through direct or indirect ownership or by other means)
- Name and surname;
- Name of father;
- Date of birth;
- Place of birth;
- Nationality or Nationalities;
- Residential Address;
- Number, Type and Country of issuance of identification document;
- Date of Death (where applicable);
- Date on which the UBO became the beneficial owner;
- The nature and extent of the rights which are directly or indirectly held by the beneficial owner;
- The role of the beneficial owner in the trust or in the similar legal arrangement;
- Any other information and/or supporting documentation requested by CySEC for identification purposes.
CySEC can provide access of the UBO Trust Register to the following:
- Cyprus Securities and Exchange Commission, the Cyprus Tax Department, the Cyprus Customs Department and the Cyprus Police with no restrictions;
- Any liable entity, in the context of due diligence and identification measures for their client;
- Any natural or legal person who can demonstrate a legitimate interest. This will be subject to acceptance by the Cyprus Securities and Exchange Commission; and
- Any natural or legal person who has a controlling interest in a company or other legal entity, inter alia, either directly or indirectly, indirect ownership, or through shares in the bearer or through control by other means. This will be subject to acceptance by the Cyprus Securities and Exchange Commission.
If access is granted, any natural or legal person will have access to the name, month and year of birth, the country of residence and the nationality of the people involved in the trust and the type and extent of the rights they hold in the trust. The information in the UBO Trust Register shall not be available to the general public (unlike the UBO Companies register) but they will only be available to certain authorities and or people that show legitimate interest.
The Cyprus trusts laws are one of the most favorable legislations in the world capable of giving unique protection and benefits to any interested party. It is an invaluable tool for flexible and effective estate and tax planning. Cyprus as a trust jurisdiction has now become an important player and prime location in the field of international trusts. Conclusively, Cyprus trusts offer an extra layer of protection to the parties involved as their particulars are not available to the general public.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.