The Legal Framework Governing Cyprus International Trusts

A Cyprus International Trust ("CIT") is a legal structure through which an individual or legal person, known as the settlor, transfers assets to a trustee, who then administers those assets for the benefit of chosen beneficiaries. International trusts operate under the Cyprus International Trusts Law of 1992 ("the Law"), as amended . Below, we analyze the criteria and requirements for establishing a CIT, the main roles involved, and the most important benefits that arise from its creation.

Criteria and Requirements

According to Article 2 of the Law, there are some basic conditions that must be met in order for a CIT to be validly established. These are:

1. The settlor, whether a natural or legal person, must not be a resident of the Republic during the calendar year preceding the year in which the trust is established.
2. At least one trustee must be a resident of the Republic throughout the duration of the trust.
3. None of the beneficiaries, whether a natural or legal person (except for a charitable institution), may be a resident of the Republic during the calendar year preceding the year in which the trust is established.

At this point, it is important to clarify that the Law does not prohibit the settlor or a beneficiary of the CIT from becoming a Cyprus tax resident after the CIT is established.

Main Roles in a CIT

There are a few key roles that are important for setting up and running the trust: Settlor, Trustee, and Beneficiary.

Settlor

Under Article 2 of the Law, the settlor is the natural or legal person who transfers trust property or disposes of it for testamentary purposes under the terms of a trust. Essentialy, the settlor establishes the trust, moves assets into it, and specifies how they would wish for those assets to be managed and distributed. While the settlor may keep certain powers—such as appointing trustees or making amendments to the trust—once the assets are placed into the trust, direct control is generally relinquished to the Trustee except as permitted by the trust deed.

Article 4A of the Law outlines some powers the settlor may retain:

• revoking or modifying the trust's terms (or related trusts or powers)
• distributing or directing income or capital from the trust property
• issuing binding instructions regarding companies owned by the trust
• appointing or removing trustees, protectors, beneficiaries, investment advisors, etc.
• changing the governing law or forum for trust administration
• restricting the trustee's discretion, e.g., requiring approvals.

Trustee

According to Article 2 of the Law, the trustee is a person or entity who holds or is expected to hold the trust property. The trustee holds it for the benefit of beneficiaries, whether or not the trustee is also a beneficiary himself.

Per Article 8 of the Law, trustees have broad investment powers. Subject to the provisions of the trust deed, they may:

• invest all or part of the trust capital in any form of investment
• diversify or retain investments in their original form, exercising care and prudence as a reasonable person would
• hold, maintain, or invest in movable or immovable property in Cyprus or abroad, including shares and real estate—even properties held legally before the relevant Law came into force

Beneficiary

Per Article 2, a beneficiary is a natural or legal person, including someone not yet born at the date of the trust's creation, or a class of persons, who has a right or interest in the property subject to the trust. Beneficiaries receive benefits (income, capital, other distributions) as determined by the settlor in the trust deed.

Benefits of Establishing a CIT

There are many benefits, but here are the two most important:

• Asset Protection

Under Article 3 of the Law, a CIT is protected from claims—even in the event of the settlor's bankruptcy, liquidation, or from settlor's creditors—regardless of whether the trust was created voluntarily or for the settlor's benefit. The exception is where it is judicially proven that the trust was established with the intent to defraud creditors. The burden of proof lies with the creditors. Any claim must be made within two years after the assets are transferred into the trust.

This means assets placed in a CIT are safeguarded from creditor claims, legal disputes, and adverse personal circumstances of the settlor.

• Tax Advantages

According to Article 12 of the Law, taxation of a CIT varies depending on the residency of the beneficiaries. If a beneficiary is tax resident in the Republic, income and profits (both from within and outside Cyprus) are taxable in Cyprus. If the beneficiary is not Cyprus tax resident, only those income or profits derived from sources within Cyprus are taxed.

In simple terms: foreign-sourced income is not taxed in Cyprus for non – tax residents , and since there is no inheritance or estate tax in Cyprus, CITs can become effective tools for global wealth preservation and cross-generation succession.

In conclusion, CIT is a flexible and powerful structure for managing and protecting wealth. It allows assets to be safeguarded from potential risks, ensures privacy, and offers important advantages, especially for non-resident beneficiaries. In addition, it provides an effective way to plan for succession and transfer wealth smoothly across generations. Overall, a CIT is an attractive option for individuals and families who want a secure, efficient, and tax-friendly way to manage their assets internationally.

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.