A variety of trusts can be set up in Cyprus. The choice of the type of trust depends on the requirements of the settlor and the objectives each wishes to achieve. This article outlines some of the different types of trusts.
The discretionary trust is the most commonly used type of trust in Cyprus, due to the many advantages it has to offer.
Among these advantages, the following are included:
- The beneficiaries cannot be taxed on the trust fund because they have no legal right in the trust fund until the trustees exercise their discretion in their favour;
- The beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets, until the trustees exercise their discretion;
- The beneficiaries' trust assets are not available to their creditors in case of a bankruptcy.
There is flexibility to the discretionary trusts. Trustees are allowed to vary the various interests under the trust, as and when circumstances change, without the need to recourse the procedures of variation of trusts (i.e., getting the agreement of all the beneficiaries or asking the court to vary the terms of the trust).
The discretionary trust can provide anonymity with the Register of Beneficial Owners of the Cyprus Registrar of Companies. Individuals interested in keeping their anonymity can set up a discretionary trust, which owns the shares in their company.
A discretionary trust allows trustees to pay the income or capital of a trust fund to any or all of a particular class of persons defined in the trust deed. The trustee may also be given discretion in deciding when to pay any money to any of the members of the class. Therefore, none of the beneficiaries has any right to be paid any money out of the trust fund, since the trustee may exercise his/her discretion and postpone any such payment or even decide not to pay a particular beneficiary at all. However, the settlors may set out their intentions regarding the administration of the trust in a letter of wishes.
A fixed trust does not give the trustees any discretion when distributing the assets to the beneficiaries. An example of this type of trust is one that requires the trustees to distribute the income of the trust property to a particular individual, during that individual's lifetime and thereafter, distribute the capital to a named beneficiary or beneficiaries in specified shares.
Fixed and Discretionary Trust
There is a possibility to establish a trust combining elements of a fixed trust and a discretionary trust. For example, the trustees may exercise discretion regarding the distribution of income for a specified period of time, but ultimately, they are required to distribute the capital in fixed proportions.
Under a trading trust, the trustee is usually a limited liability company. The trust has trading functions and the company's employees manage its business. Third parties are not aware of the existence of the trust, as all documentation used is in the name of the trustee company.
Under the Cyprus International Trusts Law 1992, a purpose trust can be used to accumulate corporate earnings for general or specific corporate purposes instead of providing for a defined group of individuals.
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.